Weak demand for oil is sign of weak global economy

David Weinberg Oct 14, 2014
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Weak demand for oil is sign of weak global economy

David Weinberg Oct 14, 2014
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Oil prices have been on a downward swing for the past few months and now there is an expectation among industry forecasters that demand for oil will slow soon.

The International Energy Agency says oil demand growth is at its lowest in five years, with demand expected to grow by 700,000 barrels a day. That’s 200,000 fewer than it previously expected.

Antoine Halff is the chief oil analyst for the agency: “The main driver really has been the economy,” says Halff. “The economic recovery continues to be slower than expected.”

The agency lowered its forecasts in large part because the International Monetary Fund recently lowered its forecast for GDP growth worldwide.  

“And now China, which for the last 10 to 15 years was the main engine of economic growth, has been slowing dramatically as well,” says Halff.

Slower growth in Asia and in developing nations around the world is a big factor in oil demand. Last year, for the first time, the demand for oil in developing countries exceeded that of developed nations.

Growth in those developing nations is slowing, a worrying sign for oil producers, says IHS oil analyst Jamie Webster. “It’s also a worrying sign for the economy and for oil markets because that is really considered to be the home for demand growth long term.”

Despite the drop in global demand, so far at least, oil production has not declined. As a result, analyst Steven Kopits expects gas prices to drop in the U.S. which could spur demand.

“The caveat on that is that the miles per gallon for our automobiles has increased quite a bit,” he says. “For new cars over the last seven years, or so it’s up 20 percent.”

Renewable energy sources don’t make up a big enough share to cut into demand for oil. But gains in efficiency, and the rise of the electric car, Kopits says, could be game changers.

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