Why oil prices are barreling up

[bemildred]

LONDON - In the past week, oil prices have regained about US$3 a barrel after hitting a low of $45. Apart from the perennial US weather factor, positive sentiment was reinforced by IEA (International Energy Agency) data revising previous forecasts for world oil demand growth in 2005 by 80,000 barrels per day, or 0.08 million barrels/day (mbd), to the suspiciously modest figure of 1.52 mbd.

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The Organization of Petroleum Exporting Countries (OPEC) is usually wheeled into the pricing melee by saying it will now "defend" $40/barrel, after waiting until December 2004 to say it was no longer "defending" a price range of $22-28/barrel. But the question is: what spare capacity does OPEC really have? This raises the key question as to what exactly OPEC's current 11 members (OPEC-11) produce and export. Using data from the Oil & Gas Journal on world daily average production in 2004 and 2003, only Iran, Qatar, Kuwait and Saudi Arabia are credited with production hikes of over 3% in 2004, excluding the very special case of Iraq. For Oil & Gas Journal, there was a 55% increase in Iraq's daily average production to about 2.05 mbd in 2004, while EIA (Energy Information Administration) and the DoE (Department of Energy) figures give about 1.55 mbd, almost identical to the 2003 average output. BP places Iraq's 2003 production at a daily average of 1.33 mbd. This is exactly half the growth in world daily average oil demand in January-December 2004.

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This pattern of domestic demand increasing much faster than production is common to more than nine out of 10 oil producers, both OPEC and non-OPEC. Net exports, therefore, will always tend to grow slower than national production. Conversely, world oil import demand is significantly higher than consumption demand. In 2004, for example, world oil demand rose 2.68 mbd, but import demand growth was about 3.1 mbd.

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One of the biggest problems facing the IEA, the EIA and a host of analysts and "experts" who claim that "high prices cut demand" either directly or by dampening economic growth is that this does not happen in the real world. Since early 1999, oil prices have risen about 350%. Oil demand growth in 2004 at nearly 4% was the highest in 25 years. These are simple facts that clearly conflict with received notions about "price elasticity". World oil demand, for a host of easily-described reasons, tends to be bolstered by "high" oil and gas prices until and unless "extreme" prices are attained. This is the real fundamental, on the demand side.

Asia Times