China Demand Pushes Oil Price To Record Highs
Though this blog concentrates on coal, oil is definitely part of the same energy phenomenon. In fact, oil is an even more important issue because coal is used largely for electricity generation, which can be produced by various alternative (though more expensive) means.
On the other hand, and despite some claims to the contrary, there are no current, sufficient, affordable and feasible alternative supplies of the valuable substances we consume is mass quantities and derive almost exclusively from petroleum for chemical feedstocks and transport fuels. For example, Paraffin, and Toluene. China's demand for the stuff continues to expand faster than producers can (or will) expand their supply, and so the price goes up for everybody and will continue to do so.
The oil price hit an all-time-high last summer and is poised to surpass that mark this summer according to the International Energy Agency. Of course, the price of oil is quoted in current nominal US dollars, so that's not necessarily a good mark of how expensive it is for people to afford compared to what it was in the past. Some people say that despite the recent complaints of US motorists, if you take inflation into account oil is still cheaper than it used to be. This is incorrect - compared to the US Consumer Price Index - Oil is more expensive than it's ever been, including the first oil shock, except for the 30-month period between August 1979 and January 1982 - the 1979 energy crisis which followed the Iranian Islamic revolution.
From the Financial Times:
Why has oil become so expensive and will it stay that way? It's said that those who live by the crystal ball must learn to eat ground glass, but I'll wager a prediction anyway. Oil is more expensive primarily for simple reasons of supply and demand (with a smaller effect from high risk premiums based on political instabilities in oil-exporting regions), it will remain pricey and become increasingly expensive in the coming years, with a strong possibility of the real price surpassing that of the 1979 shock in the short term.
OPEC claims on its website to have a large 15% spare production capacity, so some argue that a good deal of the price is created from the cartel using its market power to impose artificial supply tightness to boost prices. And of course, that is the reason for OPEC's existence so it's a strong argument. India, in particular, has singled out the group's policies as one of the major restraints on its present and future economic growth. But OPEC counters that they are merely acting as a "stabilizing influence", reducing the damaging effects of a radically volatile oil price, maintaining a reserve capacity to deal with unexpected supply disruptions, and balancing supply and demand in an industry that otherwise would fluctuate wildly through boom and bust cycles. OPEC also argues that a high price reflects the optimal profitability management of their reserves. If they pump additional oil now and lower the price, vs keeping it in the ground and selling it at a much higher price in an oil-scare future, they would be losing money. Then again, if they don't pump enough they could stall the global economy, and produce severe political conflicts. They will discuss these, and many more issues, at their 145th meeting taking place, perhaps coincidentally, on September 11th, 2007 at their headquarters in Vienna, Austria.
Demand for oil is inelastic, which means that even when the price goes up substantially, consumers still buy nearly the same amount, and simply forgo the other purchases they would have made with the additional money because they are unable to adjust their consumption patterns in the short-term. The detrimental effect on the overall economy and on the real-wealth of the average citizen is obvious. The extra demand, of course, comes from China. The world consumed an extra 639,000 barrels of oil a day last year, with China accounting for 473,000 of those barrels or 74% of the additional demand!
Oil is the ultimate globally-exchanged commodity and so inflation, currency exchange rates, and average wages matter more than 'purchasing power parity'. The British Pound and Euro are at record highs against the dollar, so oil is relatively cheaper for them, while the Chinese Yuan remains, more-or-less, pegged at a low-exchange rate to the dollar, so oil is quite hard to afford there, which is one of the reasons they only consume 40% of the oil the US does. Nevertheless, Chinese oil consumption rose 7% last year (US demand decreased 1.3% last year) and is slated to expand exponentially for some time to come given the expansion of automobile ownership.
Some people claim that not only is oil running out (as fossil fuels do by definition) but that the global capacity to produce a quickening rate of barrels per day is quickly coming to an end, and so even with plenty of oil in the ground, annual supply will peak then start to drop precipitously just as demand in the developing world starts to take off and as a result prices will skyrocket. That scenario, if true, could be catastrophic, but then again, similar groups have been incorrectly predicting this kind of imminent disaster for many years. On the other hand, many industry analysts, and myself, agree with the conclusions of Cambridge Energy Research Associates, Inc. (CERA) which predicts that oil production will increase slowly for the next decade, then plateau and stabilize for decades thereafter. Real prices, on the other hand, will continue to slowly march upwards for the foreseeable future, those higher costs helping to maintain supplies by incentivizing additional production that would be unprofitable at lower prices.
On the other hand, and despite some claims to the contrary, there are no current, sufficient, affordable and feasible alternative supplies of the valuable substances we consume is mass quantities and derive almost exclusively from petroleum for chemical feedstocks and transport fuels. For example, Paraffin, and Toluene. China's demand for the stuff continues to expand faster than producers can (or will) expand their supply, and so the price goes up for everybody and will continue to do so.
The oil price hit an all-time-high last summer and is poised to surpass that mark this summer according to the International Energy Agency. Of course, the price of oil is quoted in current nominal US dollars, so that's not necessarily a good mark of how expensive it is for people to afford compared to what it was in the past. Some people say that despite the recent complaints of US motorists, if you take inflation into account oil is still cheaper than it used to be. This is incorrect - compared to the US Consumer Price Index - Oil is more expensive than it's ever been, including the first oil shock, except for the 30-month period between August 1979 and January 1982 - the 1979 energy crisis which followed the Iranian Islamic revolution.
From the Financial Times:
Additional Commentary Below:The world is facing an oil supply "crunch" within five years that will force up prices to record levels and increase the west's dependence on oil cartel OPEC, the industrialized countries' energy watchdog has warned.
In its starkest warning yet on the world's fuel outlook, the International Energy Agency said "oil looks extremely tight in five years time" and there are "prospects of even tighter natural gas markets at the turn of the decade".
The IEA said that supply was falling faster than expected in mature areas, such as the North Sea or Mexico, while projects in new provinces such as the Russian Far East, faced long delays. Meanwhile consumption is accelerating on strong economic growth in emerging countries.
... The widening gap between rising consumption and lagging non-Opec supply will force Opec to sharply increase its production in the next five years.
Lawrence Eagles, head of the IEA's oil market division, told the Financial Times: "If we get to the point were there is insufficient supply, the only way to balance the market will be through higher prices and a drop in demand."
The IEA Medium Term Oil Market Report came as oil is approaching last year's record high.
Why has oil become so expensive and will it stay that way? It's said that those who live by the crystal ball must learn to eat ground glass, but I'll wager a prediction anyway. Oil is more expensive primarily for simple reasons of supply and demand (with a smaller effect from high risk premiums based on political instabilities in oil-exporting regions), it will remain pricey and become increasingly expensive in the coming years, with a strong possibility of the real price surpassing that of the 1979 shock in the short term.
OPEC claims on its website to have a large 15% spare production capacity, so some argue that a good deal of the price is created from the cartel using its market power to impose artificial supply tightness to boost prices. And of course, that is the reason for OPEC's existence so it's a strong argument. India, in particular, has singled out the group's policies as one of the major restraints on its present and future economic growth. But OPEC counters that they are merely acting as a "stabilizing influence", reducing the damaging effects of a radically volatile oil price, maintaining a reserve capacity to deal with unexpected supply disruptions, and balancing supply and demand in an industry that otherwise would fluctuate wildly through boom and bust cycles. OPEC also argues that a high price reflects the optimal profitability management of their reserves. If they pump additional oil now and lower the price, vs keeping it in the ground and selling it at a much higher price in an oil-scare future, they would be losing money. Then again, if they don't pump enough they could stall the global economy, and produce severe political conflicts. They will discuss these, and many more issues, at their 145th meeting taking place, perhaps coincidentally, on September 11th, 2007 at their headquarters in Vienna, Austria.
Demand for oil is inelastic, which means that even when the price goes up substantially, consumers still buy nearly the same amount, and simply forgo the other purchases they would have made with the additional money because they are unable to adjust their consumption patterns in the short-term. The detrimental effect on the overall economy and on the real-wealth of the average citizen is obvious. The extra demand, of course, comes from China. The world consumed an extra 639,000 barrels of oil a day last year, with China accounting for 473,000 of those barrels or 74% of the additional demand!
Oil is the ultimate globally-exchanged commodity and so inflation, currency exchange rates, and average wages matter more than 'purchasing power parity'. The British Pound and Euro are at record highs against the dollar, so oil is relatively cheaper for them, while the Chinese Yuan remains, more-or-less, pegged at a low-exchange rate to the dollar, so oil is quite hard to afford there, which is one of the reasons they only consume 40% of the oil the US does. Nevertheless, Chinese oil consumption rose 7% last year (US demand decreased 1.3% last year) and is slated to expand exponentially for some time to come given the expansion of automobile ownership.
Some people claim that not only is oil running out (as fossil fuels do by definition) but that the global capacity to produce a quickening rate of barrels per day is quickly coming to an end, and so even with plenty of oil in the ground, annual supply will peak then start to drop precipitously just as demand in the developing world starts to take off and as a result prices will skyrocket. That scenario, if true, could be catastrophic, but then again, similar groups have been incorrectly predicting this kind of imminent disaster for many years. On the other hand, many industry analysts, and myself, agree with the conclusions of Cambridge Energy Research Associates, Inc. (CERA) which predicts that oil production will increase slowly for the next decade, then plateau and stabilize for decades thereafter. Real prices, on the other hand, will continue to slowly march upwards for the foreseeable future, those higher costs helping to maintain supplies by incentivizing additional production that would be unprofitable at lower prices.
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