Forget shale for a moment: Opec’s big problem is weak demand

By now, everyone is aware of the serious threat rising shale output from the US poses to Opec .But sluggish demand growth in response to the quadrupling of prices between 2002 and 2012 is at least as a big a challenge for the group. Consumption in the developed economies peaked at 50 million barrels per day (bpd) in 2005 and is still just 45 mbpd nine years later, according to the US Energy Information Administration (EIA).Developing economies consumption has risen by 12 mbpd over the same period (around 9.5 mbpd outside the Middle East).Net growth of 4.8 mbpd over nine years is slower than Opec and other forecasters expected a few years ago.Oil demand in Asia is not growing quickly enough to offset stagnating consumption in the advanced economies and absorb all the extra supply from shale.Opec has confronted this problem before in the early 1980s, when consuming countries took unprecedented steps to reduce demand in response to the oil shocks of 1973 and 1979. Nuclear power programmes in France and Japan, the conversion of heating systems from fuel oil to gas, stricter fuel economy standards for new motor vehicles, and punitive taxes on motor fuels were all deliberately intended to cut oil consumption.Slowing demand growth as much as rising supplies contributed to the price crisis in 1986, just as it is now causing a similar problem for Opec in 2014. Oil consumption (and energy consumption more generally) is strongly responsive to price changes provided they are sustained for long enough. In the short term, the quantity of oil consumed is not sensitive to price changes (the price elasticity of demand is low).The lack of short-term feedback has misled many commentators to conclude that demand is not responsive to prices at all. But that is wrong.In the medium and long-term, oil and energy demand is highly responsive to price changes.Price elasticity is a function of time. And time is the most important but under-appreciated variable in analysis and forecasts of commodity markets.Total US energy consumption actually fell in both 1974-75 and again in 1980-82 in response to the oil price shocks.