Forecasts in uncertain times

Sept. 20, 2010
Several factors have influenced the challenging feat of forecasting world economic growth in 2010.

Several factors have influenced the challenging feat of forecasting world economic growth in 2010. The impact of the global recession and government stimulus packages has had uncertain effects in forecasting both economic growth and world oil demand growth, according to the latest monthly oil report from the Organization of Petroleum Exporting Countries.

Forecasters have been more cautious in their approach to determining economic growth because of the depressed world markets.

OPEC predicted in August 2009 that worldwide economic growth in 2010 would be 2.3%, but recently revised this figure to 3.9%. In addition, other forecasting institutions have since revised their outlooks upwards, aligning with OPEC's expectations.

In connection with the revisions, Oxford Economics' original forecast called for worldwide economic growth of 2%, and then was subsequently revised to 3.5% of growth.

The projection from the International Monetary Fund, meanwhile, has been revised up from 1.9% last year to now stand at 4.6%. These revisions were primarily based on stronger-than-expected stimulus efforts that governments placed on their economies as well as the fiscal incentives provided by central banks around the world.

Oil demand growth

Because of constant revisions to the worldwide economic growth rate, forecasting global oil demand has been difficult, OPEC said in its report. Earlier forecasts for world oil demand underestimated the impact that the massive government stimulus would have on oil consumption.

OPEC's new forecast of world oil demand growth in 2010 now has been revised upward by 0.5 percentage points to 1.2%. Oil demand growth is less than a third of the GDP rate that was readjusted upward by 1.6 percentage points. This difference highlights the weakening correlation between GDP growth and oil demand, OPEC said, due mainly to ongoing structural changes in the economy.

Among the key factors contributing to this declining relationship are the expansion of the service sector relative to manufacturing—particularly in the Organization for Economic Cooperation and Development—and the shift of global growth contributions from the developed to the developing countries.

Despite the upward revision of demand growth, this year's second half is expected to be slower due to the government stimuli coming to an end. Thus oil demand has a probability of declining based on an assumption of the correlation of GDP and oil demand. Oil consumption is already showing signs of slowing down, and in some parts of the world it has turned negative.

Forecasting oil market growth is a very complicated issue and difficult to predict based on the continual revisions of world economic growth forecasts, and thus oil demand forecasts are subject to frequent modifications as well.

Past data has shown that actual oil demand is typically lower than original predictions; therefore regular downward adjustments are made.

IEA's take

In its September Oil Market Report, the International Energy Agency said it sees annualized worldwide oil demand growth easing from around 2.3 million b/d in the first half of 2010 to 1.5 million b/d in the second half as a result of a slowdown in economic growth.

Yet the Paris-based agency optimistically forecasts that global economic growth this year will be 4.5%.

"We expect growth to moderate further to 1.3 million b/d in 2011, although as noted last month, a weaker-than-expected economic outcome (of, say, 2.8% growth for GDP), could knock as much as 1.2 million b/d off 2011 absolute demand," IEA said.

IEA continued, "So for the time being, nagging concerns over the robustness of economic recovery, a US gasoline season which ended with a whimper and questions on the durability of still-robust non-OECD demand growth are holding at bay perceived short to medium-term supply risks (be they from hurricanes, a Macondo-inspired drilling moratorium or geopolitical and domestic volatility in Iran, Iraq or Nigeria)."

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