The Wall Street Journal-20080115-Politics -amp- Economics- Oil Prices Detach From Demand in West
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Politics & Economics: Oil Prices Detach From Demand in West
Oil prices have disconnected from demand in rich countries, showing how the global oil market has become unmoored from some of the factors that steered it in the past.
For decades, slumping oil thirst in North America, Europe and Japan has sent oil prices lower because these regions accounted for much of the growth in crude consumption. But now, oil prices are hovering around record highs even though demand is declining in the world's top industrialized countries.
The International Energy Agency, the energy watchdog for rich countries, is scheduled to release data tomorrow that are likely to show oil use among the 30 members of the Organization for Economic Cooperation and Development fell slightly in 2007 as consumers adjusted their consumption in the face of high crude-oil prices and mild weather.
A year ago, when the Paris-based IEA announced a similar drop for 2006 -- the first such fall since the early 1980s -- analysts believed that oil prices were set to slide and that the great price run-up of the past few years could be over.
Instead, prices went on a tear for the rest of 2007. After breaking the $100-a-barrel level for the first time earlier this month, U.S. benchmark crude on the New York Mercantile Exchange rose 1.6% yesterday to $94.20 a barrel on concerns about tensions between the U.S. and Iran. At these levels, oil prices are near the inflation- adjusted record of $102.81 set in April 1980.
With so many other factors now gripping the oil patch, from rapid energy demand in China to skyrocketing oil-exploration costs to unpredictable politics in oil provinces such as Venezuela, the pace of wealthy nations' oil use as a barometer of oil-market fundamentals has become almost an afterthought.
Ebbing oil consumption in the industrialized world has sprung from a many of factors: a shift from manufacturing to the service sector, a move to more energy-efficient cars, the introduction of alternative fuels, and higher energy prices, which encourage conservation.
The U.S. Department of Energy says petroleum use last year in America, which uses about one in every four barrels of oil consumed globally, grew by 0.2% to 20.7 million barrels a day. Demand across the OECD, of which the U.S. is a member, slipped by 0.2% in 2007, according to the DOE.
The last time oil prices soared to record highs, in 1980 during the Iran hostage crisis, industrialized countries responded by dramatically cutting their oil use. Prices fell accordingly. This time, the demand drop among rich countries is tiny by comparison. Energy costs weigh far less heavily on the economy; in 1982, the U.S. spent 13.7% of its gross domestic product on energy, compared with 9% last year, according to the DOE.
In many wealthy European nations, similar efficiency gains have been gleaned and consumers continue to find ways to shave their energy bills. Economic activity grew by nearly 60% from 1986 to 2006, while oil demand rose by just 18%, according to the IEA.
Analysts expect OECD oil demand to rise by about 1% this year from 2007, although a severe U.S. economic recession would dint oil consumption there and also likely affect the economic health, and oil demand, of the rest of the world.
But aside from that prospect, analysts cite a slew of reasons oil prices are likely to remain firm this year.
A Dow Jones Newswires Survey in December, before oil hit $100 a barrel, showed 32 banks and other institutions raised their 2008 oil- price forecasts on average by almost 5% to nearly $80 a barrel for U.S. light, sweet crude oil as suppliers in the Organization of Petroleum Exporting Countries keep a leash on production and as non- OPEC suppliers struggle to keep up with demand.
Another big driver for lofty prices is rising demand in developing nations in Asia and the Middle East. While industrialized nations still drain two out of every three barrels of oil used globally each day, it is the fast-growing, developing nations such as China, India and Saudi Arabia that are now behind much of the growth in crude demand. The IEA predicts such nations to gobble up seven out of every 10 barrels of that growth in oil consumed daily from now to 2030.
Government fuel subsidies in many developing countries -- more than $250 billion annually, according to the IEA -- accentuate demand and limit the scope for high prices to induce consumers to curb consumption.
