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Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up?
By VIVIENNE WALT / PARIS Vivienne Walt / Paris – Fri May 29, 7:05 am ET
Storage tankers across the globe may be brimming with oil that no one is buying because of the global economic downturn, but the traditional laws of supply and demand don't always apply to oil prices. Drivers have faced rising prices at the gas pump in recent months, as investors and oil-producing countries hoard supplies in anticipation of a global economic recovery later this year. The 12 member countries of the OPEC cartel voted in Vienna on Thursday to maintain output at current levels rather than increase supplies in order to bring some relief to consumers, particularly in the gas-guzzling West. The OPEC oil ministers, whose countries account for about 40% of the world's entire crude-oil supply, also renewed their commitment to stick to their agreed quotas, rather than ship extra oil, as they began doing last April when several members ignored their agreed output limits. OPEC leaders, many of whose economies are heavily dependent on oil exports, have struggled to stabilize prices at a level that suits their own economic needs amid falling demand and rising supplies. Prices had rocketed to a record level of $147 a barrel last July before plummeting to $30 just five months later and beginning a new climb.
Oil analysts believe OPEC's decisions on Thursday could help push oil prices even higher; oil futures on the New York Mercantile Exchange have risen 36% in just two months, to about $63.46 a barrel on Thursday. And that appears to be on track to achieve targets set by OPEC leaders. Saudi Oil Minister Ali al-Naimi - OPEC's key power player - said Wednesday that oil prices ought to rise to between $75 and $80 a barrel by the end of the year. "Demand is picking up, especially in Asia," he told reporters puffing alongside him as he jogged through the streets of Vienna. "The price rise is a function of optimism that better things are coming in the future."
The economic recovery Naimi so optimistically predicts would certainly be vital to oil-producing countries, whose own economies would be imperiled by a drawn-out recession. Oil demand in rich countries has crashed since the onset of the economic crisis last year, and is now at its lowest level since about 1981, according to the Paris-based International Energy Agency. U.S. oil inventories - the stored surplus - this month reached their highest level since the 1980s. And about 2.6 billion barrels are currently stored in commercial tankers around the world. "There is some risk we will run out of storage space in the next four to six weeks," says Simon Wardell, director of global oil at IHS Global Insight, an energy-forecasting company in London. To oil-rich countries that possibility evokes grim memories of 1998, when the Asian economic crisis sent demand plummeting, driving world oil prices down to $10 a barrel. "If we run out of storage it could prompt a collapse in the price," says Wardell. Oil producers might then choose to dramatically cut output in order to run down the surplus.
Despite such dangers, investors and oil producers are betting that global demand will roar back, apparently hoping that the recession has already hit bottom. Over the past two months, investors have plowed billions of dollars into oil futures. If the U.S. and other major industrial economies rebound, oil supplies could be depleted because the recession has prompted producer nations to freeze hundreds of projects to open new oil wells or upgrade existing ones. In the oil-rich Niger Delta, a major Nigerian government offensive against rebels has seriously disrupted production for several weeks. Venezuela's Oil Minister Rafael Ramirez said in Vienna that his country could not afford to invest in major new oil exploration unless prices rise further. "We need a level of at least $70 [a barrel] to recuperate investment," he said on Thursday. Muhammad-Ali Zainy, senior energy analyst at the Center for Global Energy Studies in London, says oil demand could increase quickly once the recession ends, especially as China has begun to build up its strategic oil reserves. "We think the price is going to go up gradually," says Zainy.
For those feeling the pain at the gas pumps, however, there is one piece of good news. Oil is unlikely to hit $147 a barrel again - at least not during the coming decades. The U.S. Energy Information Administration said on Wednesday that oil prices would likely rise to $110 a barrel by 2015 and $130 a barrel by 2030. By that time the world oil markets might once again follow the normal rules of economics.
7 comments from 6 users
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posted by
donmason
on May 29, 2009 at 09:22 AM
Oil prices are rising along with all tangible commodities as a hedge against currency devaluation (inflation pressures). US Treasury yields are falling, as supply is exceeding demand, the result of trying to finance our massive deficit.
http://www.bloomberg.com/ap...
In our present situation, commodities are the best bet for investors trying to find real returns, so speculation is helping to drive up prices.
http://www.bloomberg.com/ap...
A full economic recovery world wide will result, once again, in chronic shortages of most vital commodities, so long term price increases are assured. The prices will rise until the recovery is stalled, and the cycle begins again.
At the present time, US gasoline stocks have fallen below seasonal norms, the result of reduced production when refinery margins hit the basement 6 months ago.
Actual US crude oil stocks, while at record highs, have been declining for the last couple of months.
http://tonto.eia.doe.gov/oo...
For those feeling the pain at the gas pumps, however, there is one piece of good news. Oil is unlikely to hit $147 a barrel again - at least not during the coming decades. The U.S. Energy Information Administration said on Wednesday that oil prices would likely rise to $110 a barrel by 2015 and $130 a barrel by 2030. By that time the world oil markets might once again follow the normal rules of economics.
This statement is absurd. The US EIA is a grandstanding agency. Their cost projections have been wrong 100% of the time for the last 20 years.
The sky is the limit on prices. By 2030, oil need will be dire, as available production will have declined far below demand.
World oil markets will never follow “normal” rules of economics again, since supplies will be tight long term going forward. The old “rules” no longer apply. No amount of capital spending will be enough to bring supply back into balance with demand.
posted by
motopoet
on May 29, 2009 at 11:52 AM
I thought gas prices were going to be cheap once Obama got in office! Well, to be more specific, that's what the uninformed of those who voted for him thought. Guess the posts in which I mentioned that who occupies the white house has little to do with the price of oil was right after all. It's not about the president, it's about the people and what they're willing to pay. Last time the speculation was based on instability in Iraq and Iran, but now that nobody really seems to care about that anymore, NIGERIA'S instability is being cited as a major factor. Um...How about it's summertime and gas always goes up because they know people will be using more gas? I'm just sayin.... posted by
donmason
on May 29, 2009 at 01:50 PM
Hi Moto,
Yeah, any US President is powerless to control petroleum prices. World demand and supply sets prices.
The deep world recession brought us a reprieve from higher prices, but it won’t last very long.
Small shortages or surpluses cause huge swings in price, Speculation and fear of shortages runs the price up when supply is tight, and lack of storage and speculation (shorting) causes the price to crash when there’s a surplus available.
Just a few percentage points of surplus or shortage easily brings price swings that can double or halve the price in just a few months.
This volatility is destructive to long term supply. At a price below $80 per barrel (2009), exploration and secondary recovery efforts are curtailed, and maintenance is deferred on existing infrastructure. Lot’s of the oil patch infrastructure world wide is rusting away faster than it’s being replaced or refurbished.
Once demand rebounds, we’ll be in worse supply shape than before the crash.
Most folks don’t realize that crude oil production world wide peaked in late 2005, and the high prices that allowed huge new investments in exploration and enhanced recovery only resulted in holding production flat. Demand kept increasing, supply became tight, and speculation added to price pressures.
Just before the July commodity price crash began, as a result of the economic crash, US oil supply inventories dropped to record lows.
Had the credit and banking crisis not happened, energy shortages would have strangled further economic growth anyway. Had demand trends continued from last summer, the world supply of petroleum would now be at least 5% less than demand. $ 6 gasoline would have had a major impact on business costs and consumer spending.
It will be interesting to see exactly how this plays out over the next 24 months.
The long term price trend is up, but the markets will remain extremely volatile as the world economy tries to readjust.
We are entering a new era of permanent tight supplies of petroleum. Many will blame the coming high prices on everything except the real problem. There just won’t be enough to go around. posted by
NancyII
on May 29, 2009 at 02:44 PM
We can gussie it up with all kinds of would events and finances and supply til the cows come home but I'm with Moto on this one. Yesterday coming home I saw a normally low price gas sign take a big hike. My first though was "criminy, who blew up what well?" Then it hit me doofus, it's SUMMER. Kinda like when it gets to be 110 and people start with the "I can't believe it's this hot" and I always respond with "Where were you last summer?" There ya are. posted by
siouxcityranch
on May 29, 2009 at 05:36 PM
Summer and all major holidays..hasnt failed us yet..just because we got the almighty O on our side (yuk yuk) doesnt necessarily mean that will ever change..can I say SUCKERS yet? posted by
erikbako
on May 31, 2009 at 03:40 AM
Because businesses are trying to gouge the consumer once again. I don't know about you, but when the price went down I didn't see anyone try to conserve - they went back to their old habits of buying bigger cars and boats and driving more as if the prices were going to stay low forever. I hardly ever see cars on the road anymore, they are replaced by monster truck and SUVs and the ocassional moron driving a hybrid that costs twice as much to buy and twice as much to maintain. What galls me is when the price is passed along to the consumers it's passed along threefold in the form of higher fuel prices, the % of taxes incorporated into them, and the price of commodities that are raised because of the fuel price increase. I don't know about you, but I didn't see the fast food's $7 per pukey meal average plummet along with the fuel prices, but what do you want to bet they won't skyrocket again in response to "the higher price of fuel". It's like they reset the standard everytime it goes up or down, without ever adjusting the price. Now I'm just waiting for the next wave - "a new cow flu means milk is $5/gal again" or "more people using a/c's to cool off means a tripling in electrical rates". Like lambs to the slaughter, the people, already nickled and dimed to death, do not question the system but just keep acknowledging they will pay more and continuing to fork it over. The only good thing about the entire hike in prices is that if you work for the petroleum industry (as many in Kern County do) you'll probably benefit in one way or another from the increased prices. Our company stock is up 50% from just a few months ago, overtime is reinstated, and the amount of work to be done, like those taxpayer dollars, just keeps pouring in! posted by
tkozy
on May 31, 2009 at 11:19 AM
Don,
Let's list facts that I have stated previously.
TK continues:
Non conventional resources such as the BAKKEN can be profitable at 40 bucks per barrel and will return to the drilling boom of the 08 at 70/barrel.
A discussion that connects resource availability with production is dishonest. The resources are there beyond the imagination of most Americans. It is the dedication to extract those resource that is limited.
Combining the huge resources of crude with the reality of alternative energy that is available today. Such as Hydrogen. America has a future in energy leadership of the future.
Transforming America to a Alternative energy nation. And exporting crude to less wise nations.
The dinosaurs need to get out of crude and into Alternative energy, or face extinction.
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