If Oil Demand Is Falling, Why Are Prices Going Up?

The International Energy Agency, the gold standard for forecasting global supply and demand for crude oil, says that the world will need 2.56 million barrels per day less than it did in 2008. CNBC reports that the number is the largest drop since 1981.

Despite this reported lack of demand, the price of oil has moved up sharply and touch $60 a barrel this week.

The problem with the IEA statistics is that too few people believe them. There may be very good reason for that. While demand in the US and Europe may remain modest,  there are more and more signs that the Chinese economy is making a quick recovery from its recession due to the central government’s willingness to pump $585 billion into the country’s financial and commercial sectors. While the effects may not be long-lasting they are still very real.

The other trend that should offset falling demand is the lack of exploration and production by large multinational energy companies and the nations that hold most of the world’s crude reserves. The relatively low cost of oil over the last year has not given producers much incentive to make the capital investments to drill new fields, upgrade refineries, or use expensive technology to increase the yield from existing deposits. Supply in the ground may be significant, but the amount of crude being brought to the surface for refining is not likely to grow much to match any short term rise in demand from developing countries.

The IEA report may make good reading, but oil prices are not collapsing in reaction to it. That speaks volumes.

Douglas A. McIntyre