OPEC’s Funny Math For Oil Demand

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OPEC recently released its January Monthly Oil Report. The analysis by the economists for the Organization of the Petroleum Exporting Countries is that the need for crude this year has risen compared to their earlier estimates. “Given the latest upward revision in world GDP (gross domestic product), world oil demand growth is forecast at 1.23 million barrels per day (bpd) averaging 87.3 million bpd in 2011, 50,000 bpd higher than last month’s estimate.”

OPEC sees no threat from this more robust demand even if the price of crude rises above $100, according to comments from two oil ministers for countries which are members of the cartel. There are rumors that OPEC has started a very modest increase in output, but crude prices do not reflect that.

The OPEC data and its interpretation by some of its members are very different from other expert opinions. The IEA says a rise in oil prices could severely damage the world’s economic recovery. IEA’s Chief Economist, Fatih Birol said earlier this month that “Oil prices are entering a dangerous zone for the global economy. The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.”

Many analysts agree with Birol.

The reasons OPEC gives for the increased demand for crude are the same as most others. China, the largest net importer of oil, needs more supply to fuel its rapid economic expansion. The same is true of other large developing economies such as India. In the meantime, a recovery of the economy in the US will cause a modest rise in demand. The sputtering smaller economies of the EU may need less oil, but nations with robust growth including Germany will more than offset that.

The OPEC figure needs to be viewed with skepticism. The cartel’s economists have every incentive to downplay the need for a great deal more oil this year. It gives OPEC a defense when importers of crude call for more supply to offset an ongoing increase in price. This will be especially true if crude prices cross $100 barrier – an important psychological line. The impact of this on everything from petrochemical prices to gasoline will be immense. And, it will add to the underlying inflation which has already begun to drive up the prices of commodities widely used in most nations.

OPEC has its own agenda which is reflected, to be sure, in its forecasts.

Douglas A. McIntyre

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