Oil demand in North America:
1980–2020
Salman Saif Ghouri
Abstract
This paper first analyses price and income elasticity of oil demand
in the United States, Canada and Mexico for the period 1980–99.
Economic activity is the main driving force that influences oil consumption in each country. Changes in oil consumption generally
lagged by a few years before the full impact of changes in oil prices
was realized. Consumers in the short run are constrained by technological and other barriers and, therefore, less sensitive to changes
in oil prices; however, they are more responsive in the long run —
though response is still inelastic. The use of advanced technology
facilitated these countries to use less oil over time. The paper then
looks at demand over the next 20 years. The best-fitting model predicts that, by the end of 2020 (reference case), the USA, Canada and
Mexico will respectively consume 24,900, 2,596 and 2,321 thousand
barrels daily, compared with 19,519, 1,943 and 1,970 thousand b/d
in 1999. The model forecasts economic slowdown during 2000/2002.
The USA and Canada are expected to recover quickly, while Mexico
will take longer.
December 2001
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The author is Senior Economist, Corporate Planning, at Qatar Petroleum in
Doha, Qatar.
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A
NUMBER OF YEARS are required for discovering new fields through
comprehensive exploration efforts and developing these to bring to
the consumption centres. Therefore, long-term forecasting is always
beneficial for producers in formulating exploration strategy to meet future anticipated oil demand. The primary objective of this paper is to forecast oil demand in the United States, Canada and Mexico by 2020, in order to facilitate
planning by producers and consumers ahead of time.
This paper is divided into five sections. Section 1 analyses the historical trends
for oil consumption, oil prices and activity variables for the period 1980–99 to establish relationships between dependent and independent variables. Section 2 develops
an econometric model. The regression results and their interpretation are presented in
section 3. Using the best-fitting model in section 3, the paper forecasts oil consumption under alternative scenarios (reference, low and high) and these are presented in
section 4. Conclusions are presented in section 5.
The data on historical oil consumption, production, imports, domestic production, GDP and oil prices is from the Energy Information Administration (EIA, USA)
and the BPAmoco Statistical Review of World Energy (June 2000).
1. Review of historical trends
This section qualitatively analyses the historical trends for oil consumption, oil
prices, GDP, population and oil intensity in the USA, Canada and Mexico.
1.1 United States of America (USA)
As shown in figure 1, oil consumption displayed a declining trend in response to
the oil price increases of 1979. In fact, oil consumption responded to dwindling oil
prices only after a lag of two-to-three years and then continued to rise sharply against
plummeting oil prices.1 A similar trend is also visible in 1990, albeit with less magnitude. By visual inspection of the graph, it is evident that oil consumption inversely
follows oil prices with some lags. That is, oil consumption decreases/increases with
the increase/decrease in oil prices with some lags.
During the last two decades, the US economy recorded phenomenal growth,
despite a period of slowdown, due to higher oil prices. GDP grew from $4,239.9 bn in
1980 to 7,678.7 bn in 1999, recording an average annual growth rate of 3.1 per cent.
US oil consumption is strongly correlated with economic growth, as measured in terms
of GDP. The former tends to follow the later (figure 2). Strong economic growth
induces personal consumption, private investment and government expenditure, that,
in turn, stimulate oil demand.
The oil increases of the 1970s ended an era of cheap energy and induced the
developed world to move towards conservation and efficiency. Oil intensity improved
significantly after the price increases of 1973 and 1979, compared with an era when
real prices where declining. Due to significant technology-led improvements in efficiency levels, the country used only 5.3 thousand British thermal units of oil to
produce a dollar’s worth of output, compared with 8.5 thousand Btu in 1980.
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341
Figure 1
USA: historical relationship between oil consumption, oil production and oil
price
mb/d
25
$/b
70
60
20
50
15
40
Imports
30
10
20
5
10
0
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Oil consumption
Oil production
Oil price
Figure 2
USA: historical relationship between oil consumption and GDP
mb/d
25
$ billion (1990)
9,000
8,000
20
7,000
6,000
15
5,000
4,000
10
3,000
2,000
5
1,000
0
0
1980
1982
1984 1986
Oil consumption
342
1988
1990
1992
1994 1996
1998
GDP
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OPEC Review
Figure 3
Canada: historical relationship between oil consumption, oil production and oil
price
$/b
mb/d
3.0
70
60
2.5
Exports
2.0
50
40
1.5
30
1.0
20
0.5
10
0
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Oil consumption
Oil production
Oil price
Figure 4
Canada: historical relationship between oil consumption and GDP
mb/d
2.5
$ billion (1990)
800
700
2.0
600
500
1.5
400
1.0
300
200
0.5
100
0
0
1980
1982
1984 1986
Oil consumption
December 2001
1988
1990
1992
1994 1996
1998
GDP
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343
Figure 5
Mexico: historical relationship between oil consumption, oil production and oil
price
mb/d
4.0
$/b
3.5
70
60
3.0
50
Exports
2.5
40
2.0
30
1.5
20
1.0
0.5
10
0
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Oil consumption
Oil production
Oil price
Figure 6
Mexico: historical relationship between oil consumption and GDP
mb/d
2.5
$ billion (1990)
400
350
2.0
300
250
1.5
200
1.0
150
100
0.5
50
0
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Oil consumption
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GDP
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1.2 Canada
Figure 3 depicts the relationship between oil consumption and oil prices. Consumers in Canada reduced consumption in response to the higher prices of 1979. Surprisingly, oil consumption did not reverse in response to slumping oil prices until
1984. A similar delayed response to a price change was also visible in the late-1980s
and early-1990s.
In 1980, Canadian GDP was US $440 bn (1990 $), which increased to $719 bn
in 1999, recording an average annual growth rate of 2.6 per cent. The correlation between GDP and oil consumption is presented in figure 4. Apart from the early part of
the 1980s, oil consumption follows GDP, i.e. having a positive correlation. Like the
USA, Canada also recorded a significant improvement in oil intensity, which declined
from 9 thousand Btu in 1980 to 5.7 thousand Btu in 1999.
1.3 Mexico
Oil contributed about 33 per cent of government revenue in 1999 and accounted
for more than 65 per cent of the total energy spectrum at the end of 1999. Mexico’s
domestic oil production increased significantly after the second oil price rises of 1979,
which resulted in a tremendous increase in economic growth. The momentum of rapid
oil production quickly faded and almost levelled off in the presence of plummeting oil
prices (figure 5). Towards the end of 1998, Mexico reduced its production, in line with
OPEC’s similar action, in an effort to enhance prices. During the last two decades, its
domestic production has risen from 2,153 thousand b/d in 1980 to more than 3,373
thousand b/d in 1999 — an increase of 56 per cent.
Unlike its neighbouring countries, Mexico’s consumption increased even when
prices were still rising, driven mainly by strong economic growth, which is associated
with burgeoning domestic production and higher world prices (figure 5). Demand
surprisingly tapered off, while oil prices were still declining. However, such a trend
was just for a brief period, whereafter consumption continued to grow in the presence
of languishing oil prices. It appears that consumption and prices move in opposite
directions, although, at times, the magnitude is of a lesser degree.
In the early part of the 1980s, the economy recorded strong economic growth
driven mainly by high levels of production and high oil prices. As a result, demand
also expanded, disregarding strong oil prices (figure 6). Demand slumped, while oil
prices were still declining, due mainly to sluggish economic growth, which, however,
bounced back immediately with the increase in oil production. Oil consumption and
GDP have recorded similar movements, going up and down simultaneously, which
substantiates a positive correlation, while the expected sign of the GDP coefficient is
positive. Oil intensity in Mexico is higher than in its neighbouring countries and remains at a level of around 12 thousand Btu.
2. The model
Demand is a dynamic concept and consumer response to a price change lags by
a couple of years due to technological and other barriers.
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We assume that oil consumption behaviour can be explained by a simple static
model. This can be specified as follows:
Ct = a + bYt + dPt + xXti + nt
(1)
where:
C
Y
P
Xi
a
n
= total oil consumption (thousand b/d)
= Gross domestic product (1990 US $ bn)
= the world oil price2
= a host of variables, as explained in the methodology section
= a constant
= an error term
The variables are expressed in natural logarithms, so that b is the income elasticity and d is the short-run price elasticity. Unless stated otherwise, we shall assume that
the error term is normally distributed, independent of the explanatory variables, and
neither serially correlated nor heteroscedastic.
Equation (1) is a static specification of oil consumption and, therefore, may not
allow for any long-run reaction to price changes. Oil demand is then assumed to be a
function of income and price, according to the following double-logarithmic equation:
Ct = a + bYt + d0Pt + d1Pt–1 + d2Pt–2 + ......... + nt
or:
∞
Ct = a + bYt +
∑δ j Pt–j + nt
(2)
j=0
where a, b and d are the parameters to be estimated, d0 is the short-run price elasticity
and d1, d2 ... are the intermediate price elasticities, because they measure the impact on
mean "C" of a unit change in "P" in various periods.
2.1 Almon polynomial distributed lag model
Almon (1965) assumes that the lag weights can be specified by a continuous
function, which, in turn, can be approximated by a discrete point in time. Moreover,
the influence of a change in oil price (P) is complete after a finite number of periods,
so that there is a finite maximum lag.
Let us begin with the finite distributed lag model:
Ct = a + bYt +
346
k
∑
i= 0
diPt –i + et
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OPEC Review
Almon ingeniously makes use of a mathematical theorem. She assumes that a suitable
degree polynomial in "i", the length of the lag, can approximate the coefficient. For
example, if the lag scheme is a quadratic or second-degree polynomial in i, we can
write:
di = a0 + a1i + a2 i2
(4)
or, more generally, we may write:
di = a0 + a1i + a2i2 + ... + amim
(5)
which is the mth degree polynomial in i. It is assumed that m < k (the degree of the
polynomial "m" is less than "k", the maximum length of lags).
To explain how the Almon scheme works, we assume that d0 follows the seconddegree polynomial. However, we shall be using a different polynomial with a different
length of price lag. The particular profile will be reported that provides the best explanation in terms of economic and statistical significance.
Consider again the finite distributed lag structure:
k
Ct = a + bYt +
∑ diPt –i + et
(6)
i= 0
Substituting equation (4) in equation (6):
k
Ct = a + bYt +
∑
i= 0
(a0 + a1i + a2i2) Pt–i + et
(7)
or:
Ct = a + bYt + a0
k
k
k
i= 0
i= 0
i= 0
∑ Pt –i + a1 ∑ i Pt –i + a2 ∑i2 Pt –i + et
(8)
For simplicity, let us define:
k
Z1t =
∑ Pt –i
i =1
k
Z2t =
∑ iPt –i
i =1
k
Z3t =
∑ i2 Pt –i
i =1
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347
Table 1
Estimated results — Almon model
USA
(1)
Canada
(2)
Mexico
(3)
Constant
1.52
(1.35)
0.85
(0.51)
1.13
(0.85)
GDP
0.989
(7.35)*
1.08
(4.05)*
0.84
(8.49)*
–0.0185
(–4.36)*
–0.013
(–1.89)^
T
POP
—
—
–0.019
(–3.2)*
0.49
(1.69)^
P0
–0.029
(–2.91)*
–0.007
(–0.8)
–0.015
(–1.68)^
P1
–0.016
(–2.73)*
–0.02
(–0.9)
–0.032
(–3.34)*
P2
–0.006
(–1.43)^
–0.014
(–1.11)
–0.04
(–6.05)*
P3
0.003
(0.73)
–0.014
(–1.64)^
–0.04
(–6.39)*
P4
0.003
(1.102)
–0.01
(–1.21)
–0.02
(–3.12)*
P5
—
0.005
(–0.22)
0.02
(1.35)
–0.045
(–1.99)**
–0.06
(–1.87)^
–0.13
(–6.0)*
0.979
2.02
0.96
1.96
0.99
2.33
∑ Pi
Adj.R2
DW
Numbers in parenthesis are t-statistics.
* indicates 99 per cent, ** 95 per cent and ^ 80 per cent level of significance.
T is time trend, POP is population.
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Therefore, we may write equation (8) as:
Ct = a + bYt + a0 Z1t + a1 Z2 t + a2 Z3t + et
(9)
All variables are expressed in natural logarithms. In this scheme, the dependent
variable Ct is regressed on the constructed variable "Z", not on the original variable
"P". Equation (9) can be estimated by the usual ordinary least squares procedure. The
estimates of a, b and ai thus obtained will have all the desirable properties (Best Liner
Unbiased Estimators "BLUE"), provided that the stochastic disturbance term satisfies
the assumption of the classical least-squares method.
3. Regression results
For each country, several equations were examined, using different combinations of explanatory variables. The results reported in this section are those that best
fit, in terms of coefficient, sign, statistical significance and relevance to economic
theory. The estimated results are presented in table 1 (equations 1 to 3).
The coefficient of GDP is positive and statistically significant at the 99 per cent
level of confidence. This further validates our hypothesis and qualitative analysis that
oil consumption is directly correlated with GDP. The income elasticity is 0.98 (USA),
1.08 (Canada) and 0.84 (Mexico), which suggests that, if income increases by one per
cent, oil consumption increases respectively by 0.98, 1.08 and 0.84 per cent, if other
things remain constant.
As anticipated, the coefficient of trend variable "T" is negative and statistically
significant. That is, over time, technological advancement ensures a lower level of
energy use, compared with previous periods. The negative and significant coefficient
of the trend variable "T" indicates that these countries have made a substantial improvement in terms of energy efficiency, which is further supported by declining oil
intensity.
For the US economy, composite oil prices (1999 $) have been used, instead of
world oil prices.3 Only the first three-lagged price coefficients are statistically significant at the indicated level of significance. This is not meant to imply unequivocally
that the effect of a price change is exhausted after two years — only that the identifiably measurable effect dissipates after that period. The effect of a change in price of
one per cent in the current period is to alter oil consumption in the opposite direction
by 0.029 per cent. This is a rather inelastic response. As expected, the intensity of
response becomes stronger, but remains inelastic over the long term, when the total
effect of a change in price by one per cent alters the level of oil consumption by 0.045
per cent in the opposite direction. Short-run price elasticity is quite consistent with the
findings of other studies. For example, Gately and Rappoport (1988) estimated the
short-run price elasticity of demand for the US economy at –0.07, Suranovic (1994) at
–0.09 and Gately (1992) at –0.066.
The short-run price elasticity of oil consumption in Canada and Mexico is –0.007
and –0.015, which suggests that, if oil prices increase by one per cent, consumers respectively reduce oil consumption by 0.007 and 0.015 per cent in the same period. It is apparent
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349
Figure 7
USA: oil demand, 1980–2020
mb/d
35
ACTUAL
FORECAST
30
25
20
17.056
19.519
15
10
5
0
80
90
Base, 24.900
00
10
20
High, 30.397
Low, 20.358
Figure 8
Canada: oil demand, 1980–2020
mb/d
3.5
ACTUAL
3.0
FORECAST
2.5
2.0
1.873
1.943
1.5
1.0
0.5
0
80
90
Base, 2.596
350
00
10
Low, 2.199
© 2001 Organization of the Petroleum Exporting Countries
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High, 3.255
OPEC Review
from the estimated results that the long run price elasticity of consumption is greater than
the short-run price elasticity in each regression. That is, consumers are more responsive
to a price change in the long run than in the short run.
During the last two decades, Mexico's population increased from 69 million in
1980 to 97 million in 1999, recording an annual average growth rate of 1.8 per cent,
which is 24 per cent of North America’s total population. Population is an important
variable that influences the consumption of oil in Mexico. A one per cent increase in
the population leads to an increase in oil demand of 0.49 per cent. However, when
population as an explanatory variable is added to the USA and Canada, the model
loses its economic and statistical sense and is, therefore, dropped.
Overall, the regressions fit extremely well. All the coefficients have the expected
signs and are statistically significant at the indicated levels of significance. The Durbin
Watson (DW) statistics of 2.04 (USA), 1.96 (Canada) and 2.33 (Mexico) ruled out the
presence of autocorrelation, which is quite a common problem in time-series data. The
high value of adjusted R2 indicates that the model explains more than 97 (USA), 96
(Canada) and 99 (Mexico) per cent of the variation of oil consumption by the given
sets of variables.
4. Forecasting oil demand
The best-fitting regressions are used to generate the oil demand forecasts for
each country to 2020. In order to forecast oil demand, we have used historical annual
average growth rates to generate a GDP reference case, and thereafter assumed that
GDP will grow by minus/plus 40 per cent for the low- and high-case scenarios. Population is assumed to rise by ten per cent less than that of the historical growth rate, and
the time trend variable “T” is added to capture the technological development, which
is expected to bring about efficiency in oil usage.
4.1 United States of America
The oil demand forecasts for the USA under alternative scenarios (reference,
low and high case) are presented in figure 7. During the forecast horizon from 1999 to
2020, GDP is projected to grow at an annual average rate of 2.8 per cent. The model
predicts that the US economy might suffer from mild recession during 2001/2002,
whereafter it sees robust economic growth, as GDP is projected to increase by over 73
per cent between 2001 and 2020. By the end of the forecast period, oil demand is
expected to reach 24.9 mb/d, recording an annual average growth rate of 1.2 per cent
(reference case).
Unlike the reference case, recovery in the low-case scenario is rather sluggish,
and even once the recovery is made, oil demand remains almost flat. At the end of the
forecasting period, it barely reaches 20.4 mb/d — an increase of about 4.3 per cent,
compared with 1999.
In the high-case scenario, GDP is projected to record phenomenal growth during
1999–2020 and recover comparatively quickly from economic down-turn, compared
with the reference- and low-case scenarios. GDP is projected to increase from $7,678 bn
in 1999 to $17,854 bn by the end of the forecasting period, an increase of 132 per cent.
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351
With strong projected economic growth, oil demand is expected to increase by about
56 per cent between 1999 and 2020. By the end of the forecasting period, American
consumers are expected to consume 30.4 mb/d.
4.2 Canada
Canada ranked third, as far as oil consumption is concerned within the region.
Historically, the Canadian economy recorded an average annual growth rate of 2.5 per
cent during 1980–99, while oil consumption experienced a placid annual average growth
rate of 0.2 per cent. With this growth rate, Canadian oil consumption increased from
1.873 mb/d in 1980 to 1.943 mb/d in 1999 — an increase of 3.7 per cent. Unlike in the
USA, the Canadian economy records steady economic growth and, simultaneously,
slow and steadily increasing demand for oil. The demand for oil is projected to increase,
especially after 2003. In the reference case scenario, the demand for oil is projected to
increase to 2.596 mb/d in 2020 — an increase of 33 per cent over 1999 (figure 8).
In the low-case scenario, the Canadian economy is projected to grow at an annual average growth rate of 1.6 per cent, while demand for oil is projected to grow by
0.6 per cent. Oil demand is projected to grow slowly till 2009 and, thereafter, it will
rise more quickly, but still significantly less than in the reference case. At the end of
2020, demand is projected to reach 2.199 mb/d. In the high-case scenario, the Canadian economy is projected to grow at the rate of 3.5 per cent and its GDP will reach to
$1,512 bn by 2020, compared with 719 bn in 1999. With this high level of economic
growth, oil demand during 1999–2020 is projected to increase by about 67 per cent,
reaching 3.255 mb/d by the end of 2020.
4.3 Mexico
Oil is vital for the Mexican economy, as it contributes substantially towards government revenue, an important contributor to GDP. The country's export earnings are
highly dependent on it. The demand for oil (reference case) is projected to increase
from 1.970 mb/d in 1999 to 2.321 mb/d at the end of 2020 — an increase of 18 per cent
compared with a 55 per cent increase during 1980–99 (figure 9). GDP is projected to
grow at an annual average growth rate of 2.3 per cent — reaching $569 bn by 2020,
compared with $346 bn in 1999. Oil demand is projected to slow down in response to
sluggish economic growth and recovery is expected to take place in 2003/2004, whereafter demand for oil will record a continuous upward trend.
In the low case, the demand for oil reaches a level of 2.055 mb/d, which is just
4.3 per cent above the 1999 level. In sharp contrast to the low-case forecast, oil demand in the high-case scenario is projected to grow at an annual average rate of 1.6 per
cent, in response to a strong average economic growth rate of three per cent. At the end
of the forecasting period, Mexicans are consuming 2.761 mb/d — an increase of 40
per cent over the 1999 level.
5. Conclusions
This paper analyzes oil demand in the USA, Canada and Mexico for the period
1980–99, using qualitative and quantitative analysis. Qualitative analysis provides useful
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Figure 9
Mexico: oil demand, 1980–2020
mb/d
3.0
ACTUAL
FORECAST
2.5
2.0
1.970
1.5 1.270
1.0
0.5
0
80
90
Base, 2.321
00
Low, 2.055
10
20
High, 2.761
information to substantiate the relationship between oil consumption, the oil price and
economic growth.
The estimated results substantiate our qualitative analysis and indicate that the
consumer response to oil price changes is highly inelastic (non-responsive) during the
short run. The response, however, gets stronger with the passage of time, but remains
highly inelastic in the long run. The inelastic oil demand suggests that consumers are
constrained by technological or other barriers, at least in the short run, and may find it
difficult to turn to a substitute with an alternative source of energy. Therefore, oil
demand does not increase or decrease, following an decrease or an increase in oil
prices in a given year. In the long run, consumers in the USA, Canada and Mexico tend
to reduce oil consumption in the opposite direction by 0.045, 0.06 and 0.13 per cent,
following a one per cent increase in the oil price.
Consumers are strongly influenced by economic growth and tend to increase oil
consumption by 0.98 per cent (USA), 1.08 per cent (Canada) and 0.84 per cent (Mexico),
following a one per cent increase in income, which also confirms our hypothesis of a
positive correlation between oil consumption and economic growth.
The trend variable “T” was included to capture the technological advancement
that may bring about energy efficiency over time. The negative and statistically significant coefficient of the trend variable indicates that these countries over time have
made substantial improvements in terms of efficiency, which is, incidentally, evident
in the declining oil intensity.
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353
The best-fitting model is then used to forecast oil demand by 2020 under alternative scenarios — for the reference, low and high cases. In the reference case, the model
assumes that GDP follows the historical growth rate, while GDP is assumed to decrease/increase by –/+ 40 per cent for the low- and high-case scenarios. Population is
assumed to grow by ten per cent less than the historical growth rate. The model predicts that oil demand will slow down during 2000/2002, as a result of mild economic
slow-down in 2001.4 The USA and Canada are expected to quickly recover from mild
recession, while Mexico will take longer. The oil demand forecast (reference case)
indicates that demand for oil in the USA, Canada and Mexico will reach 24.9, 2.6 and
2.3 mb/d in 2020.
Footnotes
1.
The refiner acquisition cost of crude oil for each category and for the composite is derived by dividing the sum of the total purchasing (acquisition) costs of all refiners by the
total volume of all refiners' purchases (EIA).
2.
The refiner acquisition cost of imported crude oil — defined as "the world oil price" in
Energy Information Administration (EIA). Forecasts and analyses will be used for Canada
and Mexico, while, for the USA, a composite oil price will be used.
3.
For Canada and Mexico, world oil prices in 1999 dollars have been used.
4.
For 2000, the model predicted that oil demand would be 19.5 mb/d in the USA, 1.967 mb/
d in Canada and 1.992 mb/d in Mexico. According to the US DOE’s EIA, the actual
figures for the USA and Canada were 19.7 mb/d and 1.97 mb/d.
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December 2001
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