Wednesday, June 06, 2012

As Supplies Rise, Demand Appears to Stagnate

At the same time as global demand appears to be stumbling, global supplies of liquid fuels appear to be steadily rising. This is a predictable phenomenon of supply and demand economics, although sometimes one must allow prices to rise quite high over time before consumers are motivated to conserve, and producers are motivated to produce.


The world is pumping out more oil and other liquid fuels right at the moment when the global economy is starting to slacken and people are using less of the stuff.

So where did this extra oil* come from? Some of it was tapped from new unconventional supplies in the United States and Canada. But OPEC countries have also been cranking up crude production in the past year. Iraq is slowly rebuilding its oil industry. And Saudi Arabia has added about 1 million barrels per day in the past year, to the point where it’s now pumping out more oil than it has in the past three decades.

Meanwhile, global demand as falling. As my colleague Steve Mufson reports, according to Barclays Capital, most of the growth in global oil demand in recent years has been coming from just four countries: Saudi Arabia, China, India, and Brazil. And those last three countries are all slumping. That means there are fewer takers for that extra oil than was expected.

Add that up, and many analysts are now predicting that crude prices will keep falling this year — possibly as low as $90 per barrel. From a historical point of view, that’s still very high. But from the perspective of the U.S. economy, that could provide a small stimulus as gasoline prices keep falling. _WaPo
Of course, the US economy can benefit either way the oil price swings. But on the balance, it is still better for US commerce if oil prices do not rise too high.

On the supply side, we are just beginning to see producers taking advantage of the large gas to oil price spread. With the rise of GTL (gas to liquids), and the global development of vast shale gas ( and oil ) resources, we are likely to see more downward pressure on global oil & gas prices, at least in some markets.

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