*****Deutsche Bank is out with its oil forecast for 2010. It believes reduced demand will keep oil prices at an average of $65 a barrel in 2010. The banks analysts believe that demand in the U.S. has peaked and that greater “oil efficiency” around the world will mean that demand will not rise much.
The term “oil efficiency” basically means that we get more use out of every gallon of oil. Like with higher MPG cars. We might drive just as many miles, but we use less gas to do so. That clearly makes sense. But there are also many assumptions included in Deutsche Banks’ theory.
One is that rising Chinese demand for oil will not continue on its current path because Chinese growth at current levels is not sustainable. Personally, I’m very hesitant to say that China can’t keep growing at an astounding pace. As we know, China can continue to support its economic growth for quite some time simply by deploying its foreign currency reserves. It doesn’t have to go into debt to support its economy like the U.S. does.
Also, let’s not forget that at some point, domestic demand in China will pick up and China’s economy can begin to transition away from its export orientation. When this happens, China’s growth becomes self-sustaining, the standard of living rises and you can bet that means oil demand will rise.
As it happens, there is an important catalyst for domestic demand in China we can watch for. Right now, China has a ridiculously high savings rate – around 39%. That’s because China has no social security type of retirement plan. It’s up to individuals to prepare for retirement. At some point, China’s government will implement some form of social security. And that may be the key that unlocks domestic demand in China because it will mean that Chinese citizens can spend more money.