The world adjusting to rising oil prices
Thursday, 25 October 2007
Ed CrooksONLY a month after breaching $80, the price for a barrel of oil is now scaling heights barely conceivable a few years ago.
While the speculative flurry that has driven the oil price higher could easily be reversed, underlying demand seems set to keep growing.
A year ago the International Monetary Fund's economic forecasts were based on an assumption that oil would average $75.50 this year. The IMF's annual meetings took place last weekend with the price $15 higher.
Yet global growth has remained remarkably robust. The world has shown that it can live with oil at $70 a barrel and higher.
William Ramsay, deputy executive director of the International Energy Agency, which represents the rich countries' interests in the oil market, says: "What we have had in the market is a demand shock, not a supply shock, and the system reacts differently."
The IMF's World Economic Outlook in April set out a model of a rise in the oil price that could be accompanied by stronger, not weaker, global growth if it were caused by a rise in demand from fast-growing emerging economies.
With China leading the growth in oil demand, that seems to be exactly what is happening.
"We have seen over the past seven years the resilience of consumers in not responding to rising prices," says Mr Ramsay. "Demand seems almost indestructible."
At the meeting of the Organisation of the Petroleum Exporting Countries in Vienna last month there were concerns that the credit squeeze would hit global growth in the oil market, those fears have melted away.
The IEA expects that the rich countries that are members of the Organisation for Economic Co-Operation and Development will consume slightly more oil this year than last year, with higher demand in North America offsetting declines in Europe and the Pacific region (principally Japan and South Korea).
Next year, it thinks, their demand will keep growing.
Often consumers do not feel the full impact of the rise in crude oil prices. In the US and Europe, refiners have held down the prices of petrol and other refined products, at the cost of a sharp squeeze on their margins. The price of petrol in the US is still well down from its high in the spring.
European consumers are also shielded from the effect of higher oil prices by the high rates of tax on petrol which make the changes in the price they pay less dramatic -- and by the rise in the euro.
Although oil prices have jumped $15 a barrel since their peak in the spring, in euro terms they are just euroO.75 higher.
Above all, many of the emerging economies responsible for almost all the growth in world oil demand have regulated fuel markets, so rising crude oil prices are not fully passed on to consumers.
China's demand will rise by about 400,000 b/d on average this year, the IEA thinks, while the Middle East's demand will rise by about 300,000 b/d. Both are expected to continue growing at only slightly slower rates next year.
For months the IEA has been warning of a shortage of oil looming at the end of the year.
The latest leap in prices has made its point in the clearest way possible.
"The market would not react in this way if it was relaxed," says Mr Ramsay. "Why is it not relaxed? Because it is tight ... When markets are that fragile, they react dramatically."
The month until the next Opec meeting - the Riyadh summit on November 17-18 -- seems a very long time to wait for production to be raised.
........................................
FT Syndication Service
While the speculative flurry that has driven the oil price higher could easily be reversed, underlying demand seems set to keep growing.
A year ago the International Monetary Fund's economic forecasts were based on an assumption that oil would average $75.50 this year. The IMF's annual meetings took place last weekend with the price $15 higher.
Yet global growth has remained remarkably robust. The world has shown that it can live with oil at $70 a barrel and higher.
William Ramsay, deputy executive director of the International Energy Agency, which represents the rich countries' interests in the oil market, says: "What we have had in the market is a demand shock, not a supply shock, and the system reacts differently."
The IMF's World Economic Outlook in April set out a model of a rise in the oil price that could be accompanied by stronger, not weaker, global growth if it were caused by a rise in demand from fast-growing emerging economies.
With China leading the growth in oil demand, that seems to be exactly what is happening.
"We have seen over the past seven years the resilience of consumers in not responding to rising prices," says Mr Ramsay. "Demand seems almost indestructible."
At the meeting of the Organisation of the Petroleum Exporting Countries in Vienna last month there were concerns that the credit squeeze would hit global growth in the oil market, those fears have melted away.
The IEA expects that the rich countries that are members of the Organisation for Economic Co-Operation and Development will consume slightly more oil this year than last year, with higher demand in North America offsetting declines in Europe and the Pacific region (principally Japan and South Korea).
Next year, it thinks, their demand will keep growing.
Often consumers do not feel the full impact of the rise in crude oil prices. In the US and Europe, refiners have held down the prices of petrol and other refined products, at the cost of a sharp squeeze on their margins. The price of petrol in the US is still well down from its high in the spring.
European consumers are also shielded from the effect of higher oil prices by the high rates of tax on petrol which make the changes in the price they pay less dramatic -- and by the rise in the euro.
Although oil prices have jumped $15 a barrel since their peak in the spring, in euro terms they are just euroO.75 higher.
Above all, many of the emerging economies responsible for almost all the growth in world oil demand have regulated fuel markets, so rising crude oil prices are not fully passed on to consumers.
China's demand will rise by about 400,000 b/d on average this year, the IEA thinks, while the Middle East's demand will rise by about 300,000 b/d. Both are expected to continue growing at only slightly slower rates next year.
For months the IEA has been warning of a shortage of oil looming at the end of the year.
The latest leap in prices has made its point in the clearest way possible.
"The market would not react in this way if it was relaxed," says Mr Ramsay. "Why is it not relaxed? Because it is tight ... When markets are that fragile, they react dramatically."
The month until the next Opec meeting - the Riyadh summit on November 17-18 -- seems a very long time to wait for production to be raised.
........................................
FT Syndication Service