Come second quarter of next year, oil demand from emerging markets and developing countries, especially oil producing ones, is expected to exceed that from countries of the Organization for Economic Cooperation and Development (OECD). It is, “a trend that is unlikely to be reversed,” observed the International Energy Agency (IEA) in a recent report. The expected change will have implications and repercussions that exceed the oil market into other socioeconomic and political developments worldwide.
It was a century ago that a single decision by then British Admiralty Minister Winston Churchill to use oil instead of coal as a source of energy for the British war fleet has put its prints in human history. The black gold, as it came to be called, turned into a strategic commodity tied more with politics as well as economy and to the extent some think it has nothing to do with the market basic and fundamental rule of supply and demand than with high politics and war rooms.
For more than a century it was this strict and direct relationship of the oil market that mirrors what is going on in the world of politics and vice versa.
The new shift in demand and the lead of the emerging markets over OECD is yet another proof of that trend.
According to the IEA forecast, oil demand in emerging markets and oil producing countries will top 45.7 million barrels per day (bpd) that is some 600,000 bpd more than expected demand from OECD countries. Aside from the burgeoning economies of China, India, Brazil and Argentina, the oil producing countries in the Gulf as well as Russia and others will be consuming more. That is attributed to a number of factors. On the top of them is the high income of these countries given the rising oil prices, which helped in fueling economic growth. There is also the factors of growing population and fuel subsidies.
On the other hand the general world oil demand that has settled around 700,000 bpd last year is expected to increase by mere 100,000 bpd to reach 800,000 bpd expected growth in world oil demand by next year. Total oil demand then will top 90.9 million bpd. Of that, OPEC countries are expected to provide 30.5 million bpd leaving the rest to non-OPEC producers to appropriate the difference.
Despite its reduced contribution in meeting world demand, OPEC production came along way from the 19.5 million bpd it used to produce back in 1998, but notably less than the 33 million it pumped four years ago before world economy was hit by the financial and economic crisis and still reeling under its impact.
The shift in oil demand that will have ripple effect ramifications in various areas and all over the world is yet to unfold, but one can expect impact on certain areas. One of the first areas that need tackling is the flow of information and transparency on what actually goes on in these emerging markets. People still remember how everyone was puzzled back in 2005 to see that some kind of an unjustified strong oil prices. The reason was discovered later when it became clear that it was the Chinese strong demand that nobody was aware of, which was pushing prices up.
Over a long period of time and because of relatively good transparency and flow of information it was easy to monitor developments in the US markets, for instance, from the driving season to weather, to new regulations affecting traffic and consumption trends so that it was simple to predict with a relative degree of certainty on the expected demand.
That is definitely not the case in the emerging markets. Sensing the problems years ago, the Riyadh-based the International Energy Forum has set up the Joint Oil Data Initiative (JODI), where producers and consumers provide their figures about what is going on into their countries as far as energy production and consumption is concerned. Still there is much that could be done to improve the flow of information, have up-to-date figures with the aim of reaching a stage of real time news.
The same applies to oil producing countries especially in the area of domestic consumption. That area is of great concern to the market for the simple reason that any barrel consumed by a producing country itself will be at the expense of exporting that very barrel. Moreover, growing consumption and for that matter reducing export abilities of oil producers will raise the question that so far has been ignored: who replace those exporters that are leaving the market.
Indonesia used to be the only Asian country in OPEC. Years ago, it saw its production on continuous decline to the extent that it decided to drop its OPEC membership. The irony is that the biggest consumption market of Asia does not have a single country with reasonable oil production to justify OPEC membership.
And that is a worrying mirror for an unknown future.
