Oil demand growth in 2001 has been hit by a powerful combination of weak economic growth and persistently high oil prices. GDP growth in the first half of the year has slumped to unexpected lows, weakening oil demand in key countries that normally contribute most to global oil demand growth. As a result, oil demand forecasts for this year have been revised down sharply to take account of the deteriorating economic environment. The CGES now expects an increase of only 0.5 mbpd in global oil demand in 2001, 1 mbpd less than was predicted a year ago when the global economic outlook seemed much more favourable.
Although the economic slowdown began in the United States, it has been transmitted rapidly to the rest of the world, especially Asia, which had become highly dependent on the US after nine years of strong economic growth in the world's largest economy. Oil demand in the Asia Pacific region has collapsed this year as the US-led recovery following the 1998 Asian economic crisis came to an abrupt halt. Moreover, the situation has been made worse by local currency depreciation against the US dollar that has kept consumer oil prices high despite a weaker crude market. With economic growth in Asia well down on last year and no respite in sight for consumer oil prices - which have risen sharply in many Asian countries over the past two years - the CGES expects to see little or no growth in oil demand in the region in 2001.
The CGES' analysis of global oil demand over the long-term shows that almost all the variation in oil demand growth over the past 45 years can be explained in terms of economic growth and changes in crude oil prices. During the past decade, global oil demand (excluding the former Soviet Union) has grown at an average of 1.4 mbpd, stimulated by strong economic growth in the US and Asia and moderate to low oil prices. However, with OPEC apparently determined to keep oil prices at or above $25/bbl for their basket of crudes and the world struggling to recover from this year's dramatic slowdown in economic activity, oil demand growth in 2002 is likely to remain well below average.
In order to boost global oil demand growth next year back up to the average 1.4-mbpd level achieved in the 1990s, the CGES estimates that crude oil prices would have to fall by 20% to $20/bbl in 2002 - even if the world economy bounces back quickly to its trend rate of growth of just under 4%. If OPEC truly wished to stimulate world oil demand rather than maximise oil revenues it should be prepared to accept a lower price for its oil. This, however, is no longer on OPEC's agenda, leaving oil demand set to grow more slowly over the next few years as the world economy adjusts to higher oil prices.