 Director of the Oil and Middle East Program, Oxford Institute for Energy Studies, & St. Antony's College, University of Oxford – UK In terms of lessons for Middle Eastern producers, technological progress is irreversible, and should not be resisted. Instead, producers should focus on reducing price volatility. They should: ensure that investment in the oil sector is sufficient to ensure a spare capacity cushion; emphasize the importance of hydrocarbons to economic development; and not shy away from the debate on climate change. Producers should also seek active participation in international policy making. |
Oil demand growth has been focused in a few non-OECD economies. Oil exports will therefore shift away from the US and Europe. Oil demand is dependent on economic growth in a non-linear way. Above a certain threshold price, demand in OECD countries falls rapidly. The ratio of energy expenditure to income is therefore an important indicator to monitor.
Non-OECD countries are likely to see faster growth in oil demand as new consumers enter the market. In future, however, non-OECD countries are likely to respond more quickly to price changes as subsidies are phased out.
The effects of price changes on oil demand are asymmetric — an increase in oil price will eventually reduce demand but it is not necessarily true that a decrease in oil price would reverse that decline.
Since 2000, monetary policy has been able to cushion economies from singular oil price shocks. It is uncertain how high oil prices would need to rise to affect economic growth.
Relative prices in the energy mix have little effect, since fuel substitutions occur only on the margin. Shocks from outside the oil market, such as from severe recessions, can lead to steep declines in oil demand, with concomitant effects on prices.
Technological developments toward energy efficiency are affected asymmetrically by oil prices, as price rises increase incentives towards efficiency, but falling prices are unlikely to slow progress.
Assumptions about economic growth have substantial effects on oil demand projections. However, perhaps more important are the assumptions made about the income elasticity of oil demand.