How will the world meet future oil demand needs?

How will the world meet future oil demand needs?

It has become fashionable for many to predict the “end of oil” and the notion of “peak demand”, but we have landed firmly on the other side of the story, as discussed in a number of our columns. , including last week’s one published as part of Arab News’ special coverage of the LEAP conference.

There is an economic concept called elasticity which basically evaluates how the demand for a good or service changes in relation to changes in the price of that good/service.

If, for example, the price of something like poultry increases by 10% and its demand decreases by 10%, its consumption would be called “elastic”. Using poultry again, if its price increases by 10% and its demand decreases by only 1%, its demand would be called “inelastic”.

In the case of oil, global demand is “perfectly inelastic” – prices have risen sharply over the past two decades and demand has risen sharply as well. The trend reflects the lack of alternative fuels for transportation and petrochemicals. Although there are alternatives, the limited volume of viable substitutes is the critical problem that we do not believe can be solved for decades.

In a related discussion, the global market faces the challenge of secular growth in demand for oil from emerging market economies that is rising up the standard of living scale. It is surprising how few people realize that the past two decades have seen nearly 100% of the gains in global oil demand come from developing countries (in oil vernacular, non-OECD countries ).

Almost all developing economies have low per capita oil demand rates (i.e. barrels consumed per person), a consideration worth pondering over the medium to long term outlook.

A small list we have compiled of notable emerging market economies includes China, Indonesia, India, Egypt, Brazil, Mexico and Pakistan. These nations represent 45% of the world’s population and they are all moving up the standard of living.

Notably, these same countries have low consumption figures on a per capita basis. The highest rate on the list is China (the figure is just under four barrels per person per year) and the lowest on the list is Pakistan (the ratio is just over 0 .7 barrels per person per year). By comparison, the ratio for the United States is close to 19 barrels per person.

If we consider that a country like China is itself working higher up the standard of living scale towards a level of per capita use that is, say, only 50% of the US rate, it would need 39 million barrels of oil added per day – a figure that equates to 40% of total global demand last year.

For India, the additional jump in oil demand would be an additional 36 million barrels per day. The question you have to ask yourself is how will such volumes be delivered, especially in the face of a fierce anti-carbon environment?

• Michael Rothman is President and Founder of Cornerstone Analytics, a US-based consulting firm focused on macro-energy research. He has nearly 40 years of experience covering global energy markets and has attended OPEC meetings since 1986. He is also the author of “Cornerstones of Life”, available on Amazon.

Disclaimer: The opinions expressed by the authors in this section are their own and do not necessarily reflect the views of Arab News

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Felix J. Dixon