The surprising reasons why price is no object in poorer countries thirsty for oil

Developing countries are presently below the average 4.7 barrel allotment, but their consumption is rising

Forbes has a good team of contributors to its energy section. Yesterday’s story by the delightfully named Robert Rapier is no exception, as he looks into the bottom line, and, often counter-intuitive reasons for market prices in oil to be where they are. According to Rapier, conventional wisdom gets it wrong when it says “the increase in prices has been due to oil speculation, the restriction of supplies by OPEC, growth in developing countries, peak oil, or various geopolitical factors. Regardless of the cause, the response to higher prices in developed and developing countries may be surprising.”

There is more than a ring of truth to this assessment, as Rapier explains well. “[C]onsider the consumption patterns in developed countries. Developed countries consume a lot more oil than they really need because they have more discretionary consumption. Thus when oil prices rise, consumers in developed countries make a few lifestyle changes—driving fewer miles, buying more fuel-efficient cars, using more mass transportation, etc.—and oil consumption falls.

“So the 22nd annual barrel of oil consumed by someone in the U.S. isn’t worth $100 to us, and we use a bit less when oil prices rise. If oil prices were sustained at $150 a barrel, we would use even less. But the vast majority of the world uses very little oil, and aspires to higher standards of living. The average consumption of oil in the world—87 million bpd in 2010 (Source: 2011 BP Statistical Review of World Energy) divided by a global population of approximately 6.8 billion people in 2010—is 4.7 barrels of oil per person per year. In other words, if everyone on earth was allocated an equal amount of oil, the 2010 allotment would have been 4.7 barrels per person. This is 79% lower than average U.S. consumption, and 54% lower than average EU consumption.

“Developing countries are presently below the average 4.7 barrel allotment, but their consumption is rising. Chinese consumption has risen to 2.5 barrels per person per year, a 79% increase in the past ten years. At that growth rate—and of China’s population remains constant—China will reach 4.7 barrels of oil per person in slightly over ten years. But this would require another 8 million barrels of oil per day for China (which explains why they are doing oil deals all over the world), which either must come from the allotment of other countries—most likely developed countries—or would require global oil production to rise another 10%.

“Bear in mind that this is only for China; other developing countries are also on growth trajectories that would see their demand for oil collectively increase by millions of barrels per day over the next decade. The threat for developed countries is clear: As oil prices rise, consumption in developed countries is likely to continue to decline in response, but developing countries could continue to increase their consumption and still grow their economies. To the extent that the consumption decline in developed countries is a result of the adoption of alternative fuels and improved efficiencies, economic growth in developed countries may be able to continue. But if the decline comes as a result of people simply being unable to afford oil, economic difficulty in developing countries is practically assured,” he says.
Implications for the Future
“The 20th barrel the average person in the U.S. consumes each year might allow us to drive that 12,000th mile. But the first barrel that someone in a developing country consumes might allow them to drive their first mile and have heat in their home for the first time. They will be willing to pay a lot more for those initial barrels than we are for our excess barrels, and this explains why their consumption has increased even as oil prices have risen.

“And if future oil prices are dictated by how much developing countries are willing to pay for their second or third barrel of oil per capita, this number may ultimately be much higher than $100 per barrel. This is a major reason that I don’t ever foresee a sustained return to cheap oil. There are many who have placed most of the blame for increased oil prices on speculation, but the thirst for oil in developing reasons should not be underestimated as a factor. Petroleum is, after all, a global commodity.”


“The developing world–and in particular Asia Pacific–will play a very important role regarding global energy consumption, and as a result in global carbon dioxide emissions. With respect to energy supplies, developed regions should recognize the risk that this growth will keep upward pressure on oil prices over the long term, and governments would be wise to pass policies that anticipate and mitigate this risk. In developing regions, governments must recognize that future growth will ultimately be slowed by rising oil prices unless alternatives to oil become an increasingly important part of the mix.

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