October 13, 2008 by Allen
Last Friday, crude oil futures prices dropped by $9 a barrel. This was the same day the International Energy Agency (IEA) announced revised estimates for oil demand for this year and next. It cut both forecasts due to weak global economic conditions stemming from the global credit crisis.
The IEA cut its 2008 energy demand forecast by 240,000 barrels a day (b/d). It is now projecting total oil demand to average 86.5 million barrels a day (mmbd). The IEA's new forecast for oil demand in 2009 is for 87.2 mmbd, down 440,000 b/d. Of course the 2009 cut includes the 2008 reduction, but still, the IEA is now only looking for about a 700,000 b/d increase in 2009 over this year, but that is well below the average oil demand growth this decade, which has averaged slightly over 1 mmbd.
The oil price drop seemed to suggest that investors are looking a a significant gloabl recession. They are taking their thoughts about the oil market from the 1979-1983 recession period when oil consumption fell by a total of 6.5 mmbd over the four year period. That is about 83% of total Chinese oil demand now, so don't look for that country to bail out the world's oil market.
So now we know why OPEC is calling for an emergency meeting to talk about cutting production, merely a few weeks after they announced they were pairing production back to match the official production quotas.
Should oil demand fall anywhere near as much as it did in the early 1980s, there is probably little OPEC can do to stop the slide in oil prices. From $80 we would probably be heading toward $50 a barrel. Of course that would force the industry to cut its capital spending and slow exploration and development of new oil and gas reserves insuring that there will be another surge in oil prices down the road.
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