The global demand for oil and gas is expected to increase steadily in the next few decades, as oil and gas remain the world’s most reliable sources of energy. Currently, the world consumes more than 95 million barrels of liquid fuels and oil per day. This translates to about 35 billion barrels a year. In 2008, the consumption was 86 million barrels per day. When we compare the 2008 and 2016 figures, we notice a steady rise in demand of about 11 percent per year. In this article, we’ll discuss the factors that influence the ever-rising demand for oil and gas worldwide.
Before we look at these factors, it is important to note that the demand for oil is inelastic to price; in other words, demand is not affected by the price. The demand for oil products will always rise with time. The reason for this is that the demand for oil is dependent on three key parameters:
Nations are striving to grow their economies while households are working hard to increase their incomes. Other factors such as actions taken by OPEC, growth in the transportation sector, idiosyncratic factors and new discoveries in science and technology may also affect the demand for oil.
Developed countries consume more oil than developing nations; yet, they do not have as many people as there are in the developing countries and regions. For instance, the United States consumes 25 times more oil than India, which has a higher population. This is expected to exert pressure and fuel demand for oil in the developing countries as they try to catch up with developed countries.
Note that a developed nation’s demand for oil is unlikely to decrease. For example, the U.S. demand for oil stands at 19.3 million barrels per day, and statistics show that the demand will continue to rise because oil has no substantial alternative; furthermore, the American economy uses millions of barrels of oil every day. Also, models and forecasting show that the demand for oil in Europe is set to increase as the economies of some member countries continue to grow.
The swelling world population is a major factor that is exerting pressure on the demand for oil. As noted in a recent Forbes article, the demand for gasoline increased by 15 percent in the first half of 2016 as the India’s population continued to grow. Also, personal incomes of many families in India are on the rise and more families are working hard to replace the motorcycles and scooters with cars. The country has about 380 million children who are under the age of 15. These children will inevitably influence the country’s demand for oil in the coming few years as they begin to drive.
Evolution in science and technology is also contributing to the ever-rising demand for oil. The desire to develop materials that can withstand high temperature, high pressure and high stress is positively impacting the demand for oil: manufacturing these materials requires millions of gallons of oil as the primary raw material. This has led to a sharp rise in demand for hydrocarbon fuel.
The transportation sector relies on oil for all its activities. The sector consumes enormous amounts of gasoline and diesel every day; in fact, almost 50 percent of oil consumed in the United States is for the transportation industry. This means that the demand for oil to satisfy the needs of the sector will always increase as manufacturers bring more vehicles on roads. According to the latest statistics, the number of vehicles produced every day is growing faster than it did a few decades ago. For instance in 2015, over 165,000 new cars were produced every day. These are fuel-driven cars that together require millions of gallons of gas per day.
The role of OPEC (Organization of the Petroleum Exporting Countries) in oil market stabilization cannot be argued. The organization’s actions have a direct impact on the oil market prices, which in turn influence the global demand for oil. Seasoned world watchers wait for signals from OPEC before they increase or reduce the volumes of oil they buy. OPEC holds regular meetings and encourages members to formulate policies and agreements meant to bring stability to the world’s oil market.
In some cases, OPEC’S objective to reduce price fluctuations send wrong signals to players. Oftentimes, in its effort to stabilize prices, OPEC makes announcements meant to eliminate unnecessary fluctuations; unfortunately, such actions are usually misinterpreted and result in increased demand for oil.
There are other idiosyncratic factors that directly impact the demand for oil. For instance, China is taking advantage of reduced world oil prices to fill its strategic oil reserves. The country is planning to build 500 million barrels of storage space by 2020, resulting in an increase for the demand for oil. The trend is expected to continue until the country achieves its target. Note that other than filling its strategic reserves, China’s transportation sector is also growing, and consumes more oil year over year.
There are peripheral factors that directly influence the demand for oil, such as higher taxation levels. Lower oil intensities in countries that consume oil are likely to affect the demand for petroleum products. Also, greater efficiency and purposeful consumption of petroleum products tend to reduce the amount of oil consumed and decrease demand. Lastly, adopting a more diverse energy mix that allows oil consumers to utilize other sources of energy such as electricity and renewables may in the long run influence the world’s demand for oil. For now, however, demand will increase.
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