Record oil prices and a slowdown in advanced economies are set to curb global oil demand despite growth in China and the Middle East, the International Energy Agency (IEA) forecast yesterday, saying stockpiling was a key factor.
Demand from emerging economies might be set back if and when governments decide that fuel subsidies are unsustainable, the IEA said in its monthly report.
It also provided figures showing a surge in production of biofuels.
On balance “despite continued strength in China and the Middle East, it would seem that the risks to demand [for oil] remain on the downside,” the IEA said, asking: “Do we need more oil?”
“While consumers may be adjusting to high oil prices, the full impact of current high oil prices in excess of US$120 per barrel, if sustained, has yet to be factored into either behavior or forecasts,” it said.
“The most recent data and estimates suggest that the oil market should have been in surplus for the past two months and should remain in that position for the rest of 2008 — as long as OPEC maintains output at current levels,” it said.
A driving factor in the surge of oil prices recently to a record of US$125 per barrel was competition between users seeking to replenish oil inventories and users buying oil to meet immediate demand.
By deciding not to address the matter of inventories until September, OPEC had probably intended to send a message of stability to markets.
But it had created instead a perception that it was happy with a price of US$100 a barrel or more and would not increase output.
This had ratcheted up the price baseline, the IEA surmised.
But, forecasting “further downward adjustments to demand,” the report said that one such factor which might emerge was the unwinding of fuel subsidies.
“Faced with the realization that high prices may be with us for some time, several countries, such as Indonesia, are reassessing the budgetary reality of sustaining oil price subsidies,” it said.
“It will not be easy to unwind them,” the IEA warned, saying that “many countries are wary of civil unrest, and may therefore try to cushion low-income earners with other payments.”
But “when such shifts do come, they could cause temporary downward shocks to demand.”
China, the IEA said, had recently decided to boost subsidies as a response to shortages, but it said that the cost of this could be huge.