Here is a post focused on what influences energy demand – namely oil. This macro understanding is key for speaking to why the oil price is where it is as well as to inform an educated forecast – a common question in interviews for sales & trading, oil & gas investment & corporate banking (as well as industries where oil is a major feedstock) and energy equity research.
Economic Growth and Oil Demand – Anchored by China and the US
The economy is the number one driver for oil demand growth as oil (via gasoline/diesel for cars, trucks and rail and kerosene for planes) moves goods around while gas powers operations through electricity and keeps residential to commercial buildings heated.
As the US and China have by far the largest economies in the world, oil speculators and traders are always looking at US and Chinese economic data (Industrial Production, GDP Growth, Consumer Confidence, Consumer Spending) for clues as to whether there will be more draws on oil.
Per capita consumption is very important for oil growth, but GDP also moves with population growth. Demographic trends are important to note for long term oil demand, as how a society ages will dictate spending patterns.
Government Policy on Oil Consumption
Oil is a very political industry and oil production may be sustained by subsidies to producers – especially in developing nations where employment in oil and gas fields that would be cut in a competitive business environment are kept on. In some countries, such as China, oil and gas production is important for self-sufficiency, so fields may keep producing to ensure they are always online and for getting up the learning curve.
At the downstream level, gasoline is subsidized in many countries and would face large scale public backlash if pared back. For some countries, governments used the recent oil price pullback as a good time to ween out subsidies, as consumers were not used to paying so little at the pump.
On the converse, progressive developed nations have more advanced infrastructure and may have carbon taxes that make gasoline and oil production relatively less competitive such as carbon taxes and car quotas. They may also make alternative technologies more efficient through subsidies, such as rebates on electric vehicles.
These are meant to push companies to switch from gas to clean energy options and commuters to mass transit options such as buses and subway systems.
Oil Demand Destruction & Fuel Switching
If oil prices move too high, consumers will switch to substitutes. People may stop purchasing cars and use transit – all of which stimulate research and development of alternative energy.
As cities become more efficient and urbanization (rural population moving to densely populated cities with mass transit) continues en masse globally, the need for cars diminishes. New technology has also boosted fuel efficiency, so cars require less fuel to go further. Depending on how quickly electric vehicle infrastructure ramps up, there may be more pressure on gasoline.
Almost all banks and think tanks project oil demand to continue growing for the next while – however there is a very large range as to forecasts for where oil demand starts to slow.