The world's thirst for oil

Oil is the biggest source of world energy

By Economics Correspondent Andrew Walker

We have a voracious appetite for oil. Last year, world demand was 75 million barrels of the stuff a day, and the International Energy Agency (IEA) forecasts a rise of 2.4% this year.

The reason for this thirst for oil - and other forms of energy - is simply economic growth.

As industrial production increases, industry needs more energy. It also needs more fuel to transport its products and raw materials.

Economic activity increases consumption in several ways

Shops and offices need increasing amounts of energy to provide heat, lighting and air conditioning. Economic growth also brings with it consumers who spend more on energy-hungry leisure activities, such as motoring.

Oil is the biggest single source of the world's energy. The IEA says oil accounted for 45% of the total in 1973. It has declined since then, but was still easily top in 1996 at 35%.

With increasing total demand for energy as the world economy has grown, demand for oil has grown too despite its declining share in the total.

Oil shocks

Many countries were badly affected by the oil price shocks of 1973-74 and 1979-80 and they were anxious to become less dependent on oil.

Governments and business introduced conservation programmes to curb the heavy and - many people would say - wasteful use of oil before 1973.

Governments raised taxes on oil and introduced incentive schemes to encourage people and business to use alternatives.

Production has risen although some countries are more energy efficient

In the 10 years after 1973, oil consumption actually fell in Western Europe and Japan by more than 2%, and in the United States by 14%.

It was the Communist world that kept total demand up - its consumption rose by 40%.

In the rich countries of the West the trend of declining oil dependence has continued.

In the early 1980s oil accounted for about 13% of their import bill. A decade later it was down to 4%.

Rich v Poor

The result of these changes is that the threefold increase in oil prices in the 12 months after March 1999 has been nowhere near as disruptive for the developed world as it would have been before.

Economic growth still depends on increased energy consumption. But the increase required to maintain a particular rate of overall economic growth in the rich countries has declined.

According to one estimate, a growth rate of 5% in the 1970s was associated with a 7% increase in oil demand. By the mid-1980s, this was down to 2%.

Consumption has risen faster in the developing world

In the rich countries, the relative decline of the manufacturing industry, which is energy intensive, in favour of the service sector has accentuated this trend.

It is however another story for the developing nations.

Manufacturing plays a key role in development for many of them. Urbanisation and increased car ownership have added to their demand for oil.

The developing countries used to account for 26% of oil demand in the early 1970s. Now their share is close to 40% and likely to continue growing.

The IEA says the developing countries use more than twice as much oil to produce one unit of economic output as the rich countries.

For people in the rich countries, high oil prices are a real nuisance. But they are not the threat to the economic outlook they once were. For the developing world, though, Opec's decisions matter a great deal more.