When might oil prices recover? An important question – and not just for oil producers. Higher energy prices could choke off any global economic recovery. That, indeed, is the main reason Opec decided this weekend against trying to force prices up by cutting back output. Nevertheless, many in the industry, including Opec, still believe that $75 per barrel remains oil’s “correct” long-run price, compared with less than $45 now. That could be wishful thinking.

This year the world will consume some 85m barrels of oil a day – about 1m b/d less than last year. But in the 1979 oil price shock, demand shrank by 2.5m b/d in the first year, and then fell for another two years. That alone suggests the effects of this recession are still to play out. Meanwhile, on the supply side, spare production capacity is rising. Saudi Arabia is adding about 2m b/d, Brazil another 500,000 b/d. Refining capacity is also on the up in China and the Middle East. This reduces the probability of supply bottlenecks and of price spikes. This, at least, removes a risk premium from the market – another reason for prices to stay low.

Furthermore, the shape of demand is changing. Oil is used mostly for transport, with almost a third accounted for by intra-urban commuting. Yet the traditional global car industry looks finished. Gas-guzzling is out; Credit Suisse reckons efficiency standards enacted by the Bush administration will shrink US gasoline use by 2 per cent a year. The shift to hybrid cars will remove a further chunk of demand. Even China wants to reduce its energy intensity by some 20 per cent by 2010. Combine that with the new US standards, and world demand would fall by about 6m b/d. That is a massive amount, equivalent to three quarters of Saudi Arabian output. Oil prices could remain lower for longer than many seem to think.

BACKGROUND NEWS

Opec decided over the weekend against more supply cuts, signalling that it would delay its goal of boosting oil prices to $75 a barrel, at least until next year.

“We took into consideration what is happening in the world,” said Abdalla Salem el-Badri, Opec’s secretary general. “We have not abandoned this price, but the time is not right.”

Crude oil for April delivery fell on Monday by as much as 6 percent to $43.62 a barrel in electronic trading on the New York Mercantile Exchange.

To e-mail the Lex team confidentially click here
OR
To post public comments click here

The Lex column is now on Twitter. To receive our daily line-up and links to Lex notes via Twitter, click here

_________________________________________

Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe now

If you have questions or comments, please e-mail help@ft.com or call:

US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article

Comments

Comments have not been enabled for this article.