Oil Demand Predictions Revise Up For 2010 And 2011, Maybe

The International Energy Agency has revised upward its forecast for oil demand this year and next.

Demand is seen at 86.6 million barrels per day in 2010 , 50,000 barrels a day higher than the agency’s last forecast. The IEA says demand will move up to 87.9 million barrels a day in 2011.

The IEA hedged its predictions. It believes global GDP will be up 4.5% this year and 4.3% in 2011.The forecast that 2011 will be worse than 2010 in terms of growth has now become a chorus among economists. Oil demand could actually fall slightly if global expansion falls off even slightly.

The IEA study and the potential for slowing is based to a very large extent on China. It has become the largest net importer of crude, having passed the US in 2009. China’s economy is showing signs of slowing, joining a number of Western nations. The slowing could cause both a drop in demand and prices.

A drop in crude prices would seem to benefit an economic recovery. Low oil prices should help stimulate the use of gasoline and crude by-products, but that is only true if refineries pass along savings. Margins in the refining business have been low for four years. The companies may take the opportunity to take in less expensive crude but not pass that price benefit along.

Crude prices are also essential to the expansion of several African nations, Russia, and Venezuela. Oil at $60 may be good for China, Japan, and Europe, but it could hamper the growth of the net exporters.

The oil economic formula is hard enough to calculate in a full-blown recovery or recession. In the present environment, it is impossible.

Douglas A. McIntyre