Oil price-demand link no longer as simple as ABC

"Oil prices go up and demand goes down, it's simple, it's ABC," then Saudi Oil Minister Zaki Yamani was quoted as saying in 1979, shortly before demand then prices collapsed from a record above $30 a barrel. Few would agree with him today.
Oil above $60 for the best part of two years and at $70 today has barely dented demand growth and neither Opec nor the International Energy Agency (IEA) foresee a repeat of the events of 1979-1983, when consumption fell sharply.
"We have seen unprecedented economic growth in the past 2-3 years, unaffected by oil prices," said Hasan Qabazard, the head of Opec's research division.
"Never say never. However, it is fair to say that a lot of the easy substitution away from oil has already happened," said Lawrence Eagles, head of the oil industry and markets division at the IEA, which represents 26 industrialised consumer nations.
"The primary driver of oil demand is GDP growth and not prices. And as world moves towards a more transportation fuel oriented model these rigidities become more entrenched."
Heavy industry's share of oil consumption has more than halved to below 10 percent since 1973, according to the IEA. Economists see little scope for further steep falls in the amount of fuel used to power developed and developing economies.
"Even in the late 1990s we didn't see a collapse in consumption. There was the Asian crisis but it was no collapse," said Paul Horsnell, Barclays Capital managing director.
"For really weak consumption you have to go back to the 1980s when oil was removed from OECD power generation and heavy industry. It never came back, so it can't fall again."
At the same time, transport's share of oil consumption has risen to around 60 percent from 42 percent in 1973. Despite the best efforts of policymakers in the United States and Europe, there is no 'quick fix' for the world's addiction to gasoline and diesel.
"Can we shift away from gasoline and diesel? We can drive less, take more public transport. But if you talk about dramatic shifts we're not going to switch easily," Eagles said. "The economics for biofuels have also been called into question."
Even an environment of high interest rates - borrowing costs are on the rise in Europe, the United States, Japan and China - and high oil prices has not stifled oil demand growth. There is no hard and fast rule linking interest rates and oil demand, analysts said, with much depending on the stage of the economic cycle.
"Rising rates when economies are showing signs of slowing may have more of an impact. But at this point no one is talking about a recession," Eagles said.
Emerging economies, notably the world's second biggest consumer China, could be expected to feel the pain of high oil prices first. But Jeff Brown, chief economist of FACTS Global Energy Group consultancy played down the danger here too.
"The only way we'll see slower oil demand growth in China is if the economy slows down," said Brown. "For now, the booming economy is winning out over the high price of oil." FACTS expects fuel demand in the world's third biggest importer, behind the United States and Japan, to expand by 400,000 to 450,000 barrels per day.
The Organisation of the Petroleum Exporting Countries concluded in its World Oil Outlook, published on Tuesday, that economic growth and oil demand were "more resilient to higher oil prices than previously thought."