The International Energy Agency’s most recent monthly report estimates for 2005 that global demand will grow by 1.8 mb/d, or 2.2%. This projection is on par with the level of growth
experienced in 2003, as the global economy was recovering from a steep, but short-lived, recession, but is conservative when comparing it to the record 2.5 mb/d -- or 3.2% -- projected
The 2005 demand estimate assumes: normal weather, a moderate slowdown in global GDP growth, an easing of crude oil and product prices and a modest reduction in Chinese oil consumption growth. Even so, Chinese oil demand
is expected to grow by 510 kb/d, or 8.1% in 2005. The Middle East is also expected to contribute strong consumption growth in 2005 of 260 kb/d or 4.7%. These high growth rates contrast with substantially lower oil demand growth
in the OECD of slightly less than 1% in 2005, holding flat in OECD Asia
but rebounding slightly in OECD Eastern Europe. Non-OPEC supply, including non-crude production from OPEC, is expected to show robust growth of around 1.6 mb/d in 2005. Non-OPEC supply growth averages over 1.0 mb/d per year during 1995-2005. Russia has been the engine of non-OPEC supply growth over the last half of this period and has the capacity to maintain strong growth in the future. However, in light of recent developments in Russia, this Report takes a more conservative approach to supply growth in 2005. Despite ongoing investments in infrastructure that should allow higher rates of exports, we expect Russian production growth to slow to 400 kb/d in 2005. There are both upside and downside risks associated with this assumption. Elsewhere, Angolan supply is forecast to grow by 250 kb/d and Brazil by 215 kb/d. In addition, OPEC NGL, condensates and non-conventional crude are expected to grow by 420 kb/d. The net result of the projected supply-demand balances is that the ‘call on OPEC’ crude plus stock change is set to grow by only 200 kb/d in 2005 versus 900 kb/d in 2004. The key variable here is the projected moderation in economic activity and oil demand growth. Should oil demand growth continue at 2004 rates, not only would there be a greater ‘call on OPEC’ crude, but these requirements would tax oil infrastructure from the wellhead to the gas pump. But a few caveats are in order. Supply uncertainties in Iraq, Nigeria, Russia and Venezuela, demand uncertainties in China, North America and Asia and continuing tensions in the Middle East will affect our projections to varying degrees as the year unfolds. The market sets off into the next 18 months with limited spare production and distribution capacity. Product stocks are still low heading into a winter of unpredictable weather.
Finally, while most analysts predict a moderate decline in economic growth next year, reduced liquidity from higher interest rates and tighter credit policies could sharpen the decline.
From 2004 to 2005
Despite record high prices, oil consumption is growing at a breakneck pace. Based on current estimates, oil product demand expanded by roughly 1.7 mb/d, or 2.2%, in 2003, and is set to grow by nearly 2.5 mb/d, or 3.2%, in 2004. A further gain of 1.82 mb/d, or 2.2%, is expected for 2005. This sequence of gains contrasts with the milder growth pattern of 1998 to 2002, roughly the period from the Asian financial crisis to the global economic downturn of 2000-2001 and its aftershock. During that time, annual demand growth averaged 765 kb/d, sinking to a low of 300 kb/d, or 0.4%, in 2002.
Demand growth in the late 1990s and early 2000s was slowed, first and foremost, by adverse
economic conditions, be it on a regional scale during the Asian financial crisis or, more recently, at a more global level. Meanwhile, much of the economic growth that was achieved during that time was led by sectors with relatively low energy intensities, such as the service industries and the internet economy. Those economic effects were compounded by fuel-switching away from oil in both OECD and non-OECD economies. Switching from oil to natural gas for electricity generation was embraced in various countries, including parts of OECD Europe, OECD Asia and Southeast Asia, the US and the FSU.
The current oil demand rebound mirrors those developments. World oil consumption bounced back in 2003 with the beginning of the US and global economic recovery, helped by low interest rates and US tax cuts. At the same time, supply shortfalls affecting other forms of energy caused wide-scale fuel switching into oil by electric utilities and industrial users. Those one-off disruptions included a natural gas price spike and natural gas deliverability issues in the US and extended nuclear plant shutdowns in Japan. An exceptionally cold 2002-2003 winter in the northern hemisphere further boosted demand. While some of those factors have since abated, rapid and synchronous economic recovery spanning most of the globe helped fuel record-high oil demand growth starting in late 2003.
Two of the world’s fastest growing economies, the US and China, are among those that have recently experienced the steepest oil demand growth, with Chinese apparent demand soaring by more than 1 mb/d in the first half of this year.
Our forecast for 2005 reflects the expectation that the world economy will continue to expand at a relatively fast pace of around 4%, albeit more slowly than the 5% factored in for 2004. Uncertainties regarding the pace of economic growth continue to cloud the outlook. Of particular concern is the sustainability of Chinese economic expansion. China has been a key driver of both global economic growth and global oil demand in recent months. Recently, there have been signs that Beijing had achieved some success in its bid to restrict loans and prevent overheating of the economy, but concerns remain that its efforts may either not be enough or overshoot their target and cause a hard landing. Chinese imports of some commodities have slowed dramatically. The working assumption in this Report is that robust Chinese economic growth will continue through 2005, albeit at a somewhat slower pace than in 2004. US economic expansion is also expected to moderate in 2005, despite an improving labour market and recovering consumer confidence, due to the reversal of tax and interest-rate stimulus measures that helped spur the recent rebound.