What is up with oil?
Posted by Daniel Hall on December 19, 2008
The pithy answer is nothing — not production, not consumption, and certainly not the price.
I have heard some head-scratching and shoulder-shrugging about the recent behavior of the oil market. (Yes, you have to listen closely to hear those things.) In the last year we’ve had:
- the biggest run-up in oil prices in history
- the biggest collapse in oil prices in history
- the biggest announced production cut from OPEC in history
- oil prices continuing to slide down after this cut
Whiskey. Tango. Foxtrot.
My short answer — and I would be only too happy to receive corrections or alternate theories from more educated readers in the comments — comprises 3 factors:
1) The price rise was demand-led; the current collapse is demand-led as well. It turns out that even in car-loving America you can get a nice bit of short-term (and perhaps long-term) demand destruction with $4 per gallon gas.
2) Oil futures are not tremendously influenced by OPEC’s announced cuts. OPEC does not have a great track record for maintaining cartel discipline when the market is loose. Too many of the small countries oversell their quotes, and the budgetary pressure on some of these governments — who spent the last year making all their plans with $80-140 barrel per oil in mind — will be intense.
3) The most important factor in oil futures right now is not the OPEC announcement but expectations about future economic conditions. And in this sense the oil future prices we are seeing right now are terrifying. America is going to remain in recession in 2009 and demand will be weak, but you would think that even moderate economic growth in China would be enough to buoy the oil market. I find the fact that futures are down so far to be extremely worrying.
By the way, here is a fascinating map that depicts where US oil imports come from.