Oil Demand: The Price Is Right or the Customer Is Right?
(Bloomberg Gadfly) -- Gasoline prices are up about 30 cents a gallon for the average American over the past year. And you can bet the average American doesn't like that -- even though, at about $2.80 a gallon, gasoline is nowhere near the nearly $4 level that held before oil prices crashed.
Half a world away, India's drivers have it even worse. Pump prices in Delhi are actually higher than in the summer of 2014 and have become a political flashpoint ahead of next year's elections. Similarly, Beijing's drivers are paying prices not far off those that prevailed before oil began falling.
It's easy to think that drivers drive, come what may; if you need to go get groceries, you go get groceries, whether you're burning fuel that costs $2 or $4 a gallon.
But data compiled by ClearView Energy Partners, a research firm based in Washington, suggest that isn't necessarily the case -- and not just in the U.S. They looked at the correlation of oil demand with real gross domestic product and real Brent crude oil prices across several 10-year periods for 67 countries (using numbers from BP PLC and the World Bank). For the sake of clarity, I've selected 25 of the largest or fastest-growing oil markets, representing about 80 percent of global oil consumption in 2016.
The charts below show oil demand for each country and its correlation coefficient with GDP (y-axis) and oil price (x-axis) for three 10-year periods ending in 2006, 2011 and 2016. The bubble size corresponds to share of global oil consumption. They're also colored according to whether or not they are OECD members.
During the super-cycle, China's breakneck pace of industrialization and construction required oil at any price (especially diesel). Hence, it sits high up in that upper-right quadrant where oil demand marched in lock-step with both rising GDP and rising prices. Then again, so did most of the world. For example, Americans didn't (temporarily) lose their taste for trucks until late 2007, when oil neared $100 a barrel and the economy neared recession.
Rolling five years on, the oil-price spike and the financial crisis pushed the single biggest oil market in the world into a markedly different neighborhood. U.S. demand decoupled from GDP and appeared to react to the rebound in oil prices that began in 2009. While emerging markets remained essentially captive customers for oil, the U.S. looked more like Japan or Germany, where economic and conservation factors have weakened the link between GDP and consumption.
Come 2016, the map changed completely. Oil demand in much of the emerging world remains closely correlated with economic growth. But now, as in the U.S., it displays some negative correlation with prices. In other words, the picture suggests that, for these countries, oil demand goes up as economies grow but also tends to react to prices -- like an everyday product.
Hold on, though.
Before declaring oil addiction to be over, it's worth remembering the majority of that negative correlation to prices relates to the period after 2013 -- that is, during the crash. Demand increased faster because prices fell. India's jumped about 8 percent in both 2015 and 2016, the fastest pace for two consecutive years since the late 1990s (just after another oil crash, as it happens).
What we don't know yet is whether that negative correlation with prices holds if prices rise further from here, either for reasons of economic or consumer behavior -- or, in India's case, if the government reimposes price caps to relieve the burden on voters -- sorry, I meant drivers.
Yet it would also be a mistake to presume everyone will simply shift back to hanging out in the top-right quadrant of those charts. For one thing, even with the federal government attempting to weaken fuel-efficiency targets, U.S. oil demand's link with GDP is likely to keep weakening along with that of primary energy demand in general, and price sensitivity looks stronger than it used to: Gasoline demand, roughly half the U.S. market, flattened out again last year as average prices rose all of 28 cents to $2.53 a gallon. That applies even more so for the OECD as a whole -- which is still 48 percent of the global oil market.
Emerging markets, too, aren't likely to be as captive as they were. Analysts at Bank of America-Merrill Lynch concluded in a recent report that the leading countries in terms of oil demand growth are also those that display the highest sensitivity to prices. Oil demand growth in the biggest, China, has shifted more toward consumers; and efforts to mitigate pollution and rising dependence on imported oil, plus build a domestic electrified-vehicle industry, present structural headwinds not present a decade ago.
India's government appears to have scaled back its ambitious plans for vehicle electrification. Yet the factors behind them remain: India imports four out of every five barrels of oil it consumes and is home to 10 of the world's 20 most-polluted cities, according to the World Health Organization. Falling prices for electric vehicles should rekindle those ambitions over time.
The apparent shift in what drives oil demand isn't conclusive. But it fits with the emergence of more competition in energy's historically siloed markets -- and suggests suppliers taking consumer demand at any price for granted at their peril.
-- Correlation charts by Dimitrios Pogkas
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.
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