Traditionally, demand levels would determine the overall condition of the oil market. Supply (and the investment required for that supply) would be based upon what demand told us.
Actually, oil never reflected the demand-supply relationship as well as other sectors of the market. Oil has an irritating habit of not reflecting what it should in the dynamics of market play. Until recently, petroleum economists would comment (or lament) about the demand inelasticity of oil. That means, due to the lack of available alternatives (especially in transportation), demand for oil products would not decline as the price rose.
Such a relationship has certainly been tested over the last several years. The New York market price for West Texas Intermediate benchmark crude (WTI) moved from a $147.27-per-barrel high in July of 2008 to below $33 by the end of that year, only to rise again to almost $114 by the end of April of this year. It's moved back down to the $85-$90 range since then.
We did witness some demand destruction in the summer of 2008, and then (to a much lesser extent) in the spring of this year, with the rise of prices at the pump to well over $4 a gallon.
Yet what must be remembered is the simple fact that developed countries no longer call the shots in oil demand.
This is now - officially - a global market.
On the production side, of course, it has been a global market for more than 50 years. The primary reserves are located in the Middle East, the former Soviet Union and offshore in places stretching from Vietnam and Australia to the Arctic basin. The supply side, therefore, has been global for some time.
But now the demand component also is global in scope
. This changes everything, as you'll see. And there's even a way to track this new (and more accurate) demand for oil.
Three "Crude" Shifts
By fixating on U.S. demand, analysts exhibit an out-of-date tendency. The description of the American market as "having less than 5% of the world's population yet consuming 25% of the world's energy" no longer has the impact it once did.
Yes, the United States remains one of the two largest end users internationally (the other being China
). But the spike in demand now is coming from developing parts of the world. As demand figures move laterally in North America and Western Europe, they are accelerating elsewhere.
Three elements are leading to this rise.
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