Energy Production Committee

Understanding the Petroleum Industry

Price Overview | Demand | Supply | Trade and Imports | Refining | Stocks
What's Hot: Demand | Supply | Trade and Imports | Refining | Stocks

Demand

Global Players and Patterns

• World oil demand reached nearly 74 million B/D in 1997, setting a new high for the ninth year in a row. This sustained 1990’s growth has paralleled the path demand followed in the 1970’s. However, in-between, oil had to struggle with the repercussions of the second oil price shock and subsequent recession, and world demand finished the 1980’s at a level barely higher than its earlier, 1979 peak.

Chart: World Oil Demand in total and by region.

• The steep drop in demand in the Former Soviet Union (FSU) after the collapse of communism in 1990 was more than offset by growth elsewhere in the world, especially in Asia. After 1994, as the FSU’s demand decline slowed, world oil demand growth picked up to 1.7 million B/D annually, tripling its average early 1990’s rate. The Asian crisis (See What's Hot) has now abruptly reversed this pickup.
• The growth in oil demand has been heavily biased toward the higher quality, harder to refine products. Gasolines and middle distillates - diesel, jet fuel, heating oil and kerosene - now account for almost 2/3 of world oil demand. Each now has a market share at least double the share for residual fuel oil (the heavy fuel oil used for power generation and ship fuel), which has dropped from 25% to 15% in the last 15 years.

Chart: World Oil Demand by product

• This bias has not been matched by any improvement in crude oil quality. It has therefore put enormous pressure on refiners’ margins and investment needs. (See Refining section) This pressure has been exacerbated by a fragmentation of the markets for gasoline and distillate (see What's Hot) as specialty grades, such as low sulfur diesel, unleaded gasoline and oxygenated gasoline, have been mandated at international, national, regional, state or even city levels in response to environmental concerns. An unexpected tug-of-war between gasoline and distillate (see What's Hot) for regional demand dominance has aggravated the situation yet further.
• To understand the shift in the product demand mix, it is helpful to categorize oil demand by the purpose for which the oil is used. The are four main energy-related ones : mobility or transportation (moving people or goods in private vehicles, buses, trucks, trains or planes), two under-the-boiler markets: heat and power, and electricity generation. There are also non-energy or process uses, such as feedstock for the petrochemical industry. The non-transportation uses are frequently grouped together as "stationary" uses.
• Although energy demand for each end use responds in broadly the same way to the level of economic activity, there is a marked difference between the end uses in their vulnerability to fuel substitution. Both transportation and non-energy uses are relatively captive markets for oil. However, in many energy-related, stationary markets, the substitution risk became high in the early 1980’s, after the first two price shocks and with the perceived threat of more to come. First coal and nuclear, and then natural gas, became economically attractive alternatives to oil. These other fuels were therefore able to dominate the new boiler and electricity generating markets and to displace oil from a large number of existing ones.
• Hence, transportation, where gasoline, jet fuel and diesel reign supreme, now accounts for over half of world oil demand, up from under 40% in the early 1970’s. Non-energy uses held their share of world oil demand steady over this same period, but energy-related stationary uses lost ground. Demand in the industrial sector, the mainstay for residual fuel oil, suffered most, because the synergy between the scale of industrial users’ consumption needs and the economies of scale needed to justify capital intensive development projects like LNG or natural gas trunklines made the sector especially vulnerable to inter-fuel competition. Contributing to the decline were environmental mandates that favored natural gas.
• Oil demand per capita varies greatly between countries, The annual average is still under 1 barrel a person in both China and India, but over 16 barrels in North America. This variation is due primarily to differences in standards of living, economic maturity and access to other fuels.
• These same factors lead to wide variations in the product mix between regions too. Dependence on the transportation sector, and therefore the role of gasoline and distillate, is much greater in the mature industrial economies, and in the U.S. in particular. (See U.S. Demand).  In the industrial countries' Organization for Economic Cooperation and Development, for instance, residual fuel oil demand accounts for a mere 10% of oil demand. Easy access to other fuels, a shift toward less energy intensive, service-oriented activities, and a relocation of some industrial activities to the developing economies have all been important factors in the decline. In contrast, in the developing countries, residual fuel oil’s share is still more than double this level.
• The importance of heating oil, propane and kerosene as Northern Hemisphere heating fuels gives world oil demand a winter peak. The average 3.5 million B/D swing between the highest demand quarter, the fourth, and the lowest, the second, creates a tendency for world prices – but not necessarily U.S. prices - to be strongest in the fall and weakest in the spring. (U.S. demand peaks in the warm weather, driven by gasoline consumption.)

• In the U.S., oil demand has been significantly more variable than oil production. Demand reached its all time high of 18.8 million B/D in 1978. It then plunged by 20% in just five years, reaching a low of 15.2 million B/D in 1983. Recovering this lost ground has been much more arduous and time-consuming. Demand is finally on track to exceed its 20 year old record high this year, having climbed back to 18.6 million B/D, a new peak for its current growth phase, in 1997.

• The primary driver for these swings in oil demand has been the level of economic activity, which is itself in part a function of oil prices. Each of the last 3 U.S. recessions (1974/75, 1980/81, 1991) was immediately preceded by a sharp increase in the price of oil that, in the latter two cases, was subsequently eroded. Oil use dipped each time the economy stumbled, and then recovered as the economy picked up speed again.
• Oil demand has reflected the economy’s fluctuations but not its rate of growth, because the U.S. has become a much more efficient consumer of energy in general and oil in particular. Per dollar of GDP, the U.S. now uses only 2/3 of the energy and just over ½ the oil that it used 25 years ago. This means that oil has been meeting a shrinking share of U.S. energy needs. However, oil is still the leading fuel, with 40% of the U.S. market, and virtually all of the market for transportation energy.
• Oil’s loss of market share can be primarily attributed to substitution, especially in the energy-related, stationary markets in the industrial sector (see World Demand). Residual fuel oil’s share of U.S. oil demand has shrunk to a paltry 4%, one of the lowest levels in the world. This low level, close to irreducible, necessarily means that the substitution pendulum’s swing away from oil has lost much of its momentum.
• Captive markets are not immune to economic and price signals. However, devoid of ready alternatives, the oil demand elasticity of such markets is usually very low. In the late 1970’s/early 1980’s, this was not the case in the U.S. in oil’s most captive market, the transportation sector. Following the introduction of CAFE (Corporate Average Fuel Efficiency) standards in 1975, gasoline demand fell from a peak of nearly 7.4 million B/D in 1978 to 6.6 million B/D in 1983, greatly amplifying the recession-induced downturn in oil demand in the early 1980’s.
• Then, as the momentum behind more fuel efficient vehicles was lost, and light trucks (What's Hot) became the U.S. vehicle of choice, gasoline demand surged. It reached a new, all-time peak of 8.0 million B/D in 1997 and in the first eight months of 1998, has been running 150 thousand B/D higher. It is this surge, coupled with the substitution slowdown and a period of economic growth of almost unprecedented length, that has led to what is now the 7^th consecutive year of oil demand growth for the U.S.
• America’s love of the automobile and its relegation of fuel oil to the margins of the energy market have made the U.S. the most gasoline-oriented market in world. Gasoline now accounts for 43% of U.S. oil demand. Adding in demand for the other transportation fuels, like diesel and jet fuel - which is also high by international standards because of the country’s vastness - raises this share to two-thirds.

• The U.S., where gasoline is king, where gasoline’s use increases during the summer driving season, and where oil’s heating role is relatively minor, is the only important oil consuming region whose pattern of consumption and refinery operations is summer peaking. As a result, crude price differentials between the U.S. and other markets often peak in the spring.
• Demand varies regionally. Over 80% lies East of Rockies with the East Coast the largest single market. Gasoline is the leading product in every market except PAD 3. There, the huge feedstock demand from the Gulf Coast’s petrochemical industry pushes gasoline into a distant second place. The only region with significant oil demand seasonality is the Northeast, which has 70% of all U.S. sales of heating oil. Heating oil has an almost 60% share of the Northeast’s distillate market, while its share in the rest of the country is only 8%. Winter distillate prices are much stronger relative to gasoline in the Northeast than anywhere else in the U.S.

For more info, got to What's Hot in Demand

• Asia Then and Now
• The Gasoline/Distillate Tug-of-war, from the Demand Side
• Market Fragmentation, from the Demand Side
• Light Trucks Plus Low Prices Equals Soaring Gasoline Demand

To see graphs, go to Demand Graphs

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