FACTORIES and cars in fast-developing countries guzzled up the world’s growing oil supply at a swift rate in recent years.

Now as emerging economy growth forecasts are revised lower — China has slowed, while the prospects of countries from Russia to Brazil have dimmed — market participants are asking what this means for oil demand.

“We won’t see the oil demand growth of the past decade. There is only one China,” says Carsten Fritsch at Commerzbank. “We will still see decent growth that is more broad-based, particularly as emerging markets such as India become more industrialised and demand for transportation fuels increase.’’

It was hoped that sharply lower oil prices since last June would help boost demand via a wealth transfer from producer countries to consumer nations. Although this has been feeding through of late, the outlook is ‘only getting murkier’, the International Energy Agency said on Wednesday.

Global oil demand growth is expected to recover in the years to 2020 from the exceptionally weak gains last year. But it will fall short of the levels experienced during the boom years, according to the wealthy nations’ energy watchdog. World oil demand is expected to average 93.6mbpd this year, up from 92.5mbpd during 2014. That rise of 1.1mbpd, however, pales in comparison to growth of 3mbpd during 2010.

“After spending a lot of time thinking about peak oil supply we’re now talking about peak oil demand and that’s an extraordinary switch in 10 years,” says Neil Atkinson, head of analysis, Lloyd’s List Intelligence.

Uncertainty about global demand growth, particularly as cyclical factors coincide with structural changes that include a shift away from oil in the energy mix and moves towards a lower energy intensity, has perturbed Ali Al Naimi, the oil minister of Saudi Arabia — the world’s largest oil exporter.

“We will stand up, firmly and resolutely, in solidarity with a number of countries, against any attempt to marginalise the use of oil,” Mr Naimi said last week.

The Kingdom, in November, launched a battle to protect its market share over rivals, refusing to cut production to shore up the price of oil. The aim was to maintain Saudi Arabia’s long-term competitiveness as well as oil’s place in the energy ecosystem, particularly as competition from both inside and outside Opec grows.

Cuneyt Kazokoglu, a consultant at FGE who specialises in oil demand, says: “Everyone is racing towards a cake that is, in some ways, getting smaller and smaller.” He estimates that global oil demand will only grow by a further 10 to 15mbpd before hitting a ceiling by about 2033. “This has massive implications for producer countries.”

The IEA says mature OECD markets will see protracted contraction in oil demand in the next five years. At the same time the rest of the world is ‘no longer expected to provide as strong an offset as in the past’. Non-OECD oil demand is only expected to grow by 1.19mbpd annually to 2020, far less than its historical rate of growth.

China’s reorientation away from heavy manufacturing towards a consumer-focused economy has drastically slowed oil demand.

“Even if China’s demographics and income levels point to higher demand particularly for transport fuels, it is doing as much as it can to diversify its energy supply away from oil and increase reliance on natural gas as well as nuclear and renewables,” says Rabah Arezki head of commodities research at the IMF.

Asian countries such as India and Indonesia are expected to be a bright spot as political will to boost manufacturing aids demand while the population upgrades from motorcycles to cars.

Oil demand in the Middle East, particularly from exporter countries such as Saudi Arabia and Kuwait, has been stellar in recent years. But Laura El Katiri at the Oxford Institute for Energy Studies says should steps be taken to reduce subsidies, if more gas instead of crude and fuel oil is used for power generation, a slowdown in regional demand awaits.

Published in Dawn, Economic & Business, April 20th , 2015

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