PETROANALYSIS || ARTICLE

Modeling Regional Oil Demand I

Published on

December 6, 2019

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Article by

Omar Chique

Oil demand is mainly driven by changes in GDP. However institutional factors play an extraordinary role, as states may implement energy policies destined to reduce the carbon content of their economies. In this regard, multiple initiatives have been enforced, especially after it has been perceived that high oil import needs impact energy security. Hence, according to this view, the starting point for the study of oil demand is institutional, since it helps to shape – via incentives – the unbearable initial cost of the new oil demand competing technologies. In this case, we refer to regional net import needs (i.e. OECD) which have become a serious matter of public opinion whenever they have increased, as this has been perceived as vulnerability, and even a threat to national energy security. In this context, whenever import needs increase, states enforce more projects destined to reduce the carbon content of their economies.

However, varied policy-making aspects, among them the limited attention spans of policy makers, work to prevent major changes and to protect the status quo. That is why a delay is observed in the link between import needs and oil demand. In other words, the effect is not instantaneous, but it unfolds dynamically, over time. It also implies that changes in the environment, which could suggest changes in policy, are often ignored. But ignoring them just builds up pressure that may lead to policy action, again, over time. Therefore, policies do not adjust smoothly to these signals, but rather in non-linear spurts of changes once the policy makers start to attend to these previously ignored changes in the environment. This makes the link very difficult to observe, but the concept provides a compelling behavioral theory to attend to when modeling institutional factors. We will continue analyzing regional oil demand modeling approaches in the next article.

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