HONG KONG — Economists are arguing whether they can see the green shoots of economic recovery or whether they are still only the yellow weeds of continuing recession. But global oil markets have been hyperactive and reacting as if the green shoots have already burst into flower on the way to a full-grown prosperity tree.
So what is going on? Is this another case of speculators seeing the opportunity of a quick billion bucks and betting early that recovery will send prices soaring as happened in 2008? Or is a more fundamental shift occurring in the axes of supply and demand? Prices of benchmark crude in both London and New York leaped upward and rose above $72 a barrel recently, a far cry from the $35 a barrel forecast for 2009 by the Economist Intelligence Unit or the $42 a barrel expectation of the U.S. Energy Information Administration.
It looks very much as if the market is ahead of Saudi Arabian oil minister Ali al-Naimi and the oil-exporting countries that say $80 a barrel oil will be here as soon as the global economy gathers steam, probably by yearend in their view. To maintain prices, the Organization of Petroleum Exporting Countries is trying to police cutbacks of 4.2 million barrels a day from OPEC’s combined output. For OPEC members with ambitious economic or social programs, $60 a barrel oil is a break-even point for their constrained budgets.
But so-called oil experts are totally split on rising oil prices. The head of U.S. oil giant Exxon Rex Tillerson says he sees no justification for such high prices. “It’s just a bet as to whether the green shoots have roots or not, and none of us really know yet,” he said. American analysts say oil at $80 is the maximum that Americans can pay without their economy tipping back to recession.
Even the Saudi minister conceded that rising oil prices may “take the wheels off an already derailed world economy.” The reasons why some analysts say oil is rising too soon and too fast are clear enough. Demand for oil, especially in the United States, has fallen. Stocks are high, with enough for 62 days consumption, the highest in 15 years. Some companies have been storing oil in tankers at sea because there is insufficient land storage.
Some experts still predict a short-term collapse in the price to $40, and some even go as low as $25, but this seems less likely given the increasing clamor of optimism that the world economy is about to pick up, apart from the few curmudgeonly economists who say that it would be unprecedented for the world to recover so quickly from such a deep recession.
The picture in the U.S. is mixed. Overall, U.S. demand is down to 18.8 million barrels a day, almost 2 million barrels below demand in the first quarter of 2007. But within the general picture, there has been falling demand for distillates, mainly consumed by industry, which reflects the general industrial gloom, along with steady to robust demand for gasoline. Some oil economists say the market is reacting to expectations of rising demand from motorists as the summer driving season approaches.
According to the International Energy Agency, global demand for oil this year will be 83.2 million barrels a day, 3 percent or 2.6 million barrels below last year. Global supply in April was 83.6 million barrels a day. But the agency had a caveat in its demand forecast last month that, “Continued oil demand weakness is premised on strong economic recovery later this year remaining elusive.”
There are other factors at work that reflect a change in the axes of supply and demand. One is the rising expectations of demand from Asia, particularly China but also India. Another is obviously the fine balance between supply and demand for oil, so that any indication that China’s growth is picking up will encourage the oil bulls. Beijing has put the bulls on alert by its own spending spree to secure oil and other commodities.
Maybe Goldman Sachs should be treated as a sort of bellwether. The investment bank’s energy forecasters have rejoined the thundering herd of bulls — or “bison headed to the cliff-edge,” as a skeptical Australian called them — by predicting oil at $85 a barrel by the end of 2009 and $95 by 2010. This is based mainly on Chinese demand, which Goldman Sachs expects to fall by 115,000 barrels a day this year, but rise by 343,000 barrels next. As the biggest trader in energy derivatives, Goldman Sachs has the power to move markets.
What should be worrying is that if and when the global economic recovery does take off, oil markets are set to go sky-high again because of the lack of investment in new supply and refining capacity.
An equally important factor is that easily accessible oil is getting harder to find. OPEC estimates that $75 a barrel oil is needed for oil exploration and production to become profitable. Iran cites a $50 price as the minimum. Whether the much disputed point of “peak oil” has been reached or not, new demand is growing just as the cost of finding new oil becomes more expensive.
Perhaps the most gloomy aspect is the inability of politicians and bankers to plan ahead. With prices low, now would be a good time to put in place taxes and other measures to encourage energy efficiency, given that it takes years to decades for energy investments to bear fruit and that medium-term energy demand is rising.
But President Barack Obama’s energy secretary Steven Chu said it would be “politically impossible” for the U.S. to impose the sort of energy taxes that Europeans and Japanese have done to help create more efficient energy use and a motor industry that doesn’t depend on gas-guzzling vehicles.
The International Energy Agency said investment in oil and gas exploration and production will fall 21 percent in 2009 and that oil producers have put off $170 billion worth of investment, blaming falling prices, slumping demand and tight credit.
Demand from China and other rapidly developing countries is expected to push global oil demand to 113 million barrels a day by 2030. Previously resilient non-OPEC production is also expected to decline this year. All this means that there is a clear risk that the fine balance between supply and demand will tip. The bottom line is that $75 a barrel for oil may seem high today, but the year after tomorrow it will seem like a real bargain.
Kevin Rafferty is editor in chief of Plain Words Media, a group of journalists specializing in economic development issues. He previously was in charge of Asia coverage for the Financial Times.