Oil prices decided by rule of supply and demand
Dec 17 2008 By Nevill Boyd Maunsell
Opec’s record production cut in pursuit of an oil price of $75 a barrel is to serve “a much more noble cause”.
So said Saudi Arabia’s oil minister, Ali al-Naimi, after the cartel voted to shut down five per cent of the world’s total oil supplies.
Don’t suppose that Mr al-Naimi has turned green and wants us to believe that the Opec countries are doing their bit for the planet by pumping out less of the raw material of greenhouse gases.
He knows that we know that $45 a barrel crude – down almost instantly from a spike to $53 when the Opec cut first loomed last week – is painful for big-spending Opec countries like Iran and Venezuela and uncomfortable for the rest.
It is not much good for Chancellor Alistair Darling’s Budget sums, come to that, but we have given up counting little numbers like £2 billion here and £5 billion there.
Yet Mr al-Naimi’s nobility is not undiluted double-speak either.
He pointed out, rightly, that some oil producers are better off leaving the stuff in the ground than pumping it to sell at $45.
Oil exploration and investment projects round the world have been cancelled because there is no point of finding oil that that would be uneconomic to exploit.
Was all the talk of the new car-owning classes in India and China forcing up demand for oil the way Americans and Europeans did in the 20th century really just boomtime nonsense?
The present glut of loaded tankers steaming dead slow ahead, or tied up at terminals, has to be a temporary phenomenon, arising from the sudden worldwide industrial slowdown this autumn as the banking crisis infected everybody’s real economy.
Note: a couple of months of cheap oil are already changing behaviour.
American motorists used slightly more petrol, not less, the week before last than in the same week a year ago, recession or no recession.
Futures markets point to oil prices climbing steadily back over $100 during the next two or three years. Mr al-Naimi has every chance of hitting his “noble” target of $75. The question is how soon.
Today’s cheap oil is cushioning the recession, leaving us more money to spend on other things at a time when money is scarce.
But in a longer run the balance of supply and demand is sure to reassert itself. Be thankful for a timely respite now.
