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Crude Oil Demand Growth In Developing Countries

As the global economy begins to recover, even if clumsily from the recession, crude oil demand projections (which are in the main, GDP-based) are regaining keen currency.

According to the U.S. Energy Information Administration, EIA, global crude oil  consumption for the first half  of 2009 fell by 3.1 million barrels per day, bbls/day compared to year-earlier levels, with OECD countries accounting for 2.8 million bbls/day or about 90% of that value. The data also showed, that consumption by OECD countries for the year 2008 was well above that by non-OECD countries contrary to claims that non-OECD consumption exceeded that of OECD countries for the first time in that year. Some analysts argue that the projected decline in oil demand for developed economies will be more than compensated for by a strong growth in that of developing nations over the next few years. That, however may not be realistic and for three reasons:

First, the argument that many developing countries (and which have command or centrally planned economies) will have their demand bolstered by increased government subsidies is hardly tenable. Some of these countries do not have  significant subsidies (and can for that matter ill-afford them), while some of those that have are opting out. Even the U.S. is proposing a global end to fuel subsidies. Nigeria for example, with a population of more than 140 million people and Africa's second-largest economy after south Africa, is also one of the most heavily (petroleum-sector) subsidized. Product subsidy for 2008 was US$4.354 billion, with that for the current year set to rise to about 133% of total capital expenditure, a situation inimical to any meaningful national development. The country's Federal Government has therefore introduced a Petroleum Industry Bill (copies of which are being widely sold) which provides for full deregulation of the sector and total eradication of all petroleum product subsidies. The provisions are also expected to usher in a regime of trasparency in that country's oil business which is often shrouded in cultic secrecy.

Most developing countries derive their revenues mostly from exports to developed countries and which, considering the current economic conditions may not substantially increase anytime soon. Latin American and Caribbean exports for example are at their worst level in 70 years. The budgetary leverage for significant petroleum subsidy increases by these developing countries may therefore be unavailable.

Secondly, the much-touted growth in demand from countries like Brazil and China may be a mirage. Prior to the recent, massive pre-salt discoveries in her Santos Basin, Brazil was essentially self-sufficient in oil. What little imports she had, were of specified grades and mostly served to augment the yield of certain other refining by-products. While the current (liquid-fuels) transportation sector around the world is oil-intensive, about 50% of all vehicles in Brazil run on bioethanol ranging from E25 to E100 (0% gasoline). Brazil boasts the world's most successful bioethanol program, which with respect to gasoline, is reportedly viable down to a crude oil price of US$30 per barrel; and with current prices at about twice that value, it is not in any imminent threat. Any expectation of an explosive oil demand growth any time soon in that country may therefore be unrealistic.

Much has been reported about China's massive oil imports, but such has to be put in proper perspective. About 70% of China's energy consumption derives from coal. Driven by the exigencies of environmental sustenance, the projected energy demand by her teeming population and the probability of future oil supply constraints, China has embarked on a massive alternative energy development program. The country is reportedly ahead of the U.S. in the solar energy race. According to the United Natiions environment programme , UNEP, China in 2008 became the world's second-largest wind market by installed cappacity and the fourth-largest by overall capacity. According to UNEP also, in the same year, China became the world's largest manufacturer of PVs for solar and 95% of that was for export; and all these from a near-zero level just 5 years ago. For liquid-fuels transportation, the country has already outsourced about 5 million hectares of prime land for biofuels production expected to derive from the Brazilian model. Even her hydropower output, the world's largest (at the end 2008), is expected to double by the year 2020. China's massive oil imports must then be seen as a stopgap measure aimed at addressing near-term energy needs while aggressively developing longer-term capacities. With such astonishing rates of progress, even the stopgap measures may be shortlived indeed. That said, these imports may be limited by the availability of storage as well as state subsidy.  

Finally, the projected quantum of demand decline for developed economies by far exceeds that of growth for developing ones. For example overcapacity in Japan is expected to rise to about 1 million barrels per day in a few years (and her demand is not expected to return to pre-crisis levels) while the efficiency measures recently introduced in the U.S. are expected to reduce demand by 1.8 billion barrels (about 5 million barrels per day) within 7 years. 
Growth estimates for India and China (the expected principal growth zones) fall short of just these two values alone. For demand projection models based on GDP, the requisite growth rates may just be such a big ask for most of these developing countries.

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