Increasing Demand for Crude Oil

Soaring crude oil prices have disrupted the economic fabric of the entire world. Rapid increase in demand for crude oil is considered to be the pivotal reason for the increase in price. As the supply has not been increased by OPEC, so the price rise is inevitable. Moreover US recession which has resulted into a weak dollar is also regarded as one of the major causes of price rise.

World’s fastest and second fastest growing economies are thought to be the culprit behind the increase in demand. Demand of crude oil in China and India is increasing rapidly. Rapid urbanization and increase in the number of vehicles have ensured that crude oil remains in great demand here. TATA Motors 1 lakh rupee car, NANO, is also soon going to hit the Indian market which will further increase the consumption of oil in India.

World’s energy demand is growing at an average annual rate of 1.7 percent. Fossil fuels will be providing over 85 percent of world’s commercial energy needs as there is no alternative available at present. Oil and gas will be accounting for 60 percent of the total energy mix. If we just take into account that the demand for oil grows at an average annual rate of 1.4 percent then the demand for oil will be 118 million barrels a day by the year 2030.

Majority of the demand will be from the developing countries where the consumption is expected to reach to 58 mb/d. Half of the demand will emerge from the Asian countries like India and China. Transportation will be the major contributor in increase in demand.

OPEC Secretariat has estimated that by 2020 OPEC will have to expand its capacity by 32 mb/d to 41 mb/d to meet the global demand. To increase the capacity to such extent the member countries will have to invest around $ 230 billion to $ 500 billion.
OPEC member countries are also to invest around $ 50 billion in crude oil distillation refinery projects in order to increase the capacity by 3 mb/d by the end of 2012.

Too much dependence on OPEC does not augur well for the global economy. This is why alternative means are being evaluated to decrease the dependence of the world on crude oil. If the soaring price is not checked then it will adversely affect the global economy. Poor countries will be the major sufferers.

Biofuels are considered to be an alternative fuel but it is still in its nascent stage. It is also marred with serious controversies. Due to scarce water resources and limited land, production of Biofuels is quiet difficult. Moreover use of agricultural land for the production of Biofuels can have adverse impact on the food prices.

Although there are enough oil reserves to meet the demand for decades but still alternative means needs to be evaluated. This would not only decrease the dependence of the world on OPEC but the discovery of alternative renewable fuels will ensure cleaner and greener environment.

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Decrease Dependance on OPEC

Increase in the price of crude oil has beaten all expectations. In September 1999 crude oil was below $ 20 per barrel; in March 2004 it was around $30 per barrel; in April 2007 it reached to $60 per barrel; at present the price is somewhere around $125 per barrel and it is expected to cross $ 200 per barrel in near future.

Demand for crude oil has increased considerably in recent years. Rapid urbanization of developing countries and increase in the use of vehicles (public and private both) are considered to be the major cause of the increase in demand of crude oil. Supply has not increased as compared to increase in demand so the price of crude oil is increasing rapidly. Besides, weakening of dollar too has resulted in rise in price of crude oil.

World’s energy demand is growing at an annual average rate of 1.7 percent. Organization of Petroleum Exporting Countries (OPEC) has agreed to invest over $150 billion to increase the production of crude oil by 5 mb/d by 2012. Although the OPEC member countries are giving some signal of increasing the supply of crude oil but they are apprehensive to do it on large scale. Certain uncertainties which haunt the OPEC member countries are:

Future economic growth of the world.

Performance of non-OPEC countries

Policies of individual countries regarding the consumption of oil.

Technological development.

More than three-quarters of recoverable crude oil reserves of the world is with OPEC. OPEC which at present has 13 member countries is world’s one of the most successful cartels.

For OPEC member counties crude oil is the major contributor in their economic development. In the year 2006 crude oil accounted for 75 percent of total export revenues for OPEC member countries; however for majority of the member countries the contribution exceeded 90 percent. This is why these countries look for secure oil market and predictable demand and supply to ward off any uncertainty. And whenever they get an opportunity to maximize their profit they do it at any cost.

During 1980’s demand for crude oil had decreased to half which had adversely affected the OPEC member countries. Proper and reliable demand forecasting will help both the supplier and the consumers. Joint Oil Data Initiative is a new concept which is now being practiced wherein both the producers as well as the consumers equally participate in forecasting demand.

Although enough crude oil reserves are there to meet our demand for oil for decades to come, it is important that effort should be made to find an alternative means. The world should not be completely dependent on OPEC member countries for crude oil. Alternative fuels should be developed which will decrease our dependence on crude oil. Political initiative should be there so that OPEC does not take undue advantage of consumers.

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