ECC0060

Understanding Crude Oil Demand

“If you want your energy bills to go up, you should support an ever-greater
dependence on foreign oil, because the … demand in China and India is growing,
and the price of oil … will go sky high.”1
– Al Gore, Vice President, United States – 1993-2001

INTRODUCTION

In a report published in January 2019, Wood Mackenzie,2 a global research and consultancy group,
commented that with a consumption of 245,000 barrels per day (bpd), India’s crude oil demand
was 14 per cent of the global demand, the second highest demand globally behind the US and
ahead of China.3
In August 2018, the Organization for Petroleum Exporting Countries (OPEC4) projected that
India’s oil demand would rise by 5.8 million bpd by 2040, accounting for about 40% of the overall
increase in global demand during the period. Analysts were of the opinion that the crude oil market
in India, at times, showed a positive relationship between the market price and quantity consumed,
defying the law of demand where there was a definite inverse relationship between the market
price of a product and the quantity demanded of that product, other factors held constant.
Moreover, the change in quantity demanded of oil in the market was not uniform with the change
in price. In addition, there were factors other than price like increased incomes and the availability
of cost effective substitutes that influenced the demand for oil.

THE IMPACT OF PRICE ON OIL DEMAND

Demand for crude oil had a history of random movements. The forces for the random movements
of crude oil demand were many. The demand for crude oil products, especially gasoline, rose
sharply after World War II in the West due to a fall in prices and to people moving to the suburbs.

1
https://www.brainyquote.com/quotes/al_gore_457747?src=t_demand
2
Wood Mackenzie is a global energy, chemicals, renewables, metals and mining research and consultancy
group with an international reputation for supplying comprehensive data, written analysis.
3
https://w (Louis, 2018) ww.woodmac.com/store/industry-sector/oil-and-gas-markets/ (https://www.
woodmac.com/, n.d.)
4
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental
organization, started in 1960 by five countries, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. As of
January 2019, OPEC had 14 member countries. OPEC’s objective is to co-ordinate and unify petroleum
policies among member countries in order to secure fair and stable prices for petroleum producers.

This case study was written by Padmavathi V and Laila Memdani, IBS Hyderabad. It is intended to be used as the basis for class discussion rather
than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.
© 2020, IBSCDC.
No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of
the copyright owner.
 Understanding Crude Oil Demand

However, supply restrictions, wars among producers, and political revolutions in the 1970s
reduced the supply of oil, leading to a rise in oil prices during 1973 to 1979. In the years that
followed, a combination of energy conservation, smaller cars, the growth of the information
economy, and expanded production around the world led to falling oil prices. After 2002, there
was turmoil in oil markets due to the war in Iraq and growing world demand for petroleum (Refer
to Figure I for fluctuations in oil price since 1990s with a continuous rising trend in early 2000s).
Figure I: Fluctuations in Oil Price since 1990’s

Source: FRED Economic Research

Relation between Quantity Demanded and Price
Between 1990-91 and 1993-94, there was a fall in the price per barrel of oil from $18.62 to $15.53
and the quantity consumed increased from 7754.05 to 7852.46 barrels. However, during the period
2015-16 to 2017-18, despite the continuous rise in oil prices from $ 40.68 to $69.02 per barrel, the
quantity demanded expanded from 34574.58 to 36675.01 barrels.
In both the periods from 1996-97 to 1997-98 and 2011-12 to 2012-13, the percentage change in
quantity demanded and the change in price was not similar. The change in quantity demanded
from 1996-97 to 1997-98 was only 2% with a 35% change in price (rise in consumption of oil was
from 9625.72 barrels to 9863.73 barrels, whereas the fall in the price of oil was from $18.86 per
barrel to $12.28 per barrel). From 2011-12 to 2012-13 the change in quantity demanded was 10%
with only a 3% change in price (rise in quantity consumption of oil was 29451.04 barrels to
32282.53 barrels, whereas the fall in the price of oil was from $109.45 per barrel to $105.87 per
barrel).
For a period of more than 20 years from 1995-96 to 2017-18, the percentage change in the demand
for oil was more than the percentage change in price.
Demand for Crude Oil in India vs US
Irrespective of the fluctuations in oil price (Refer to Exhibit I) the growth rate in the consumption
of oil in India for the period 1990-91 to 2017-18 was 472.98%, whereas in the US it was only
122.38% (Refer to Figure II and Figure III respectively).

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 Understanding Crude Oil Demand

Figure II: Oil Price and Consumption in India

Source: Total Consumption from Industry Outlook, Price from FRED Economic Research
Figure III: Oil Price and Consumption in US

Source: US. Energy Information Administration; Price from FRED Economic Research

NON-PRICE FACTORS INFLUENCING OIL DEMAND

Other than the price, the factors that influenced the quantity of consumption of oil included income
levels with the changing economic conditions. An increase in GDP (Refer to Figure IV) led to an
increase in the demand for cars (Refer to Figure V). Infrastructure growth (Refer to Exhibit II) and
increasing demand from the construction, logistics, e-commerce, and consumer goods sectors, also
contributed to the growth in the demand for oil.
Other factors that influenced the demand for oil were an increased demand for heavy and medium
duty trucks for operational efficiency and economies of scale due to GST and removal of interstate
taxes5. There were general elections in 2019, which also increased travel activity and the demand
for crude oil for campaigning6. The demand for LPG from the untapped market of rural households
for clean cooking fuel was also another factor for the increase in the demand for crude oil.

5
https://www.hartenergy.com/news/opec-india-oil-demand-rise-58-mmbbld-2040-118366
6
https://www.woodmac.com/store/industry-sector/oil-and-gas-markets/

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 Understanding Crude Oil Demand

Figure IV: GDP Growth and Oil Consumption

Source: GDP per capita from World Development Indicators of World Bank; https://data.worldbank.org/
country/india?view=chart and Demand for oil from Industry Outlook a CMIE Data Base
Figure V: Number of Cars Sold in India from 1996 to 2015

Source: Society of Indian Automotive Manufacturing (SIAM), 2016

THE ROAD AHEAD

The future demand for oil would depend on the availability of substitutes at affordable prices, and
the increasing standard of living, mostly in rural areas. The number of patents filed in fossil fuel
had been growing at an accelerating pace since 1990. As of December 31, 2013, there were 2,933
patents – thirteen times as many as in 19907. However, if the substitutes for crude oil were not
cost-effective, could crude oil become a Giffen good? What would be the effect on the oil industry
and on the global market, if gasoline became a Giffen good?

7
https://www.powerelectronics.com/energy-harvesting/number-patents-renewable-energy-technology-
sees-significant-increase.

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 Understanding Crude Oil Demand

Exhibit I:
Trend in Oil Price Growth and Consumption
Price per World Consumption Total consumption Total Consumption
Year Barrel in (Million Barrels per (Million Barrels - (Million Barrels –
USD Day) US) India)
1990-91 18.62 20.31 6099.15 393.3131
1991-92 18.44 20.10 6215.95 398.3049
1992-93 16.33 20.46 6292.60 412.8989
1993-94 15.53 20.79 6467.80 424.0258
1994-95 16.86 21.46 6467.80 438.6499
1995-96 20.29 21.36 6683.15 458.3031
1996-97 18.86 21.99 6796.30 488.2513
1997-98 12.28 22.43 6905.80 500.3238
1998-99 17.44 22.84 7124.80 744.9215
1999-00 27.60 23.52 7190.50 662.1446
2000-01 23.12 23.78 7172.25 780.9822
2001-02 24.36 23.72 7212.40 816.9432
2002-03 28.10 23.76 7310.95 855.5649
2003-04 36.05 24.15 7566.45 927.6188
2004-05 50.59 24.99 7592.00 957.8478
2005-06 61.00 25.21 7551.85 964.0709
2006-07 69.04 25.09 7548.20 1032.1840
2007-08 94.10 25.24 7117.50 1095.4980
2008-09 60.86 23.96 6851.05 1198.8270
2009-10 77.38 23.11 7000.70 1373.0420
2010-11 107.46 23.67 6894.85 1398.7920
2011-12 109.45 23.42 6748.85 1493.8630
2012-13 105.87 23.05 6924.05 1637.4860
2013-14 96.29 23.49 6971.50 1663.6660
2014-15 49.49 23.54 7128.45 1651.9960
2015-16 40.68 23.97 7186.85 1753.7470
2016-17 52.51 24.22 7285.40 1839.2770
2017-18 69.02 24.40 7464.25 1860.2890
Source: U.S. Energy Information Administration

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 Understanding Crude Oil Demand

Exhibit II:
Growth in Infrastructure
Installed Capacity of Railway Route National
Year
Power KMs Highways
2004-05 120513.81 64600 65569
2005-06 124287.17 65436 65569
2006-07 128182.47 65808 66590
2007-08 143061.01 66030 66590
2008-09 147965.41 66687 66754
2009-10 159398.49 67360 70548
2010-11 173626.40 63122 70934
2011-12 199877.03 63221 70934
2012-13 223343.60 63465 76818
2013-14 245393.53 63332 79116
2014-15 271722.17 63327 91287
2015-16 298059.97 63273 97991
2016-17 326848.53 64015 101011
2017-18 330580.02 63974 120493
Source: RBI database from www.rbi.org

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 Understanding Crude Oil Demand

Suggested Readings and References:

1. Bank, W. (n.d.). worldbank.org. Retrieved from

https://data.worldbank.org/country/india?view=chart and Demand for oil from Industry
Outlook a CMIE Data Base.
2. Hartenergy. (n.d.). Retrieved from https://www.hartenergy.com/:
https://www.hartenergy.com/news/opec-india-oil-demand-rise-58-mmbbld-2040-118366
3. https://www.azquotes.com/quote/211045. (n.d.). Retrieved from
https://www.azquotes.com/.
4. Kaur, M. a. (2016). Micro Econ. Cengage.
5. Louis, F. R. (2018). Retrieved from https://www.stlouisfed.org/:
https://fred.stlouisfed.org/tags/series?t=oil
6. Mankiw. (2017). Principles of Microeconomics. Cengage.
7. (n.d.). Retrieved from https://www.woodmac.com/:
https://www.woodmac.com/store/industry-sector/oil-and-gas-markets/
8. (n.d.). Retrieved from https://www.woodmac.com/:
https://www.woodmac.com/store/industry-sector/oil-and-gas-markets/
9. (n.d.). Retrieved from www.powerelectronics.com:
https://www.powerelectronics.com/energy-harvesting/number-patents-renewable-energy-
technology-sees-significant-increase
10. (n.d.). Annual Energy Outlook. Washington: U.S. Energy Information Administration.
Retrieved from https://www.eia.gov/outlooks/aeo/pdf/aeo2018.pdf
11. Salvatore. (2018). Managerial Economics. Oxford University Press.
12. Samuelson. (2013). Economics. McGrawHill Educarion.