It has become fashionable for many to predict the “end of oil” and the notion of “peak demand,” but we have firmly landed on the other side of the story, as discussed in a number of our columns, including the one from last week published as part of the Arab News’ special coverage of the LEAP conference.
There is an economic concept called elasticity that essentially assesses how the demand for a good or service changes in relation to changes in the price of that good/service.
If, say, the price of something such as poultry rises by 10 percent and its demand declines by 10 percent, its consumption would be described as being “elastic.” Using poultry again, if its price rises 10 percent and the demand for it declines only 1 percent, its demand would be described as being “inelastic.”
In the case of petroleum, global demand is “perfectly inelastic” — prices have risen sharply over the past two decades and demand has also risen sharply. The pattern reflects the lack of alternative fuels for transportation and for petrochemicals. While there are alternatives, the limited volume of viable substitutes is the critical issue that we do not see as being solvable for decades to come.
In a related discussion, the global market faces the challenge of secular oil demand growth from emerging market economies moving higher on the standard-of-living scale. It is surprising how few realize these past couple decades saw nearly 100 percent of the world’s oil demand gains sourced to developing nations (in oil vernacular, the non-OECD countries).
Almost all developing economies have low per capita oil demand rates (that is, barrels consumed per person), a consideration worth ruminating on regarding the medium-to-long-term outlook.
A small list we compiled of notable emerging market economies includes China, Indonesia, India, Egypt, Brazil, Mexico and Pakistan. These nations account for 45 percent of the world’s population, and they are all moving up the standard-of-living scale.
Notably, these same nations have low consumption figures on a barrels-consumed-per-person basis. The highest rate on the list is China (the figure is just under four barrels per person per year) and the lowest on the list is Pakistan (the ratio is just over 0.7 barrels per person per year). By comparison, the ratio for the US is close to 19 barrels per person.
If we consider a country such as China working itself higher on the standard-of-living scale toward a per capita usage level that is, say, only 50 percent of the US rate, it would need another 39 million barrels per day of oil — a figure that equates to 40 percent of last year’s total world demand.
For India, the incremental jump in oil demand would be an extra 36 million barrels per day. The question you need to ask is how such volumes will be supplied, especially in the face of a fierce anti-carbon environment?
• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life” which is available on Amazon.
