16 Aug 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
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
- Economy of Slovakia
- Economy of Slovenia
- Economy of Spain
- Economy of Sweden
- Economy of Switzerland
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.
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