Modelling and forecasting world oil demand: a regional analysis accounting for asymmetric price responses and technical progress

• Published date: 01 June 2019
• Date: 01 June 2019
• Author: Mahmud Suleiman
• DOI: http://doi.org/10.1111/opec.12147

Modelling and forecasting world oil demand:

a regional analysis accounting for

asymmetric price responses and technical

progress

Mahmud Suleiman

Kaduna Electricity Distribution Company, Kaduna, Nigeria. Email: mu.suleiman@gmail.com.

Abstract

This study applies the structural time-series modelling technique to investigate the relationship

between aggregate oil consumption, income and prices across six regions of the world over the

period 1970–2017. Following arguments in the energy economics literature on how to

appropriately capture the impact of technical progress (TP) in modelling energy demand, this

paper assumes a general model that incorporates asymmetric price responses (to capture

endogenous TP) and an Underlying Energy Demand Trend (UEDT) (to capture exogenous TP and

other factors) to estimate price and income elasticities for each region. These estimates are then

used to produce future forecast scenarios of oil demand for each of the six world regions up to

2040 based on different assumptions about the future path of key variables that drive oil

consumption. The results suggest that for the reference-case scenario, global oil demand is

projected to rise from 98 mb/d in 2017 to 118 mb/day in 2040 consisting of strong growth in the

Middle East, Africa and Asia Pacific regions while oil consumption in North America, South/

Central America and Europe/Eurasia regions is projected decline.

1. Introduction

Since the early 1970s, world crude oil prices have experienced sharp fluctuations

brought about by supply/demand fluctuations due to a number of factors, some of which

are geopolitical related to the destabilisation of the Middle East, while others have to do

with growth in the world economy, particularly from the emerging economies.

Nevertheless, despite the considerable uncertainty surrounding the world oil market,

global oil consumption increased at an annual average rate of 3.16 per cent, 0.84 per

cent, 1.45 per cent, 1.44 per cent and 1.49 per cent for the periods 1971–1980, 1981–

1990, 1991–2000, 2001–2010 and 2011–2017, respectively (BP, 2018-B) (Fig.1).

Over the whole period, 1971 to 2017, global oil consumption increased by an

average of 1.68 per cent per annum; however, the growth varied between regions. In the

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193

North America and Europe/Eurasia regions (which together accounted for around 60 per

cent of world oil consumption over the period), the average annual growth rate in oil

consumption was limited to 0.85 per cent and 0.16 per cent, respectively. Whereas, the

average annual growth in the other regions was somewhat higher; 4.84 per cent for the

Middle East, 3.83 per cent for Africa, 3.63 per cent for Asia Pacific and 2.63 per cent for

South and Central America. As outlined in OPEC (2016), oil demand is expected to

grow across almost every sector

1

in the developing countries while in the Organization

for European Economic Cooperation (OECD), growth is expected only in the aviation

and petrochemical sectors.

One of the major factors that constrain oil consumption growth particularly in the

advanced region of the OECD is technological advances.

2

Nevertheless, there has been a

debate in the economics literature about the impact of energy efficiency improvements or

technological progress (TP) on energy demand. Some studies, such as—Beenstock and

Willcocks (1981, 1983) and Hunt et al. (2003); Hunt and Ninomiya (2003) argue that

when modelling energy demand the specification should allow for TP to be exogenous in

nature and unrelated to price development. However, others, such as Kouris (1983a and

1983b) argues that prices induce technical change so when modelling energy demand the

specification should just allow for TP to be endogenous in nature via price variable.

Furthermore, in separate strand of the oil and energy demand literature, others such as

Figure 1 Global Oil Consumption (mb/day).

Source: BP Statistical Review 2018 [Colour figure can be viewed at wileyonlinelibrary.

com]

OPEC Energy Review June 2019 ©2019 Organization of the Petroleum Exporting Countries

194 Mahmud Suleiman