The dramatic increase in oil prices has been blamed on a number of factors including financial speculators, a shortage of refining capacity and the unwillingness of Opec producers to raise their output.

These have been contributing factors but the main catalyst for the oil price surge has been the big increase in demand, particularly from developing countries.

Oil prices may fluctuate in the short term but low oil prices are a thing of the past if developing countries continue to experience strong GDP growth.

Oil supply and demand is usually measured in terms of millions of barrels per day (mb/d) with a barrel equal to 159 litres. Petrol output is slightly higher because of gains made through the refining process.

Total world demand has increased from 57.6 mb/d in 1981 to 83.3 mb/d in 2005 and is expected to be nearly 118 mb/d by 2030 (see table above).

In 2005 the 30 OECD countries, which include New Zealand, accounted for 49.6 mb/d or nearly 60 per cent of total world demand.

North America is the biggest consumer accounting for 30.6 per cent of 2005 demand follow by Western Europe with 18.6 per cent, OECD Pacific (Japan, Korea, Australia & New Zealand) 10.3 per cent, Opec 8.9 per cent and China 7.8 per cent.

The main users of oil in 2005 were road transport 38 per cent, industry 26 per cent, residential, commercial and agriculture 12 per cent, air transport 8 per cent and electricity generation 7 per cent. The soaring demand forecasts are largely based on a dramatic increase in road transport use.

Worldwide passenger car numbers are expected to increase from 700 million to 1200 million by 2030 and commercial vehicles from 210 million to 450 million by the same date.

As a consequence, oil consumed by road transport is expected to rise from 32.0 mb/d in 2005 to 46.5 mb/d by 2030.

This forecast is premised on a dramatic increase in passenger car ownership and commercial vehicle usage in China and India.

Even though these two countries will experience a sharp increase in road transport usage over the next 20-25 years they will still trail the western world on a per capita basis.

For example, by 2030 there are expected to be 60 cars per 1000 of the population in China and 50 cars per 1000 in India compared with 500 cars per 1000 in North America.

Although there will be a substantial increase in oil usage in China and India they will still use far less oil on a per capita basis than the world’s main petrol guzzlers, namely United States, Canada, Japan, Korea, Australia and New Zealand.

By 2030 the annual per capita use of oil is expected to be 19.5 barrels in North America, 16 barrels in OECD Pacific (Japan, Korea, Australia and New Zealand), 10.5 barrels in Europe, 4 barrels in China and 1.5 barrels in India.

Drivers in the western world are the first to complain about rising petrol prices but our large, gas guzzling, vehicles are primarily responsible for the price increases.

The other point to note about the demand forecasts is that OECD consumption is expected to rise by only 3.8 mb/d between now and 2030 but demand in the rest of the world is expected to surge by 30.5 mb/d.

It is going to be difficult for us to tell the rest of the world, where 82 per cent of the world’s population lives, to curb their appetite for oil when OECD consumption is substantially higher on a per capita basis.

On the production side, the 12 Opec countries – Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela – accounted for 41.2 per cent of supply in 2005.

The largest producers are Saudi Arabia, with 12.9 per cent of the world supply, Russia 12.1 per cent, United States 7.9 per cent and Iran 5.5 per cent.

The US is also the largest importer by a wide margin because of the huge demand by its road transport sector.

As far as non-Opec countries are concerned, increased production in Russia and the Caspian Sea, mainly Azerbaijan and Kazakhstan, in the medium term will more than compensate for the drop in North Sea output.

However non-Opec production is expected to plateau around 2015 and fall gradually after that. This is due to expected production declines in the North Sea, Mexico, Alaska and the rest of the US.

As the table above shows, the world will become increasingly reliant on Opec oil in the years ahead. This will create considerable uncertainty because there is no assurance that Opec countries can increase their output to anticipated levels, particularly as many of these countries have unstable political structures.

More importantly, there will continue to be a dramatic shift in economic wealth to oil producing countries as European and North American output decreases and Opec, Russian and Caspian Sea supplies increase.

But the most critical point about the non-Opec production forecasts is that there is expected to be a dramatic increase in non-conventional production, mainly CTLs (coal to liquids), GTLs (gas to liquids) and biofuels over the next two to three decades.

Non-conventional output in non-Opec countries is forecast to grow from only 2.2 mb/d or 2.6 per cent of total production in 2005 to 10.2 mb/d or 8.7 per cent by 2030.

There are big questions about the achievability of these targets because of huge capital and environmental costs, notably regarding Canadian oil sands projects, and the impact of biofuel projects on food supply and prices. Biofuels are primarily produced in Brazil and the US with bioethanol made from sugar beet, sugar cane and corn, while biodiesel is derived from oilseed crops such as soy, rape and sunflower.

Biofuels put enormous pressure on land usage and have been a major contributor to escalating food prices.

A number of oil analysts have a far more pessimistic view of the production outlook than those contained in the accompanying table. They believe that the biofuel contribution will be less than expected and output in Venezuela and Mexico will grow more slowly than anticipated.

The more bearish view is that oil production will peak around 90 to 92 mb/d in the 2012 to 2014 period and will decline after that. This would have major implications for the world economy and oil prices, particularly if China and India continue to achieve GDP growth in excess of 8 per cent per annum.

Although we bleat and complain about higher petrol prices they are an important reminder that energy is a scarce commodity. New Zealanders are high energy users yet we are reluctant to invest in new energy sources.There is huge opposition to new hydro electricity schemes and wind farms.

We have also imported a huge number of gas guzzling SUVs and our politicians have failed to develop viable public transport systems.

New Zealand’s response to the higher oil prices will be a test of character as we can either develop realistic energy and transport policies or succumb to the motor vehicle lobby by cutting petrol taxes.

The only real option is the former.

Oil – Dramatic increase in demand anticipated (million of barrels per day)

     2030  2025  2020  2015  2010  2005 
OECD Demand  53.4  52.9  52.2  51.3  50.3 49.6 
Other Demand  64.2 57.5 51.3 45.2  39.4 33.7 
Total World Demand  117.6 110.4 103.5 96.5  89.7  83.3 
OPEC Production  58.8 51.9  45.7 40.2  35.6  34.3 
Non-OPEC Production  58.8 58.5 57.8 56.3  54.1  49.0
Total Word Production  117.6 110.4 103.5 96.5  89.7  83.3

 Source: OPEC