Until a decade ago, most of the world was a captive customer of oil – consumers would pay any price for gasoline and oil demand was soaring regardless of the surging oil prices.
But recently, many countries around the world have started to show more sensitivity to oil prices – oil demand grows as their economies grow, but oil demand is also more susceptible to oil price swings, with the oil price-consumption correlation behaving more like an everyday product, according to data by Washington-based ClearView Energy Partners and research by Bloomberg Gadfly columnist Liam Denning.
Although it’s at least a decade or more too early to call the end of the world’s oil addiction, the research and data suggest that in a growing number of large oil-consuming economies oil demand now correlates negatively with oil prices. In other words, consumption drops when prices rise and vice versa – a common economic concept applicable to almost every other product on the market.
With oil, this has not always been the case.
ClearView Energy and Denning analyzed data for three 10-year periods ending in 2006, 2011, and 2016, respectively.
During the first 10-year period until 2006, countries comprising four-fifths of oil demand, including the United States, India, China, and Russia, showed a positive correlation between oil demand and their gross domestic product (GDP) and between demand and oil prices. In the decade before the financial crisis in 2007-2008, oil demand soared almost everywhere in the world, despite the fact that oil prices were also rallying. This was the period of Chinese industrialization and construction boom which gobbled up oil at any price. In most of the world, the picture was the same—oil demand rose together with rising economies and with rising oil prices, suggesting that those countries were captive customers of oil.
The second 10-year period in the research coincides with the 2007-2008 financial crisis and the recession that followed. During the 10 years through 2011, U.S. oil demand decoupled from American economic growth and started to react to the resurgence of oil prices that began in 2009. In that period, the U.S. shifted away from being a ‘captive’ customer of oil to look more like Germany or Japan, where the link between GDP and oil consumption has weakened. While this was a profound shift in how U.S. oil demand correlated with GDP and oil prices, many of the emerging economies—including the biggest oil demand drivers India and China— still looked like captive customers of oil. Their oil demand was soaring even in periods of oil price spikes, the research and data show.
Then, in the third period—the ten years through 2016—even oil demand in China and India looked like more responsive to the prevailing oil prices. In those countries and other developing economies, oil demand growth is still closely connected with the GDP growth. But oil demand has started to show some negative correlation with oil prices, suggesting that consumption is more susceptible to the price of oil than it was in the previous decades. True, the 10-year period until 2016 includes the oil price crash during which the negative correlation was heightened by the fact that demand grew faster because of the low oil prices.
Nevertheless, India and China have now moved into the group of economies that show positive correlation between oil demand and economic growth, and a negative correlation between demand and oil prices. The United States is also in this group, with a weak positive correlation between demand and GDP and with a negative demand/oil price correlation, the research showed.
It’s not clear whether the global economies will continue to show a negative correlation between oil demand and oil prices from this point onwards, but the research suggests that in the United States, and even in China and India, oil demand is now more sensitive to oil prices than it was a decade or two ago, and that oil producers may be wrong to think that they still hold captive customers who would buy their product at any price.