The Real Causes and Microeconomic Effects of High Gas Prices
At the end of the broadcast (as the transcript will show in a few days) we were asked about the future of gas prices over the next few months. Both Gail and Jim thought that they would go down, since the global economy was being driven back into recession by the current price, and recession would reduce demand. I disagreed, noting that OPEC were predicting an increase in demand in the third quarter of about 2.3 mbd, and that as a result the price would likely rise, since OPEC were not planning on producing this much.
OPEC anticipated levels of demand for 2011. (June MOMR)
Apparently we were not the only folk drawing those sorts of conclusions, and today (Thursday) the International Energy Agency (IEA) in Europe announced on behalf of its 28 nation membership that they would collectively release a total of 60 million barrels (mb) of oil.
International Energy Agency (IEA) Executive Director Nobuo Tanaka announced today that the 28 IEA member countries have agreed to release 60 million barrels of oil in the coming month in response to the ongoing disruption of oil supplies from Libya. This supply disruption has been underway for some time and its effect has become more pronounced as it has continued. The normal seasonal increase in refiner demand expected for this summer will exacerbate the shortfall further. Greater tightness in the oil market threatens to undermine the fragile global economic recovery.Note that the last paragraph from the section I quoted from the press release leaves open the possibility of further action.
In deciding to take this collective action, IEA member countries agreed to make 2 million barrels of oil per day available from their emergency stocks over an initial period of 30 days.
While the recent offer by Saudi Arabia to increase production to match global losses from the turmoil in Libya and the Middle East and North African countries (MENA) saw an initial increase in their production, until now that increase has been cut back again in the face of a lack of demand.
However the IEA action (supported by the member nations, including America, which will apparently release about half of the total) is pro-active in that it is looking at the next three months of the year, when driving increases and the demand increase that OPEC forsees, would occur. It should be born in mind that for a number of these countries when a supplier changes the amount you buy that does not have an immediate impact, because the oil has to be carried from the MENA supplier to you, and that can take weeks. Thus any increase from say Saudi Arabia would take a little while to reach Asia or America. However if the local strategic reserves are tapped, that can be made more rapidly available to local refineries cutting of the run up in prices that I was expecting. In fact, in that context, the reason for the short-term nature of this release is now stated to be to fill the gap before the additional oil from KSA and its allies reaches the market.
Obviously this release of crude has had an impact on price and the market in general. It has already lowered the price of Brent crude from an April high of $127, down to $108. More importantly it conveys a sense to industry that the crippling effect of even higher prices for gas at the pump won’t be happening, and thus provides a breather from that spiral.
Now whether or not this will ultimately have much effect is hard to say. Certainly it will, in the short term, help toward getting the world through this third quarter demand rise, without a concomitant rise in prices. But it is only of limited duration, and cannot be repeated an infinitum as the world demand continues to rise, and supply fails to keep up. As far as the current American administration is concerned, it is a long time yet to November 2012, which is going to come after the end of the third quarter next year, when the same sort of scenario can be anticipated. Will we see a similar action next year? And what will that tell you about the arrival of Peak Oil?
Hidden in the debate that is now likely to have been started by these actions, is a question that may still be answered. Saudi Arabia had said that it would supply enough additional crude to make up for the lost production due to the turmoil in the MENA suppliers. The OPEC ministers had not agreed to increase supply at their last meeting in Vienna, which would have brought about the shortfall I mentioned at the top of the column. Saudi Arabia had said that it would further increase supply to ensure that the global community did not see further price rises over competition for a short supply. But there has been a question circling for a couple of years or more now, as to whether KSA could sustainably produce that much additional oil for the market. Obviously the IEA action is assuming that this release will get the market through the bump until the additional Middle Eastern oil arrives, but if it is not enough, or if members of OPEC cut back supply to keep it short and prices higher, then things could get messier.