Tuesday, May 27, 2008

IEA Discovers Demand?

"Evidence is mounting that high energy prices are at least cutting into global oil consumption, but probably not yet at levels that will drain demand enough to drive down prices. In one key barometer, the International Energy Agency [IEA] on Tuesday revised downward its forecast for global oil-demand growth this year for the second month in a row. ... Oil demand will grow this year by 1.03 million barrels a day, or about 1.2% to 86.8 million barrels a day, the IEA estimates. ... The IEA's report acknowledges a major shift. For years, global oil demand has seemed impervious to the steep rise in crude prices because incomes have grown fast enough to offset the rising cost of fuel. ... The IEA also said oil demand may start to weaken in developing economies where it had been robust. Demand is still growing strongly in places like China and the Middle East, where fuel prices are kept artificially low by the state. But some emerging economies are creaking under the burden of escalating fuel subsidies--which in the case of Indonesia will reach $12 billion this year--and pressure is growing to end them. ... 'It's an open question as to how long these price subsidies in some Asian economies can be sustained,' said David Fyfe, an IEA analyast. 'But politically, removing them is a very difficult move to make.' ... The IEA's conclusions contradict the claim by some economists that oil demand remains largely impervious to the price of crude--an argument that had been voiced during other oil-price shocks", my emphasis, Guy Chazan and Neil King (C&K) at the WSJ, 14 May 2008.

C&K should learn some economics. The "economists" claim is amazing. I understand demand to mean a schedule of quantities purchased over some period of time at various prices, a curve with a negative slope. "Oil demand will grow", at what price will consumption grow? It seems the IEA and C&K confuse demand and consumption. These guys should all go to wikipedia to learn concepts like: price elasticity of demand.

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