The Death Of Oil Demand

Economic growth in China and a very modest recovery in the West will not be enough to drive up oil demand next year, according to the International Energy Agency. The world will only need an average or 70,000 barrels per day of crude in 2010 above what it will consumer per day this year.

The agency appears to think that the main culprit for slow demand will be America. Bloomberg cites the report as saying “industrial production has seemingly not reached the bottom in the U.S.”

The IEA could be wrong.

Recent surveys of prominent economists by both The Wall Street Journal and Bloomberg show that the majority think the recession is over. Those polled by WSJ had an average figure for third quarter growth of 2.4%. Analysts are raising their forecasts to 4% and above as each week passes and more positive data about real estate, GDP, and the pace of joblessness are announced.

Other critical factors in oil prices are likely to be a political crisis in one of more of the large oil producers or a natural disaster. Unrest among the population is most likely in Nigeria, Venezuela, or Iran but a shut down of production elsewhere due to pipeline problems or hurricanes  could curtail supply enough to cause at least a temporary disruption in the balance with demand.

It is assumed now, perhaps wishfully, that the stimulus packages in America, China, and Europe will have visible effects next year. GDP improvement in the US that might have otherwise been 2.5% could become 4%. China GDP growth could certainly move back to the 9% range. If export improvement is added to the $585 billion the central government is putting into the economic system, China could move back toward the hyper-growth that has been, until recently, the hallmark of its economy.

The economy, as it stands today, may not possess that properties that are necessary for a sharp increase in crude demand, but that could change in a matter of months.

Douglas A. McIntyre