World oil demand is growing much faster than expected. This time last year the consensus view was that oil demand would grow in 2004 by just over 1 mpbd. Now everybody accepts that they got it badly wrong and that global oil demand is likely to grow by more than 2.5 mbpd this year - the highest rate for 25 years.
Speaking in very general terms, there is a broad correlation between economic growth and oil demand growth. Variations in global economic growth rates are associated with similar variations in oil demand growth rates over a long period of time. Naturally, the correlation between the two is far from perfect, since it is also affected by changes in the price of oil - both in relation to the price of other fuels and other items the consumers happen to purchase. Changes in relative prices play an important role in influencing the demand for energy and the choice of fuel type both in the short and longer-term.
Nevertheless, it is obvious that recent levels of oil demand growth are much higher in relation to economic growth than the experience of the last decade would suggest. During the 1990s, the world economy grew at an average rate of 3.5% per annum while global oil demand grew at 1.2% a year - implying an oil-to-GDP ratio of just over a third. By contrast, the past two years have seen much faster oil demand growth relative to economic growth. Although world economic growth has risen to an average level of 4.2% in 2003 and 2004, global oil demand growth is now expected to average 2.8% - an oil-to-GDP ratio of nearly two-thirds, which is about twice the average level of the 1990s.
Most of the momentum behind oil demand growth this year is coming from two countries - the United States and China. US demand rose by 2.7% (540,000 bpd) in the first half of this year while China's apparent oil demand - calculated from domestic production and net imports - expanded at a remarkable 17% (930,000 bpd) from January to May. Together these two countries account for nearly two-thirds of global oil demand growth in the first half of 2004. In both cases, oil demand grew faster than expected given the rate of economic growth.
Interestingly, both countries are experiencing constraints elsewhere in their energy supply infrastructure that could help to explain the faster rate of growth of oil demand relative to economic activity. If these constraints on gas supply in the US and electricity supply in China continue into next year - as seems highly likely - then the oil industry could be facing another bumper year for oil demand growth.
