As Demand for Oil Falters, Price May Remain High

A rocky global economy lowered demand for crude recently, and the soft period continues. The positive by-product should be a drop in price per barrel.

The IEA reports that:

A more precarious economic backdrop and weaker 4Q11 data — particularly for OECD Europe — curb oil demand projections for 2011 and 2012 by around 0.2 mb/d.

The chance still exists that OPEC will cut production as a means to prevent a large drop in the price of crude. But a drop in demand, especially a big one, likely will offset OPEC actions. Too many other nations outside OPEC export crude.

Crude prices have risen far enough that their threat to GDP remains severe. Oil price levels are near $100 now. That contrasts to $78 in early October. The European situation should drop prices lower, but has not done so in a significant way.

High oil prices translate to high prices for gasoline, oil and petrochemicals. Economies at or near recession levels cannot weather inflation in core energy costs. These costs affect too much of the economy, from consumer spending to large business costs of goods.

One excuse for oil prices that are persistently above $90 relies on the premise that China remains a net importer of crude. That is true, but a drop in economic activity there acts as a depressant, or at least should.

The IEA data on its own should cause oil to trade lower. So far, economies that need lower prices have not been so lucky. Slack demand without a price reduction keeps the energy cost crisis in place.

Douglas A. McIntyre