Check out this chart on oil demand. The black line shows oil consumption of major developed markets. This is basically the U.S., Japan, and developed Europe. The grey line is oil consumption of the rest of the world, which is dominated by emerging markets.
Up until about 15 years ago, if you were interested in the oil market, you focused on demand in the world’s largest economies. But in recent years, developed market demand has become a marginal influence on prices. The most important driver of global oil markets today is demand from the rest of the world.
The U.S., Japan, and China, only consume about a third of global supply. The rest of the world consumes the other two thirds. If U.S. oil demand fell by a couple of percentage points it would probably send ripples through the global oil market. But if demand in the emerging markets fell by a few percentage points, it would send tsunami like waves through the market. Growth and energy policy in the rest of the world now has a greater influence on oil prices than growth and policy in the major developed markets.
My point is this. The financial landscape has changed in recent decades. The U.S. is no longer the center of the economic and financial universe. You can’t craft a properly diversified portfolio in energy or most other sectors of the market without taking a global perspective. Global economic and financial trends are just as important to your investment success as U.S. trends.
Jeremy Jones, CFA
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