We all know about the impact China has had on world commodities, especially energy denominated ones, given its thirst for resources during its urbanization over the last few years. Most think of oil or any other commodity for that matter, and immediately quote the Chinese economy and monitor its progress to forecast where it is headed. Where that may be true in most instances, there is a distinction to be made in the case of oil: the US is equally, if not more, important at times given the impact of the change in its demand for oil can have on world oil prices. Yet people do not obsess on US GDP growth to predict where oil prices are headed?
Let’s put some numbers into perspective. World oil demand is around 90 million barrels per day (mbpd). Out of that, US oil demand equates to about 24 mbpd and Chinese oil demand about 9.7 mbpd. So the US accounts for about 27% of total oil demand vs. China about 11%. Didn’t expect it, did you?
Now the reason why China’s growth rate and its level of demand has mattered so much over the last few years is because of the rate of change of its growth in oil demand (the delta). From 2010 – 2012, US demand growth has averaged -0.5% and China has averaged 12%!!
This confirms China’s impact on the marginal barrel of oil, but the distinction I am trying to make is that the way the oil price trades does not solely depend on which economy has the largest growth rate. For instance if US GDP goes down by 0.5%, 0.5% of 24 mbpd is a much bigger absolute loss in net oil barrels than a 0.5% of 9.7 mbpd.
Rather than focusing only on where the Chinese economy is headed into 2013, one must also ask where the US economy is headed? As the “delta” in GDP growth changes for the US or China, the rate of change of that “delta” is what will dictate the price action for oil.
Hmmm, now we are talking about 2nd derivatives….am I glad I stayed awake during my calculus classes!
