LONDON: Emerging economies have powered much of the rise in global oil demand in recent years, but record oil prices and rising inflation have started to put pressure on this last bastion of demand growth.
Some analysts are talking of oil demand in emerging markets either slowing or perhaps falling next year, as governments look to slash subsidies, raise administered fuel prices and hike interest rates to battle rising inflation.
Oil demand in developed nations has been declining for a while, and if emerging economies led by China, the Middle East and India, which have spearheaded much of the demand growth, slow consumption, a drop in global oil demand may be inevitable. “For the world as a whole, we might get negative growth next year,” said Leo Drollas, chief economist at the Centre for Global Energy Studies in London.
Global consumption expanded by 1.1 million barrels per day (bpd) in 2007, and is forecast by the International Energy Agency to rise by 1.03 million bpd this year.
Research by Deutsche Bank shows the oil demand growth rate was the highest in the past eight years in non-OECD countries with fuel subsidies. These countries account for around 25 million barrels of oil daily. “Certain non-OECD countries can no longer afford the subsidies and have therefore reached tipping point,” Lawrence Eagles at the International Energy Agency said earlier this month.
As oil prices hover near $130 a barrel, within reach of last week’s record of $135.09, signs are emerging that the burden of subsidies are getting too difficult to bear.
Taiwan, Sri Lanka and Indonesia have all cut subsidies on fuel, and India is likely to follow suit soon, as these emerging economies look to protect government budgets under severe strain from high oil prices. “Clearly sustaining subsidies at $130 oil is not the same as sustaining it at $50 or $80,” said Harry Tchlinguirian, analyst at BNP Paribas.
Analysts say China would have to double fuel prices to pass on fully costs of oil to consumers and India would have to increase prices by 50 to 60%.
As subsidies are cut and prices rise, analysts expect demand growth to slow in many of these countries, although the growth monster of them all — China — is not expected to do anything until after the Olympics. “In China, the brakes (on demand) will come on, in my opinion, after the Olympics,” said Drollas.
China has been busy stockpiling fuel to prevent shortages ahead of the Olympics, and that demand may completely go away after the games in August.
Analysts say the world’s fourth-largest economy could be forced to turn its attention to rising inflation against a backdrop of slowing global economic growth. Annual consumer price inflation accelerated to 8.5% in the year to April.
“The inflation aspect is going to be an extremely strong factor in shaping the future of oil demand indirectly through its economic consequences,” said Tchlinguirian at BNP Paribas, adding that China could let its exchange rate appreciate, hurting its exports, or raise interest rates.
And if China decides against letting its currency appreciate, opting to raise interest rates instead, it could slow down investment in fixed assets, which could also lead to a further destruction in oil demand.
Some analysts are talking of oil demand in emerging markets either slowing or perhaps falling next year, as governments look to slash subsidies, raise administered fuel prices and hike interest rates to battle rising inflation.
Oil demand in developed nations has been declining for a while, and if emerging economies led by China, the Middle East and India, which have spearheaded much of the demand growth, slow consumption, a drop in global oil demand may be inevitable. “For the world as a whole, we might get negative growth next year,” said Leo Drollas, chief economist at the Centre for Global Energy Studies in London.
Global consumption expanded by 1.1 million barrels per day (bpd) in 2007, and is forecast by the International Energy Agency to rise by 1.03 million bpd this year.
Research by Deutsche Bank shows the oil demand growth rate was the highest in the past eight years in non-OECD countries with fuel subsidies. These countries account for around 25 million barrels of oil daily. “Certain non-OECD countries can no longer afford the subsidies and have therefore reached tipping point,” Lawrence Eagles at the International Energy Agency said earlier this month.
As oil prices hover near $130 a barrel, within reach of last week’s record of $135.09, signs are emerging that the burden of subsidies are getting too difficult to bear.
Taiwan, Sri Lanka and Indonesia have all cut subsidies on fuel, and India is likely to follow suit soon, as these emerging economies look to protect government budgets under severe strain from high oil prices. “Clearly sustaining subsidies at $130 oil is not the same as sustaining it at $50 or $80,” said Harry Tchlinguirian, analyst at BNP Paribas.
Analysts say China would have to double fuel prices to pass on fully costs of oil to consumers and India would have to increase prices by 50 to 60%.
As subsidies are cut and prices rise, analysts expect demand growth to slow in many of these countries, although the growth monster of them all — China — is not expected to do anything until after the Olympics. “In China, the brakes (on demand) will come on, in my opinion, after the Olympics,” said Drollas.
China has been busy stockpiling fuel to prevent shortages ahead of the Olympics, and that demand may completely go away after the games in August.
Analysts say the world’s fourth-largest economy could be forced to turn its attention to rising inflation against a backdrop of slowing global economic growth. Annual consumer price inflation accelerated to 8.5% in the year to April.
“The inflation aspect is going to be an extremely strong factor in shaping the future of oil demand indirectly through its economic consequences,” said Tchlinguirian at BNP Paribas, adding that China could let its exchange rate appreciate, hurting its exports, or raise interest rates.
And if China decides against letting its currency appreciate, opting to raise interest rates instead, it could slow down investment in fixed assets, which could also lead to a further destruction in oil demand.
