Oil Prices Have Peaked?

Well at least for the time being oil prices seem to have peaked. The recent run up in oil prices always struck me as being a bubble, at least in part. Sure there was increased demand from countries like India and China that added to the upward movement in prices, and the instability in the Persian Gulf doesn’t help, but we still have these things and now the price is down 23%. Of course, it also helps that consumers are using less oil and oil based products than they were previously.

World oil consumption is now growing at a significantly lower pace than had been imagined a year ago. Last October, the International Energy Agency was forecasting global demand growth for 2008 of 2.1m barrels a day, with 750kb/d from the OECD and 1.33mb/d from emerging markets. In their latest monthly report, the IEA has slashed this by more than 60 per cent to 800kb/d, with OECD demand actually forecast to decline by over 600kb/d and emerging markets demand to grow by 1.4mb/d.

I imagine that one thing that is going on is that the higher prices in the developed world are going to start having an impact on imports. According to the Bureau of Economic Analysis imports for the last three quarters have been negative (-2.3%, -0.8% and -6.6% respectively). This in turn will hurt developing countries that are dependent on their export industries for driving growth–e.g. China. This could have additional impacts on the price of oil.

For China, which has been responsible for more than half of global base metal demand growth and as much as one-third of global petroleum demand growth, challenging times are ahead for exporters and the metal and energy-intensive producers of steel, aluminium, cement, and other primary products.

Contrary to popular myth, these energy- intensive industries rather than the transport fleet are consuming the middle distillates that drive two-thirds of China’s petroleum demand growth. And now due to higher energy costs, an appreciating yuan, weak export markets, and a protectionist backlash, exports are falling, with ramifications for their demand for resources. With China at a crossroads and GDP growth slowing to 8 per cent, product demand growth could drop from its three-year average of 490kb/d to 350kb/d (up 4.4 per cent) in 2009.

We wont see oil prices back in the $50 to $60 range, but I wouldn’t be surprised if they drop a bit more.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Zelsdorf Ragshaft III says:

    So, Steve, what you are trying to say is we will still be giving 700 billion dollars to folks who will not spend it here? Drill here, drill now. The price of oil is not ever going to get substantially less.

  2. Bithead says:

    . Of course, it also helps that consumers are using less oil and oil based products than they were previously.

    To say this is to suggest that the problem was more than psychological. The facts dno’t seem to bear this out. As of the time that this price spike started, the US already had 15% more in the way of both crude and distalates such as Gasoline, Diesel and so on, than they’d had since they started keeping records of such. Clearly this was not a price spike caused by a shortage of product.

    That’s excluding what we know of oil deposits of shale and so on.

    We wont see oil prices back in the $50 to $60 range, but I wouldn’t be surprised if they drop a bit more.

    Frankly, Steve, I’d be shocked if they didn’t. Indeed; They might not get to $50 or $60, per se’… but I see that as a function of inflationand the relative strength of the US dollar, as much as anything, and suggest that we will see prices drop down that low again, inflation adjusted assuming we’re smart enough to start drilling here in the US… not to increase oil supply so much as to get the trade balance numbers back in line so as to make a stronger dollar.

  3. Steve Plunk says:

    Does admission of a bubble mean we can accept speculators had a part in the price run up? I know many economists don’t want to accept that idea but you cannot have such a large influx of cash and increase in the number of futures contracts without driving prices up. Now that money is leaving oil futures we are seeing prices fall. Reduced demand is part of it but speculators clearly had a substantial effect.