The price of oil has plummeted this year as a result of increased volatility in most markets and a temporary imbalance of supply and demand. In view of continued long-term world growth, particularly in emerging- and frontier-market countries, we believe oil prices will probably not suffer from a prolonged price slump. As we see it, the demand for raw materials in general, including not only oil but also iron ore, copper, nickel and agricultural products, is still likely to increase over the long term with increased global growth. Much of the velocity of the recent oil price drop, we think, is based on speculation and short-term trading. In our view, the price of oil is likely to rebound in 2015 or 2016.
In the past two months, crude oil has experienced its biggest price slump since the 2007–2009 global financial crisis, with a number of reasons cited, including slowing demand growth from major economies and increased output from the United States in the past few years that hasn’t been met with decreased production among other major oil producers.
Certainly, too much supply, if it continues, will impact prices—that’s just basic economics. However, when we look at long-term demand patterns, we see the overall trend has been up, not down, and we can see how emerging-market economies have been driving this growth.
The Organisation for Economic Cooperation and Development (OECD) is a forum that facilitates cooperation among the governments of 34 member-democracies with market economies to promote economic growth, prosperity and sustainable development. Most emerging and frontier markets are non-OECD members, including China and India. The chart below shows how non-OECD countries have already surpassed the OECD countries in terms of crude oil consumption, and the gap is forecast to widen in future years.
China: Growing—or slowing?
Slowing growth in China has been cited as a reason behind the drop in oil prices, but we look at the situation a little differently than many. Sure, its gross domestic product (GDP) growth is no longer in the double-digits of times past, and that’s to be expected because China’s economy is growing—it now has a higher baseline. I don’t think growth in China is a problem. In 2010, when China was growing at about 10%, $844 billion was added to the economy. In 2013, growth had slowed to just under 8%, but more than $900 billion was added to the economy. So, yes, GDP growth has been smaller percentage-wise, but you have to look at the overall economic impact—the U.S. dollar figures.
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