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World oil demand’s shift toward faster growing and less price-responsive products and regions (report pdf)

Joyce M. Dargay and Dermot Gately, Dept. of Economics, New York University
Using data for 1971-2008, we estimate the effects of changes in price and income on world oil demand, disaggregated by product – transport oil, fuel oil (residual and heating oil), and other oil – for six groups of countries. Most of the demand reductions since 1973-74 were due to fuelswitching away from fuel oil, especially in the OECD; in addition, the collapse of the Former Soviet Union (FSU) reduced their oil consumption substantially. Demand for transport and other oil was much less price-responsive, and has grown almost as rapidly as income, especially outside the OECD and FSU. World oil demand has shifted toward products and regions that are faster growing and less price-responsive. In contrast to projections to 2030 of declining percapita demand for the world as a whole – by the U.S. Department of Energy (DOE), International Energy Agency (IEA) and OPEC – we project modest growth. Our projections for total world demand in 2030 are at least 20% higher than projections by those three institutions, using similar assumptions about income growth and oil prices, because we project rest-of-world growth that is consistent with historical patterns, in contrast to the dramatic slowdowns which they project.

From the Introduction:
Two liters a day – that’s what per-capita world oil demand has been for forty years. Yet this constancy conceals dramatic changes. While per-capita demand in the OECD and the FSU have been reduced – primarily due to fuel-switching away from oil in electricity generation and space heating, and by economic collapse in the FSU – per-capita oil demand in the rest of the world has nearly tripled, to more than 1 liter/day. In addition, the rest of the world’s population has grown much faster than in the OECD and FSU (1.85% v. 0.74% annually). As a result, the rest of the world’s total oil consumption has grown seven times faster (4.4% annually, versus 0.6% in the OECD and FSU) – increasing from 14% of the world total in 1971, to 39% today. Strangely, however, recent projections by DOE, IEA, and OPEC project a sharp deceleration of per-capita oil demand growth through 2030 in the rest of the world – from 2.54% annually since 1971 to 0.6% annually (DOE) or 1% annually (IEA, OPEC).

…Now that the OECD and FSU have almost exhausted their easy fuel-switching opportunities, it will be much more difficult to restrain oil demand growth in the future, while the rest of the world’s economies and population continue to grow. To illustrate the difficulty of reducing demand, compare two decades in which the price of crude oil has quintupled: 1973-84 and 1998-2008. After the price increases of the 1970’s, per-capita demand fell by 19% for the OECD and by 13% for the world as a whole. In the past decade, with oil price increases similar to those of the 1970’s, per-capita demand fell only 3% in the OECD; worldwide it actually increased, by 4%.

The outline of this paper is as follows. We employ a model similar to that of Gately and Huntington
(2002) to analyze oil demand disaggregated by product (transport oil, fuel oil, and other oil), for almost all countries of the world. In Section 2, we summarize how oil demand has changed over time and relative to income, by oil product and by country group. Section 3 describes the demand equations that we shall use, and Section 4 summarizes the econometric results, for each group of countries. We allow for the possibility that demand has responded asymmetrically to price increases and decreases, and find strong evidence for this in the OECD, especially for Fuel Oil. We also test for asymmetric demand response to income increases and decreases, and find evidence for this in the demand behavior of the Oil Exporters. Section 5 presents our demand projections and compares them with the short-term and longterm projections of IEA and DOE. Section 6 presents our conclusions. Appendix A describes the data sources…
(Feb 2010)

Economists deliver a sturdy smackdown of peak oil demand

Kate Mackenzie, Financial Times
Whether or not you agree with peak oil, a new paper by two economists, Joyce Dargay of University of Leeds and Dermot Gately of New York University, draws some rather dramatic conclusions.

Unlike some economists, the pair do not buy the ‘peak demand’ idea. In fact they believe the IEA, EIA and Opec have all seriously underestimated future demand growth – by almost a third:

If annual per-capita oil demand growth rates to 2030 were assumed to be held zero in the OECD, 1% in the FSU, and at its 1971-2008 historical rate (2.54% annually) in the rest of the world, total oil demand will be 138 mbd in 2030 – about 30 mbd greater than what is projected by DOE, IEA, and OPEC.

And in large part it comes down to cars and other transport needs…
(15 March 2010)

Study Finds that Peak Oil Demand is Decades Away, but Minimizes Effects of Rising Consumer Product Prices

Josh Garrett,
The Financial Times reported on Monday that a new study by British and American economists finds that global oil demand predictions by the US Department of Energy, the International Energy Agency, and OPEC fall well short of the mark. The study (available for download in its complete form at the NYU Department of Economics’ website) predicted that global crude oil demand would reach 138 million barrels per day (bpd) in 2030, about 30 million higher than the estimates of the aforementioned organizations.

The key element in the study’s picture of oil demand is its presumption that world per capita oil demand will continue to grow at a steady rate, while estimates from the IEA and others rely on an overall slowing in the growth of per capita demand. The study’s authors argue that previous declines in per capita oil demand that occurred in 1973-1984 and 1998-2008 were precipitated by declines in consumption that cannot and will not be replicated in the next three decades. The study attributes both decline periods primarily to developed nations’ (the Western nations of the OECD and former Soviet countries) switching away from oil as a fuel for electrical plants and residential heating fuel.

Demand for heating oil and residual fuel oil (a dirtier oil used mainly for industrial applications) has declined by 30 percent since 1971, the study reports. In the absence of major demand destruction during the next 30 years, the study concludes, oil demand in the OECD will not continue on its recent path of decline, but stay flat. At the same time demand for oil in developing nations led by China and India will increase markedly, bringing about a steady climb in average per capita demand around the globe….

…Essentially, the study argues that, despite a lot of talk about reducing fossil fuel usage and driving more fuel-efficient vehicles, the developing world’s efforts to curb its consumption of oil will be futile. Or, to put a finer point on it, the developed world’s piecemeal demand reductions will be dwarfed by demand increases from the developing world as its economies and share of the world population balloon.

The study’s argument is a compelling one, but it all but omits one important factor: the effect of rising prices on consumption habits. The study considers rising prices as a salient factor in possible demand reduction in its conclusion, but at the same time ties it to other factors that the authors claim would have to happen all at once to make a dent in global demand:

Hence this imbalance [between demand growth from developing nations world and flat demand from developed world] would have to be rectified by some combination of higher real oil prices, much more rapid and aggressive penetration of alternative technologies for producing liquids, much tighter oil-saving policies and standards adopted by multiple countries, and slower world economic growth.

(15 March 2010)

Forecasts underestimate oil demand, study says

Pamela Heaven, Financial Post
Official forecasts may be underestimating the future demand for oil by 30 million barrels a day, according to a research paper by Joyce Dargay of the University of Leeds and Dermot Gately of New York University. If so, the next oil crisis is going to be a whopper.

Dargay and Gately base their logic on the observation that the demand for oil no longer appears to respond to price. While price increases in the 1970s hammered worldwide demand for the fuel, the heftier oil prices we’ve witnessed over the past decade had no such effect. Instead, worldwide demand for oil increased by 4% during that time.

…If per-capita oil demand grows at the modest rates that Dargay and Gately project, rather than falling as most forecasters believe will happen, total oil demand will be 138 million barrels a day in 2030, about 30 million barrels higher than OPEC or the U.S. Department of Energy foresee.
(15 March 2010)