If you are under 25, or an adept user of the internet, you may have come across this image that was posted on many popular websites and social media platforms. Mexico Oil and Gas Review investigated the veracity of this claim and found that on 20 January 2016, not only was the American reference WTI below the price of a bucket of Kentucky Fried Chicken, but we sadly report that the international reference Brent also fell below that unfortunate benchmark. These two references stood respectively at US$26.55 and US$27.88. The oil was, in fact, so cheap, that one Bloomberg journalist even took it upon herself to buy a barrel, and named it Williston. Anecdote aside, the good news is that the price drop below the KFC reference was an isolated occurrence and has since gone unrepeated, with oil prices finally looking up – but for how long?
We sure hope so, but what would it take? Part of the reason behind this drop in oil prices is a reduction in demand, which flows from a slow-down of the global economy. Although European economies are no longer growing extensively, the sharp change comes from China, which is slowly but surely becoming a developed economy and modelling the typical growth of that economic group. Until recently, the Asian Giant enjoyed double-digit growth, fueling its oil consumption and making it the world’s second largest consumer for this commodity. The country’s growth figure for 2015 just came in, and stands at 6.9%. An encouraging figure, if compared to the growth rates of countries in the developed world, but in relation to China’s historic figures, it is the slowest the economy has grown in the past two and a half decades. As depressing as this may sound, it is important to put figures in context. China’s growth rate of 6.9% actually yields more additional output than 2007’s 14.2% growth rate.
As confusing as this may sound, it still does not mean demand for oil will be on the rise any time soon. Looking more closely at the composition of China’s growth, it becomes evident that only some parts of the industry have enjoyed exceptional growth, while others, such as the heavy industry, have been left behind. It would seem that growth is led by the booming service sectors, all delivered locally and thus undermining the possibility that a growing service sector could increase oil consumption through transport requirements. While services output grew by 11.6% year-on-year in nominal terms from January to September 2015, that of manufacturing only grew a sluggish 1.2%. As the Chinese would say, the manufacturing sector’s growth compared to service is as small as one strand of hair among nine cows.
China’s energy demand growth has slowed faster than its GDP, and in fact, in 2015, energy consumption rose by just 0.9%. This decoupling would lead us to believe that Chinese growth is no longer so dependent on fossil fuels. Moreover, growth is not China’s only concern. Not only has the stock market been crashing for months, the Yuan is also in the midst of a devaluation. One thing is certain, the world cannot count on China to get us out of the infernal downward spiral of oil prices.
The question on everyone’s mind is: if most demand came from China, who will step in to fill its shoes? It would need to be a country or region with a vast population eager to move into the middle class. Such expectations have been set for India and the Asian tigers, but internal struggles are hindering them from reaching their potential. Despite this delay, the previous expectations remain realistic. As those economies mature, hundreds of millions of people will enter the middle class with more disposable income and consume more energy, through driving cars and using air conditioning. In fact, it is this belief that led Exxon to assert that global energy demand would increase by 25% from 2014 to 2040 in its Energy Outlook published on January 25.
Rather than a question of how global consumption can be increased, it may just be a question of when. In the meantime, feel free to buy a barrel of oil in an effort to increase demand.
Source: HellenicShippingNews, Market Watch, The Economist, Bloomberg Energy, Bloomberg, World Bank