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What will happen to oil demand? - Views on News from Equitymaster
 
 
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  • Jun 30, 2009

    What will happen to oil demand?

    Oil to make a slow recovery
    There may be talks of green shoots in the global economy but the International Energy Agency (IEA) has painted a somewhat gloomy picture. As reported on Bloomberg, it has cut five-year forecasts for global crude demand because of the economic slump and is of the opinion that consumption will not regain last year's levels until 2012. For instance, in 2008 consumption was pegged at 85.8 m barrels a day and it is only in 2012 that the consumption will rise above what was witnessed in 2008 at 86.8 m barrels a day. This means that the repercussions of the global economic crisis will be felt for a long time given how deep the crisis has been and demand is likely to get severely impacted.

    What is important to note is the fact that IEA has made its forecasts assuming higher GDP growth. Therefore, if the GDP growth is lower at around 3%, then oil demand would fail to reach last year's levels even by 2014. Interestingly, the IEA is of the opinion that the drop in oil consumption has postponed the threat of a potential supply shortfall. The question that arises then is where would oil prices head. It would seem that a slowdown in pickup of oil demand would probably keep prices low. But in the longer term, supply side issues still persist in the form of depleting oil fields, not much improvement in technology in terms of extracting oil and alternate sources of energy not making too much of a headway. And of course, there is always the possibility of geo-political factors having a significant impact on the direction of oil prices. Which is why despite the current recession, in the longer term, the movement of crude prices moving upwards seems like a more likely scenario.

    The specter of unemployment looms in Asia
    Just as the Asian economies have proven to be on a firmer footing as compared to their developed counterparts, so do they have the advantage when it comes to unemployment. While the unemployment rates across the globe have been rising, they are said to be not too high in Asia when compared to the US or the European economies. However, all may not be hunky dory. The heavy dependence on exports and rising commodity prices mean that the mettle of Asian economies will be tested when it comes to aversion to large layoffs. And everyone seems to be caught in a vicious cycle. Unless demand rejuvenates to fuel economies, new jobs will not be created and lack of jobs in turn would mean lack of income, thereby further dampening demand. Therefore, the recovery from a global crisis of such magnitude is likely to be a gradual process.

    While India and China are likely to weather the storm better, Hong Kong, Korea, Malaysia, Singapore, Taiwan and Thailand are more exposed to this crisis. What's more, even if the unemployment rates in these economies is lower as compared to the developed world, the region's economic activity as a whole is actually worse than what it was in the Asian crisis. The key, therefore, for Asian economies is how strong their respective domestic markets will be given that exports are in disarray. In that aspect, India and China, though they are witnessing a slowdown, are likely to suffer less solely on the strength of the demand in their respective domestic markets. But of course, these two economies have their own set of problems. In India's case it is lack of infrastructure and mounting government deficits.

     

     

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