The Hindu Business Line : Global oil realities

While crude oil prices have slipped back from their peak a fortnight ago, there is foreboding about the long-term mismatch between demand and supply.

On Thursday, the world oil price slipped below $123 a barrel from a high of more than $135 a fortnight ago, fuelling hopes that the worst may be over as far as high crude prices are concerned. The immediate reason for the drop was the US Energy Information Administration’s report that the US demand for petrol had fallen by 1.4 per cent over the past four weeks and that stocks of the fuel had risen by 2.9 million barrels last week, more than three times the increase e xpected by analysts. While this may be good news for the world as a whole, which is currently paying almost twice what it paid for crude at this time last year, there is still some foreboding about the long-term mismatch between demand and supply.

In fact, the most important change facing the global economy is that domestic demand for crude in oil producing countries has increased to such an extent that exports are declining secularly. Countries that have been important members of the Organisation of Petroleum Exporting Countries have now turned importers. Indonesia, for instance, is a net importer of crude since 2004, its Energy Minister announcing recently that the country would not renew its OPEC membership. Russian exports through the Caspian Sea have been declining, as have Mexican and Venezuelan sales, the last two being important sources of crude for US refineries. The growing inelasticity of production has led to tightening prices. According to one report, 14 of the world’s largest oilfields, which together account for a fifth of global output, are all gradually reducing production, underscoring the need for replacement by more modern and hugely expensive facilities. In Saudi Arabia, the world’s largest crude exporter, a demand has been made to keep oil underground — instead of being pumped out to serve the current consumption requirements of foreign countries — as a good investment for the future, when prices rise even higher.

On the demand side, newly emerging economies, particularly China, are pushing up their international crude purchases to fuel rapid economic growth, skewing further the demand-supply imbalance. According to an International Energy Agency forecast, in 2008, China, India, Russia and West Asia will, for the first time, together consume more crude oil than the US, representing a rise in consumption of 4.4 per cent over levels a year ago. Rising fuel prices in these economies may temper demand which would, among other things, weaken for some time at least the secular global demand-supply mismatch. While such an impact would be desirable for the finances of the economies concerned, not to speak of enforced efficiency in fuel-use, increasing affluence could push up demand for crude even at higher prices. .

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