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May 12, 2006

Oil economics 101

Last week GM chief executive Rick Wagoner said he didn’t “expect [oil] to get to a price range when it would affect behavior.” Wagoner obviously knows as much about energy as he does about selling cars. From the (paid-subscription) Wall Street Journal, another reminder that oil is still subject to the laws of supply and demand, whatever the doomsayers may believe:

The International Energy Agency made sweeping cuts to its forecasts for world oil demand this year, saying there were clear signs that high energy prices were eating into demand and that this trend could well accelerate.
The energy security watchdog for the Organization of Economic Co-operation and Development in its monthly oil-market report made hefty cuts to its previous expectations of growth in oil demand in the first half of this year, and cut 15%, or 220,000 barrels a day, off its growth forecast for the whole year. U.S. light, sweet crude prices surged to a record $75.35 a barrel last month, fueled by a wall of investment money from hedge and pension funds and on anxiousness over the supply outlook for Organization of Petroleum Exporting Countries members Iran and Nigeria.
The IEA said unusually warm winter weather had contributed to weaker oil demand, with falling natural gas prices capping the tendency to switch between fuels.
These factors underpinned the IEA’s biggest downward revisions yet to its growth forecasts in the first half of this year, with growth being slashed by as much as 430,000 barrels a day to substantially below the one million barrel-a-day mark.
… In contrast to the weakening demand picture, global oil supply appears to be experiencing a substantial rebound, with supply up 485,000 barrels a day last month thanks to a turnaround in production from Iraq, as well as improvements to flows from the U.S., China and former Soviet Union bloc countries.
… Reflecting its cuts to demand, the IEA revised down the implied need for crude oil from Organization of Petroleum Exporting Countries in every quarter and for the year, while reporting a turnaround in supply in April to above 30 million barrels a day.

In fairness to Wagoner, he also said he expected oil prices to fall at some point.

More on the oil-price bubble here.

Posted by Stephen at 12:33 PM in Energy + environment | Permalink | TrackBack (0)

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