Building a world of
resilient communities.



Demographic oil demand and peak oil oil industry commentarist Andrew McKillop writes:  Since the time of Malthus and Ricardo (around 1810-20) and as also investigated by Engels and Marx (in the 1850s and 1860s) economists have taken an interest in mass consumption trends and patterns, and their determinants.

Oil, gas and coal consumption is most certainly a mass consumption phenomenon, but the implications of very clear -- even stark -- recent trends for world oil demand seem to go unnoticed.

Due to fast expansion of world natural gas output since the 1980s, and a much more recent and dramatic recovery in coal production (since 1995, and especially after 2000), together with growth of nuclear-origin electricity in a very few countries, the net impact on world energy has notably included shrinking per capita average oil consumption through about 1980-2000. In addition ... and likely more important as the real cause of this long-term fall in per capita oil demand ... was the trend of low or declining economic growth, and low oil prices.

The fall in world per capita average oil demand was significant, at about 14%-16% since 1975-1980, leading some analysts and writers to claim this trend has continued to the present.

This is controverted by the simple evidence that certainly since about 1999 per capita world average oil consumption is increasing. This recovery, after a long decline through about 1980-2000, has strong implications for potential oil demand, and potential annual growth of world oil demand as we enter the period immediately preceding ‘Peak Oil’ or the likely maximum sustained rate of world oil production. The peak is likely to be not significantly above 90 million barrels/day (Mbd) despite many claims by some oil majors, and some energy or economic agencies (such as the OECD secretariat and the IEA) that production "can exceed 110 Mbd" within the next 10-14 years.

Explaining the fall of per capita oil demand:
It is first useful to note the large and rapid fall that occurred in world per capita oil demand (PCOD), following an equally rapid rise in PCOD from the period of about 1960-65, that continued to at least 1977.

One major and very clear conclusion is that there is absolutely no ‘automatic price elasticity’ of world oil demand due to rising or falling year-peak oil prices. If there is any ‘price elasticity’, as most fit-to-print oil ‘experts’ and economists would like to claim, the lag element is either very large, and/or ‘price elasticity’ only works in one direction -- that is world PCOD does not recover when prices fall, but does fall when prices rise!

We could just as easily argue, and have the benefit of being much closer to the truth, by observing that world PCOD tends to rise when prices rise, and stays high, or only falls slowly when prices remain high.

That real factors and trends explaining the decline from a peak in the years 1975-79 of about 5.5 barrels/capita/year (bcy), to a low of about 4.5 bcy in the period from about 1984 to 2001 include the fact of low, and sometimes long-term declining economic growth rates for many low-income countries, and certain OECD countries (most Eurozone countries and Japan).

In this latter group of countries the trend of ‘delocalization’, that is de-industrialization (‘exporting’ oil consumption to newly industrializing countries), and increasing electrification of the energy economy also slowed recovery of PCOD, or continued to reduce apparent national oil consumption per capita, through importing energy-intensive, oil-dependent consumer goods from other countries.

It is however useful to note that continued slow economic growth and de-industrialization of most OECD countries no longer ‘translates’ to stagnant or declining oil demand, but to increasing demand, for a variety of technical, economic and societal reasons. This is particularly the case in the ‘re-industrialising’ East European member states of the EU, and in the USA.

One cause of low economic growth rates through about 1985-2000 was in fact the overall depreciation of "real resource" prices, that is world average prices for oil, gas, minerals, metals and agro-commodities.

In many ways this trend is ‘self-correcting’, for example through continued non-renewal of industrial capacities and ‘benign neglect’ of the primary product sector by institutional investors and state agencies and entities. This trend always leads to ‘supply pinch’ or insufficient capacity whenever economic growth recovers, marked by very rapid rises of primary product prices, and notably oil prices.

There is no doubt that maintaining higher economic growth rates is a major target in OECD economic policy and governing party circles, and a key element deciding the G. W. Bush administration’s re-election ‘go for growth’ campaign, featuring huge increases in already extreme US federal and trade deficits.

Economic growth is also vital to nursing world stock exchanges in their long, slow and hesitant recovery from their near meltdown of 2000-2002. For the moment, therefore, there is relatively little likelihood of any policy-decided or ‘spontaneous’ fall in world or regional economic growth rates, that would rapidly decrease world oil demand and the trend of increasing world PCOD.

Continued and ‘surprising’ economic growth:
It is likely that the real economy, and specially at the worldwide or global level is somewhat healthier and more robust than many commentators claim, for example claims made by US Federal Reserve chairman Greenspan (most recently on September 8) that "high oil prices depress economic growth" by acting as a sort of ‘energy tax’. One major reason to conclude that world economic growth is strong is because world trade growth (value of merchandise trade) in late 2004 is now running at an average rate of around 15%-per-year. This is one of the highest rates recorded in the last 20 years.

Another clear and simple indicator of strong underlying growth of the world economy is ‘surprising’ growth of world oil, gas and coal consumption. Another factor underpinning world economic growth, but disputed by many fit-to-print ‘experts’, is increasing prices for oil, natural gas, LNG and coal, entraining price rises for metals and minerals, and certain agro-commodities, leading to rapid increases in world solvent demand and to rising world liquidity.

Through the coming 2-3 years, notably due to slow recovery of Iraq’s oil production and export capacities, and increasing geopolitical uncertainty in the Middle East and Russia, there is increasing likelihood of "oil price spikes" to well above US$75 per barrel (US$/bbl).

While the ‘supply side’, overall, is characterized by slow and hesitant growth and increasing uncertainty, the demand side only shows strong or ‘surprising’ growth. This will almost surely continue until and unless a very strong and worldwide economic recession occurs. The basic cause of ‘surprising’ growth of world energy and oil demand is the recovery or renewed rise in world PCOD.

This new and recent trend is now clear in the figures, but world oil demand in fact started to show an underlying trend of renewed growth by as early as 1995-1996. The net result is a dramatic reversal of what has been called the ‘long term trend of energy demand growth’, described by certain oil majors such as BP Amoco, and agencies including the IEA as ‘about 1.4% per year on a 10-year basis’.

In the 2003 and 2004 editions of BP’s ‘Statistical review of world energy’, and in many recent reviews, statements and communiqués issued by the IEA, it is now clearly admitted that world energy demand is now growing at well above 2.75%-per-year. World oil demand growth is the lead element of this trend, and is presently (on a base of Sept 2003/Sept 2004) running at close to, or above 3%-per-year. This is the highest growth rate recorded since the early 1980s, despite the recession prone status of several Eurozone countries and Japan, and the remaining and intense poverty in most African and some Latin American countries.

Oil demand is growing at two to three times the world average rate of 3%/year in many fast growing, emerging economies, including the ‘new giant’ industrializing countries of China and India, whose combined population is well over 2.3 billion (over 3 times the combined population of the EU-25 and the USA).

Increasing PCOD and oil supply pinch:
It is easy to calculate what level oil demand would attain if today’s PCOD recovered the most recent peak value of about 5.5 bcy. World oil demand in late 2004 would not be the actual rate of around 82.5 Mbd, but would be running at about 34.5 billion barrels/year, or well above 97 Mbd. There is no certainty that world oil demand will ever attain 97 Mbd on a sustained basis, including oil from all sources (i.e. deep offshore, tarsand, heavy oil, etc. as well as so-called ‘conventional’ oil). This is particularly sure because of flaccid and hesitant increases of exploration and development effort, despite ‘record high’ oil prices.

Taking net losses of world oil supply capacity through depletion at around 1.25-1.5 Mbd each year, as estimated by ExxonMobil Exploration’s chairman J. Thompson, present demand growth of about 2.5 Mbd annual requires new production, or increased existing capacities of well above 3.5 Mbd each year. In the absence of this, oil markets cannot avoid being exposed to ‘structural supply deficit’.

After the peak of oil production is attained ... probably well before 2008 ... structural supply deficit will become permanent unless demand is cut or substituted by other energy sources. The impacts of this supply pinch or garrote will be strong and multiform on oil and energy prices and economic growth, on energy and economic policy, and have inevitable impacts on international development and international relations.

Given the historical economic reality of ever-growing PCOD in the richer OECD countries through their long period of high economic growth and rapid urbanization (roughly 1948-1975) it should be no surprise at all that exactly the same trend is now occurring in China, India, Turkey, Brazil, Iran, Pakistan and other fast-growing, industrializing countries. Due to the huge combined population of these countries there is essentially no upper limit to their oil demand potential. This can be expressed in a very few figures by taking current PCOD figures for China and India (about 1.45 and 1.2 bcy) and comparing these with the PCODs of the USA, Italy and France (about 25 for USA, 10.7 for France, and 12.5 for Italy).

If we assumed that China and India attained 4 bcy by 2014, with a combined population of 2.45 billion, their total annual oil demand in 2014 would run at 9.8 billion barrels/year, or 26.9 Mbd. This would represent an increase of more than 17.5 Mbd on their current combined total oil demand, and would be equivalent to nearly two times total oil exports by Saudi Arabia, or over 4 times net exports by Russia!

Demographic rate and world oil supply:
Forecasts by the US DoE, US EIA and the OECD’s IEA projecting world oil output at 110 or 120 Mbd by 2020 are simply based on assumptions that very large, so-far undiscovered reserves will be found, proven and developed, especially in deep offshore ‘provinces’ or regions. In addition, vast increases in production and exports from the Middle East are assumed to be sure and certain. What we can note, in these ‘official’ projections running up to 120 Mbd is that they already include a much higher long-term growth rate trend than the so-called ‘long-term trend rate’ of 1.4% annual.

The EIA and IEA forecasts give annual increases of world oil demand that extend beyond 2.75 Mbd by the 2010-2015 period, the problem being that already in 2004 we are experiencing annual growth trends of around 2.5 Mbd/year!

Taking account of depletion, these trends easily generate targets for the world oil industry to find, prove, produce or increase existing production by as much as 4.25 Mbd each year, after about 2010. In other words, "a new Saudi Arabia every 2 years."

While demographic demand (average per capita consumption) is around 25 bpy in the USA, and around 12 bpy in Western Europe, it is below 0.75-1 bpy in low income countries, including such oil exporters as Nigeria, Angola, Chad and Sudan, while in Indonesia the country’s low PCOD (below 1.5 bcy) is the only reason that Indonesia remains – for a short while longer -- a net exporter of oil products. An increase of even 1 bpy of domestic oil consumption, to rates of around 2-2.5 bcy (one-tenth the US rate) in these exporter nations will radically reduce their oil export capacities, further tighten world market supply, and further ratchet up prices.

China’s oil demand growth is averaging around 9% annual, and oil imports are tending to increase much more rapidly, due to declining domestic production (import growth has exceeded 30%-per-year since 2002). Current oil consumption in China, at around 1.45 bcy is well below one-third the world average of 4.5 bcy. If China attained the world average and experienced no increase in its population, China’s oil demand, barring economic crisis or very powerful energy diversification and oil-saving energy and economic policies will almost certainly triple within 10-12 years, and China will become the biggest oil importer in the world.

The above trends and factors, and the world wide trend towards economic globalization, all indicate very high, almost unlimited potentials for increase of world oil demand. The case of the two giant industrializing economies -- China and India -- shows this potential very clearly.

The mid-term oil price outlook (3-5 years) is therefore only upward, in fact the most serious question is to when and how oil will be withdrawn from conventional ‘market pricing’, which has always under-priced oil whenever there is any margin of supply capacity, and can only overprice oil when the market is exposed to short-term ‘pinches’. The emerging situation is one of long-term or ‘structural’ undersupply.

‘Lifeline’ oil supplies in developing countries: Outside the OECD group and the ‘traditional’ NICs (e.g. South Korea, Taiwan, Singapore), that is outside the established energy intense economies and societies, very small per capita oil consumption rates are the rule. Average per capita oil consumption of about 0.2 to 0.5 bpy serves as a ‘lifeline’ energy source. Any catastrophic increase in oil prices, for example to price levels above US$100/barrel, will certainly aggravate deforestation, erosion, and falling per capita food supplies, and will certainly increase urban migration.

Conversely, when world oil prices attain the range of even $45 to $60/barrel, and remain in that price bracket this energy price floor will significantly raise agrocommodity prices, as well as world prices for all energy-intensive metals, minerals and plantation product exports, called real resources.

Apart from generating higher, and more sustained economic growth at the global level, higher revenues for rural populations in lower income countries will limit their recourse to traditional biomass energy by enabling them to afford cooking kerosene and other petroleum products. Higher rural incomes will also slow or prevent urbanization – one urban citizen in the low income countries typically uses 1.5 times or more oil and gas than a rural person.

These ‘lifeline supplies’ of oil products represent consumption rates which, on average, are about 1/30th to 1/60th the per capita oil consumption of European and US consumers.

Recent and continuing World Bank and IMF-approved policy applied by governments in most low income oil exporter countries, for example Nigeria, result in domestic oil prices being racked up to around 35-45 Euro cents/litre (around US$75/barrel for persons with average per capita incomes 25 times below EU-15 averages). This short-term policy aims at strangling or reducing domestic oil demand, to maintain or increase export volumes, and usually leads to vigorous street protest, strikes, civil disturbance and death or injury of many persons.

  • In Nigeria, and elsewhere in low income oil exporter countries, increased consumption of cooking kerosene is seen as a threat to maintaining levels of exportable petroleum surpluses.

One immediate impact of sharply increasing the price of lifeline fuel supply, apart from street protests, is to further accelerate uncontrolled cutting of forest and woodland in the poorer, rural areas of lower income countries. In the case of Nigeria, uncontrolled forest clearance has reduced forest cover by around 85% since independence in 1960, a powerful factor in the ‘de-agriculturalization’, or reduced agricultural potential of Nigeria.

  • Nigeria is now totally dependent on food imports, but in 1960 was Black Africa’s biggest agricultural exporter nation.

Increased rural poverty in already very poor countries can only intensify already fast urbanization in these countries where one urban citizen inevitably consumes, or generates 1.5 times or more fossil energy demand than one rural person. OECD oil importers will finally not benefit from increased misery and deprivation, and environment and species destruction in poorer countries, because world oil demand and oil prices will necessarily be bid up by this worldwide economic trend of urbanization in poorer countries, that is accelerated by rural poverty.

In the case of Nigeria, heavy subsidization of cooking kerosene and vigorous agricultural and rural development, to stem the rural exodus, would greatly improve the chances of this country heading off almost certain economic crisis and even civil war. The sequels of poverty-induced civil strife and war in low income oil exporter countries necessarily include ‘denial’ of cheap oil supplies to the OECD importer countries.

Global economy restructuring and world peak oil production: World peak oil production capacity may be as little as 87-90 Mbd, according to some oil geologists and experts such as W Youngquist, C J Campbell, K Deffeyes and others. To accommodate a near-term peak for world oil production it is very hard to argue for ‘business as usual’ growth of the world economy.

This contradicts so-called ‘political reality’ because real economic conditions for most countries of the OECD group are recessionary, or ‘recession-prone’ despite (or because of) large or even huge government finance and trade deficits. In the case of the USA federal government finance, and national trade account deficits are at all-time highs, while economic growth is at best hesitant and unsure. In such conditions there is obviously official concern for consumption-based economic recovery and growth, presented by government-friendly media as ‘popular expectations’.

Outside the OECD bloc the new NICs including China and India show continuing fast and ‘classical’, oil-based economic development. Only the increasing number of ‘low performer’ economies, mostly but not exclusively in Africa, show consistent stagnation of their oil and energy demand, indicating that on a worldwide base there is little or no spontaneous movement to, or capacity for de-linking economic activity from fossil fuel burning, except through economic rout and collapse.

President Hugo Chavez Frias with the Chinese Ambassador

With world oil demand increasing at a probable ‘new long term rate’ of about 2.75%-3.3% annual, we get to 88-90 Mbd by 2007-2008. It is therefore necessary to develop scenarios where de-integration or reverse globalization of the world economy can occur, with continued economic growth but at lower rates in the developing world, and economy restructuring in the OECD group, to accommodate this oil production capacity ceiling.

This ceiling may be porous or flexible, due to a leap in tarsand or bitumen-based oil production, and gas-to-oil conversion, but both of these ‘ceiling modifiers’ need much higher oil prices and plenty of lead time to start producing large quantities. Economy restructuring, conversely, can start anytime.

  • This treats the demand side of the equation rather than trying to resolve emerging supply gaps and can be pursued without necessarily being based on ‘demand destruction’ and therefore economy destruction.

This restructuring can or could be linked to Kyoto Treaty undertakings for ‘capping’ carbon dioxide emissions, notably through planned reduction or stabilization of oil, gas and coal burning. It will almost certainly be easier achieved with realistic oil and gas price levels, neither extremely low, or extremely high, in the entry period to transition.

Alternatively, if we go with the free market and laisse faire economics, we can wait for oil depletion signals to cause runaway price rises, triggering defensive interest hikes in the OECD bloc leading not to economic recession, but long-term economic depression similar to the 1929-36 period.

Entry to long-term depression would surely cut world oil demand growth to zero, but actual contractions in demand might not become significant for some years. This can be appreciated by the ‘oil-shaving’ impacts of the 1980-82 recession, which was second only to the 1929-31 entry to, or slide into the Great Depression by the rate at which activity, business profits, employment and trade was slashed. The 1980-82 recession yielded ‘only’ about 9.6% less oil demand at the world level over 3 years. After peak oil it is likely that world oil supply will fall at up to 3%-3.5% annual for several years, and then accelerate to much higher annual rates.

Policy and strategy response to Peak Oil:
The coming peak of world oil production is dismissed or denied by organizations such as the OECD IEA, the US EIA, and UN agencies concerned with economic development. However, the fact of depletion is by necessity admitted for oil and gas production in several regions and provinces. In particular the now very fast rates of annual decline in production of North Sea oil, and the steady decline in US lower-48 oil production, resulted in an 801,000 barrels-per-day loss of oil production by the USA, Norway and UK (the 3-largest OECD oil producers) in the 12 months from June 2002-June 2003. US and Canadian natural gas production is now openly admitted to be declining, by no less than Alan Greenspan, with inevitable large increases in gas prices, which by ‘contagion effect’ tend to lever up oil prices.

The hope for large increases in Canadian and Venezuelan tarsand and bitumen-based oil production is contradicted by the huge costs and slow progress in Alberta’s syncrude projects, and continuing slow growth, or even loss of some Venezuelan heavy crude production capacity.

Without much higher oil prices, no transition to necessarily higher priced oil, nor market triggered development of non oil energy sources, will seriously commence or take place. In addition, the restructuring of the economy and energy economy will likely be chaotic if no action is taken to head off the prospect of not much above 90 Mbd being producible by 2008 or before.

The ‘strategy’ of benign neglect to rural poverty in most low income countries, including oil exporters, is unlikely to ensure large exportable surpluses of crude from such countries. Both the oil price factor, and urbanization, as well as population growth will tend to shut off and reduce exportable surpluses.

Not admitting or planning for easily described oil supply constraints of course underlies the Middle East context of the Iraq War ... Iraq was or perhaps still is supposed to have the capacity to produce more than 7 Mbd, and export over 6 Mbd by about 2010, according to some analysts such as D. Yergin of CERA. This would give about 3.75 Mbd more than Iraq was exporting before its military occupation by the US and UK.

Related to current and evolving world oil demand growth trends, as discussed above, this 3.75 Mbd net addition spread over 7 years will do less than nothing to head off the structural supply deficit that is rapidly emerging. Other solutions, based on OECD economy restructuring, increased North-South cooperation, and faster development of renewable energy will be the only sufficient ways to head off the coming oil price and oil depletion shocks.

Whatever the emerging limits on supply of oil and gas, the fact of potential demand being almost open ended is underlined by world PCOD rates and trends. World PCOD fell about 14% in the 15-18 years following 1981, but since 2000, at the latest, world PCOD is now in a ‘catch up’ recovery phase. This makes the possibility of physical supply deficits becoming ever more possible in the coming years, and ever more certain by 2008 or at latest 2010.

Increasing oil and gas prices, up to levels of US$75 or $90/bbl that will certainly be called ‘extreme’, will not in fact choke off demand.

The likely net impact, in a context where extreme interest rates are not decided and applied will be further increase of world oil demand. This ‘perverse’ impact of higher prices will therefore tend to reduce the time available for negotiating and planning energy and economic transition. Only at genuinely ‘extreme’ oil prices, well above US$100-per-barrel, will the pro-growth impact of increasing real resource prices be aborted by inflationary and recessionary impacts on the world economy.

Under almost any scenario, as well as for environmental and resource conservation reasons, it is increasingly difficult to project ‘growth as usual’ scenarios for the world economy, if only because of the near-term potential for runaway oil and gas price rises which themselves will firstly increase economic growth.

Increased local self-reliance or ‘autarky’, and de-globalization will necessarily feature in longer-term restructuring of the world’s energy and economic systems. The sooner that frameworks and structures for managing transition can be set and agreed, on a worldwide basis, the more fossil energy resources can be retained for smoothing adjustment in the necessarily long-term projects and programs that will be needed for achieving sustainability.

Making the case for energy transition and sustainable development is difficult, if not impossible, with political leaderships in the richworld drugged by the irrational slogans of ‘New’ Economics and so-called globalization.

The likely, near-term oil spikes and shocks due to emerging supply deficits (which also apply to natural gas) may break the policy stranglehold that has descended like night on serious study, and action.

Andrew McKillop  is a former expert-policy and programming, Division A-Policy, DG XVII-Energy, European Commission, founder member, Asian Chapter, Intl Assocn of Energy Economists. You may contact Mr. McKillop by email at

More commentaries by Andrew McKillop

What do you think? Leave a comment below.

Sign up for regular Resilience bulletins direct to your email.

Take action!  

Make connections via our GROUPS page.
Start your own projects. See our RESOURCES page.
Help build resilience. DONATE NOW.

New Russia Sanctions: Washington, Delusional About US Energy Capacity, Lashes Out

The effect of the sanctions will be to speed the Russian decline, forcing up …

Shales vs. solar: An investment perspective

But perhaps the real proof of a new energy paradigm shift lies in the fact …

Peak Oil Review - July 28

A weekly review including Oil and the Global Economy, The Middle East & …

The Changing Face of World Oil Markets

My conclusion is that hundred-dollar oil is here to stay.

IEA Oil Market Forecast: Optimistic Assumptions And An Economy Unable To Grow Out Of Its Problems

The International Energy Authority does does its best to paint a rosy …

Energy Crunch: Global debate heats up

News that last month was the world’s hottest June on record provided …

Divest! - Then What?

Divestment is one of the great campaigns of our times.But the question then …