When Will Energy Prices Recover?

Weakened demand for energy could persist for a surprisingly long time

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Source: “Averting the Next Energy Crisis: The Demand Challenge,” McKinsey Global Institute
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Just as you’d expect, the global recession has lowered energy demand—and prices, kicking crude oil down from an all-time peak of US $147.27 per barrel in July 2008 to a low of $33.87 in December 2008.

How long will demand languish? According to the McKinsey Global Institute, it depends on how bad the recession gets and whether you live in the developed or developing world.

McKinsey’s report, published in March, developed three scenarios based on different economic assumptions. The “moderate” scenario is based on economists’ consensus forecast for the overall shape of the global recession. The “severe” scenario assumes that the recession will be deeper than economists expect and the “very severe” that it will be much deeper. McKinsey included these last two scenarios because economists have had to revise their forecasts downward every month since mid-2008.

In the developing world, energy demand remains strong in all three scenarios. Even in a very severe economic downturn, it rises 9 percent from 2006 to 2010 and an additional 16 percent by 2015.

 

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Source: “Averting the Next Energy Crisis: The Demand Challenge,” McKinsey Global Institute
Click on image for a larger view.

 

In the developed world, however, even a moderate downturn reduces 2010 energy demand to below 2006 levels, and the very severe scenario keeps it down there all the way through 2015.

The same pattern held for oil specifically. McKinsey predicts that global demand will continue to rise in the developing world even in the face of a very severe downturn. In the developed world, however, even a moderate downturn will keep 2015 demand for oil 1.4 percent below 2006 levels, and in a very severe downturn, 6.7 percent less.

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