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Economics
Economics – Markets – Strategy
The rise in Asian
demand is a
structural one. It is
not going to go
away anytime soon
And the numbers are compelling. Take the data point for this year, 2008, which
reads 93 cents. That says that for every dollar of domestic demand generated by
the US, Asia will generate 93 cents of the same. What’s the arithmetic? Simple.
Assume that US domestic demand is 1 dollar in size. It grows by 3% on a clear
day, thus generating 3 cents of new demand. Now turn to Asia. If the US is 1
dollar in size, Asia’s is 40 cents in size. On a clear day, it grows by 7%, generating
2.8 cents of fresh demand. That’s 2.8 cents for every 3 cents from the US, or 93
cents on the dollar.
What is key is how this ratio has changed over time. Back in 1990, the US
generated more than twice as much new demand each year as Asia did. No
wonder Asia went up and down whenever the US did. No wonder everybody
said, when the US sneezes, Asia catches a cold. No wonder all those two-fer
rules came about. All those rules, all those sayings were pretty much on the
mark. Twenty years ago.
Today, the US no longer generates twice as much demand each year as Asia.
Today it generates 7% more. And that’s on a clear day. On a bad day, like today,
Asia already generates more demand than the US does (American demand growth
has been zero for the past two quarters). But we haven’t shown the sick days in
this chart because we want to stress that this change is a structural one – it has
been occurring for the past 20 years and will continue for the next 20.
Bottom line? It is this structural change, more than anything else, that explains
how Asia managed to accelerate for three years while the US slowed. Asia is no
longer too small to matter. Asian demand is driving Asia’s growth more than
ever before and will, in another year or two, be a bigger driver of global growth
than the US. Plainly, it is the growth in Asia’s aggregate demand that underlies
its growth in demand for oil, to which we now turn.
Higher oil prices – demand-driven
Take a look at the differences in the two charts below. Both plot the global
supply of crude oil (in red, quantity terms) against the price (in grey, measured
in avg USD, EUR/ECU and JPY terms, adjusted for inflation). The picture on the
left shows supply and price during the second oil crisis of 1979-84. Global
supply falls by 15% thanks a drop in OPEC output of 55% between 1979 and
1983. The price of oil triples in 13 months.
Contrast that with the picture on the right – which shows oil supply and price
over the past six years. Oil output expands steadily as the price triples over a
four year period of time (annual average figures).
Global oil production and price – 1979-84
bil bbls/yr avg USD, EUR, JPY terms, CPI def, 79=100
25
225
Global oil production and price – 2000-08
bil bbls/yr avg USD, EUR, JPY terms, CPI def, 98=100
32
300
24
23
real G3
ccy
price
(RHS)
200
175
150
31
30
29
supply
(LHS)
250
200
22
21
supply (LHS)
125
100
28
27
real G3 avg
crude price
(RHS)
150
100
20
77 78 79 80 81 82 83 84
75
26
00 01 02 03 04 05 06 07 08
50
10