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What drives oil prices? The Demand side: OECD vs non-OECD - Bear Market Trader
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What drives oil prices? The Demand side: OECD vs non-OECD

Points to take away from this read

 

Most OECD mem­bers are high-income economies with a very high Human Devel­op­ment Index (HDI) and are regard­ed as devel­oped coun­tries.

OECD coun­tries con­sume more oil than non-OECD.

OECD oil con­sump­tion has actu­al­ly declined. Where­as non-OECD oil con­sump­tion has grown.

 

Disclaimer

Most of the infor­ma­tion here comes from the U.S. Ener­gy Infor­ma­tion Administration’s web­site (EIA) and some from Wikipedia. I am not pre­tend­ing to come up with all this infor­ma­tion myself. The only thing I did was go through the infor­ma­tion and put togeth­er pieces of it to make it eas­i­er to under­stand and access for myself. This, I want to share with you and I hope it ben­e­fits you in some way. All the praise goes to the good peo­ple that put this up on the EIA and Wikipedia websites.

Please go over to these respec­tive web­sites for a lot more information:

EIA on ‘What dri­ves Crude Oil’

https://www.eia.gov/finance/markets/crudeoil/

Wikipedia on OECD mem­ber economies

https://en.m.wikipedia.org/wiki/Category:Organisation_for_Economic_Co-operation_and_Development_member_economies

Wikipedia on OECD

https://en.wikipedia.org/wiki/Organisation_for_Economic_Co-operation_and_Development

Inter­na­tion­al Telecom­mu­ni­ca­tions Union’s list of non-OECD countries

https://www.itu.int/ITU‑D/youth/yes/2009/List%20of%20countries.pdf

 

Keep­ing it simple

As I tried explain­ing in the dis­claimer this post is just going to be the sum­ma­riza­tion of ‘facts’ I have found on the inter­net. Sort of like a cheat sheet for any­thing on the sup­ply side of crude oil. Above you can find the sources for the infor­ma­tion list­ed here so head on over and look up more details if you wish.

 

So here it goes…

 

Where does all the oil go?

I list­ed up where most of the oil comes from here: What dri­ves oil prices? The sup­ply side: OPEC vs non-OPEC. Now, let’s have a look at where it flows to. The world of oil con­sump­tion can be divid­ed into two groups. The ones that belong to OECD, the Organ­i­sa­tion of Eco­nom­ic Coop­er­a­tion and Devel­op­ment, and the ones that don’t; non-OECD.

 

Current member economies of OECD

A

B

C

D

E

F

G

H

I

J

K

L

M

N

P

S

T

U

 

Biggest Non-OECD member economies

 

For the whole list of mem­ber economies please refer to the fol­low­ing PDF pro­vid­ed by the Inter­na­tion­al Telecom­mu­ni­ca­tions Union: https://www.itu.int/ITU‑D/youth/yes/2009/List%20of%20countries.pdf

 

Let’s look at a top 20, pro­vid­ed by Wikipedia, on the world’s largest oil con­sum­ing coun­tries. I mere­ly added a col­umn on if the coun­try is or is not involved with OECD.

 

Source Wikipedia, Sep­tem­ber 2015: https://en.wikipedia.org/wiki/List_of_countries_by_oil_consumption

OECD vs Non-OECD Oil Demand

Oil Con­sump­tion

  • The Orga­ni­za­tion of Eco­nom­ic Coop­er­a­tion and Devel­op­ment (OECD) con­sists of the Unit­ed States, much of Europe, and oth­er advanced countries.
    • At 53 per­cent of world oil con­sump­tion in 2010, these large economies con­sume more oil than the non-OECD coun­tries, but have much low­er oil con­sump­tion growth.
    • Oil con­sump­tion in the OECD coun­tries actu­al­ly declined in the decade between 2000 and 2010, where­as non-OECD con­sump­tion rose 40 per­cent dur­ing the same period.
  • Oil con­sump­tion from coun­tries that aren’t part of OECD has risen sharply over the last few years.
  • ris­ing oil con­sump­tion reflects rapid eco­nom­ic growth.
  • cur­rent and expect­ed eco­nom­ic growth heav­i­ly influ­ence glob­al oil demand and oil prices.
  • com­mer­cial and per­son­al trans­porta­tion activ­i­ties require large amounts of oil and are direct­ly tied to eco­nom­ic conditions.
  • many man­u­fac­tur­ing process­es con­sume oil as fuel or use it as feed­stock and in some non-OECD coun­tries oil remains an impor­tant fuel for pow­er generation.
  • oil prices rise when eco­nom­ic activ­i­ty and in turn oil demand grows.
  • many non-OECD are also expe­ri­enc­ing rapid pop­u­la­tion growth, this is an addi­tion­al fac­tor that sup­ports oil demand and its consumption.

 

Struc­tur­al Conditions

  • struc­tur­al con­di­tions in each country’s econ­o­my fur­ther influ­ence oil prices and eco­nom­ic growth
    • devel­op­ing coun­tries tend to have a greater pro­por­tion of their economies in man­u­fac­tur­ing indus­tries, which are more ener­gy sen­si­tive than ser­vice countries
    • Although trans­porta­tion oil use is usu­al­ly a small­er share of total oil con­sump­tion in non-OECD coun­tries, this use tends to increase rapid­ly as expand­ing economies increase the need to move goods and people.
    • Vehi­cle own­er­ship per capi­ta is also high­ly cor­re­lat­ed with ris­ing incomes and has much room to grow in non-OECD countries.
    • For these rea­sons, non-OECD eco­nom­ic growth rates tend to be an impor­tant fac­tor affect­ing oil prices.
  • Struc­tur­al con­di­tions in each coun­try’s econ­o­my influ­ence the rela­tion­ships among oil prices, eco­nom­ic growth, and oil consumption. 
    • Devel­oped coun­tries tend to have high­er vehi­cle own­er­ship per capita. 
    • Because of this, oil use with­in the OECD trans­porta­tion sec­tor usu­al­ly accounts for a larg­er share of total oil con­sump­tion than in non-OECD coun­tries; it is also more mature and slower-growing. 
    • Eco­nom­ic con­di­tions and poli­cies that affect the trans­port of goods and peo­ple thus have a sig­nif­i­cant impact on total oil con­sump­tion in OECD countries. 
    • Many OECD coun­tries have high­er fuel tax­es and poli­cies to improve the fuel econ­o­my of new vehi­cles and increase the use of bio­fu­els. This tends to slow the growth in oil con­sump­tion even in times of strong eco­nom­ic growth. 
    • Fur­ther­more, the economies in OECD coun­tries tend to have larg­er ser­vice sec­tors rel­a­tive to man­u­fac­tur­ing. As a result, strong eco­nom­ic growth in these coun­tries may not have the same impact on oil con­sump­tion as it would in non-OECD countries.

 

Chi­na

  • Chi­na’s strong eco­nom­ic growth has recent­ly result­ed in that coun­try becom­ing the largest ener­gy con­sumer and sec­ond largest oil con­sumer in the world. In addi­tion, Chi­na’s ris­ing oil con­sump­tion has been a major con­trib­u­tor to incre­men­tal growth in world­wide oil consumption.
    • EIA projects that vir­tu­al­ly all the net increase in oil con­sump­tion in the next 25 years will come from non-OECD countries.

 

Ener­gy Policies

  • Although oil use is clear­ly tied to eco­nom­ic activ­i­ty, ener­gy poli­cies also sig­nif­i­cant­ly affect that relationship.
  • Many devel­op­ing coun­tries, for exam­ple, con­trol or sub­si­dize end-use prices, which inhibits con­sumer response to mar­ket price changes. This reduced demand response to price changes fur­ther con­tributes to the impor­tance of eco­nom­ic growth as a key dri­ver of non-OECD demand and in turn glob­al oil prices.
  • OECD coun­tries tend to have few­er sub­si­dies on end-use prices, so changes in mar­ket oil prices are often quick­ly reflect­ed in prices faced by consumers. 
    • How­ev­er, it takes time for peo­ple to adjust their trans­porta­tion rou­tines and for the vehi­cle stock to turn over and become more ener­gy-effi­cient in response to price changes.

 

Expect­ed outcomes

  • changes in the out­look for future eco­nom­ic con­di­tions can also have an imme­di­ate impact on oil prices. 
    • For exam­ple, an improve­ment in the eco­nom­ic out­look would tend to increase the chance that oil mar­kets will tight­en in the future, result­ing in high­er expect­ed future oil prices.
    • This change in expec­ta­tions would be reflect­ed in high­er oil futures prices. This rise in futures prices increas­es the incen­tive to hold inven­to­ries, which in turn decreas­es avail­able cur­rent sup­ply and tends to raise cur­rent prices.
  • Changes in expect­ed future oil prices also affect con­sumers’ deci­sions con­cern­ing modes of trans­porta­tion and vehi­cle pur­chas­es. If prices are expect­ed to remain high or increase in the future, more con­sumers may decide to pur­chase more fuel effi­cient vehi­cles or use pub­lic trans­porta­tion. Deci­sions like these help to reduce future oil demand and would tend to mod­er­ate expect­ed price increases.

 

Thanks for reading

 

I hope this post helps to make the rela­tions between OECD mem­bers and non-OECD coun­tries more clear in terms of the demand of the world’s oil and thus oil prices.

 

If you like what I’m doing here please leave a quick com­ment. It will be much appre­ci­at­ed. Trolls are still wel­come as well. And sub­scribe to my newslet­ter if you like. 

T3chAddict
t3chaddict@bearmarkettrader.com

Day trader. Tech geek. Sim racer/Pilot.

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