China and other emerging-market economies
Over the past decade and a half, world oil prices, and commodity prices in general, experienced a sustained upward movement, often called the “super-cycle” (Chart 3). By far the most important reason for this long-term trend is the rising demand for these products stemming from rapid economic growth in China and other emerging-market economies.1
It would be hard to exaggerate the importance of the integration of China, India and other emerging economies into the world economy. The economy of China alone doubled in size between 2007 and 2013, an expansion built on the production of goods requiring energy to manufacture. With rising living standards, Chinese households have been able to afford cars and other products that consume energy. China’s oil consumption followed suit, doubling over the past decade to about 10 million barrels a day and making the country the world’s second-largest consumer of crude oil.
This growing demand for energy put continued upward pressure on oil prices. Over time, the industry responded by stepping up exploration, developing higher-cost sources, and making some major technological breakthroughs.
With the recent drop in oil prices, some commentators have been quick to declare that the super-cycle is finished, but these underlying forces still have a long way to run (Chart 4). The urbanization and industrialization of emerging economies and the growth of their middle classes is far from complete. China’s urban population has grown by about 300 million people since 2000 but, even now, only 55 per cent of its people live in urban areas, compared with more than 80 per cent for North America and advanced Asian economies such as Japan and Korea. According to some estimates, another half-billion people in China and India alone will move to cities and likely join a growing middle class over the next two decades. As long as these trends continue, they will add to world demand for oil.