High oil prices start to hit demand - Financial Times

By David Blair in London
Published: April 17 2011 18:13 | Last updated: April 17 2011 18:13

The combination of rising oil prices and growing demand that has allowed the world’s biggest oil producers to bask in renewed prosperity appears to be breaking down. Early signs suggest that high prices are now starting to restrain demand.

Last year, the cost of a barrel of Brent crude, the most important benchmark, climbed by 17 per cent. Global oil demand grew by 3.4 per cent, about twice the average rate of increase recorded in the previous decade. But the growth in world oil consumption slowed to 2.6 per cent in the first quarter of 2011, according to the International Energy Agency, compared with 4.1 per cent in the final three months of 2010.

Total growth in demand this year is forecast to be 1.6 per cent. A 31 per cent rise in the price of a barrel of Brent crude since January partly explains this deceleration. But oil prices still appear to be short of the threshold that would put a firm lid on global demand and then force it downwards.

Caroline Bain, senior commodities editor at the Economist Intelligence Unit, said the price rise experienced this year “would have had some effect” on demand, though the slowdown was expected simply because 2010’s stellar rate of growth was unlikely to be sustained.

If oil demand does climb by 1.6 per cent this year, that would only resemble a deceleration by comparison with 2010. It would be squarely in line with the 1.7 per cent average annual increase recorded between 2001 and 2007.

The key restraint on the biggest oil producers, particularly those in Opec, is a fear that high prices may rebound on suppliers by causing “demand destruction”. Globally, this does not seem to be happening.

Regionally, however, the picture varies. Most Europeans have stopped consuming more oil – overall demand was flat in the year to February, while individual countries saw considerable falls, with Britain recording a 3.1 per cent decline and France 3.7 per cent.

Analysts have noted important changes in behaviour. Shipping companies are saving fuel by slowing down their vessels, airline capacity is more closely tailored to passenger numbers, while small cars are proving popular among American buyers.

But US oil consumption was still 2.9 per cent higher in February compared with a year earlier.

Meanwhile, China and the big emerging economies continue to make the critical contribution to oil demand. Total Asian consumption grew by an annual 5.9 per cent in February; in China the rise was 9.6 per cent.

“We can do what we like in terms of buying smaller cars, changing our aeroplanes etc, but it pales into insignificance compared with what China and the other big emerging markets can contribute to world oil demand,” said Francis Osborne, from Wood Mackenzie, a consultancy. “And, so far, they seem heroically unaffected by higher prices.”