Because petroleum consumption is strongly related to economic activity, the assumed change in the direction of economic growth has drastic effects on both projected petroleum consumption and price. The result of this downward revision is a much lower demand for oil than we had previously forecasted. We now expect global oil consumption in 2009 to stay relatively flat as opposed to the projection of about 800,000 barrels per day of growth in our October STEO. Combined with the revision to the 2008 projection, the projected level of oil consumption in 2009 is 1 million barrels per day below last month’s forecast.

While the economy appears to have an immediate effect on oil consumption, the effect on oil production in countries not belonging to the Organization of Petroleum Exporting Countries (OPEC) is much less direct in the short-term. Lower prices reduce investment in some of the more mature fields, increasing decline rates, but new projects that are very near completion are unlikely to be affected because most of the development costs have already been spent. Therefore, our 2009 forecast for oil production growth in non-OPEC countries, while lower than forecast in our October STEO, has changed much less than our forecast for global demand growth. The fact that we now have 2009 global demand growth significantly less than non-OPEC supply growth is the major reason we have a much lower oil price forecast.

With the expectation for global oil consumption dramatically reduced and with little change in the non-OPEC supply forecast, OPEC lowered their production targets effective this month. EIA’s analysis of this cut is that compliance will be greater than seen historically, but not enough to do much more than prevent prices from falling significantly further. As noted in last week’s This Week In Petroleum, we assume that Saudi Arabia, the OPEC member with the ability and willingness to change production levels the most, reduces production in the first quarter of 2009 to levels consistent with production in the first part of 2007. This would represent a reduction of nearly 1 million bbl/d from Saudi Arabia’s estimated peak monthly production level in the third quarter of 2008. Our analysis is that Saudi Arabia, and to a lesser extent, some other OPEC countries, will be willing to comply with production targets a little more closely than they have in the past because of the steep drop in oil prices seen since July.

We understand EIA’s responsibility to provide the best possible assessment of energy markets and to make sure that the assumptions going into our forecasts are as transparent as possible. Transparent assumptions make it easier for our customers to understand our forecast and adjust it accordingly if they disagree. While it is unprecedented for us to make such a radical change in our forecast from one month to the next, we thought it was especially important for our readers to understand the extraordinary changes in our economic assumptions and the analysis behind the changes. Click here to continue article.