Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up?

Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up?

Storage tankers across the globe may be brimming with oil that no one is buying because of the global economic downturn, but the traditional laws of supply and demand don’t always apply to oil prices. Drivers have faced rising prices at the gas pump in recent months, as investors and oil-producing countries hoard supplies in anticipation of a global economic recovery later this year.

The 12 member countries of the OPEC cartel voted in Vienna on Thursday to maintain output at current levels rather than to increase supplies in order to bring some relief to consumers, particularly in the gas-guzzling West. The OPEC oil ministers, whose countries account for about 40% of the world’s entire crude oil supply, also renewed their commitment to stick to their agreed quotas, rather than to ship extra oil, as they began doing last April, when several members ignored their agreed output limits. OPEC leaders, many of whose economies are heavily dependent on oil exports, have struggled to stabilize prices at a level that suits their own economic needs amid falling demand and rising supplies. Prices had rocketed to a record level of $147 a barrel last July before plummeting to $30 just five months later, and then beginning a new climb.

Oil analysts believe OPEC’s decisions on Thursday could help push
oil prices even higher; oil futures on the New York Mercantile
Exchange have risen 36% in just two months, to about $63.46 a barrel on
Thursday. And that appears to be on track to achieve targets set by OPEC leaders. Saudi oil minister Ali Naimi — OPEC’s key power player — said Wednesday that oil prices ought to rise to between $75 and $80 a barrel by the end of the year. “Demand is picking up, especially in Asia,” he told reporters puffing alongside him as he jogged through the streets of Vienna. “The price rise is a function of optimism that better things are coming in the future.”

The economic recovery Naimi so optimistically predicts would certainly be vital to oil-producing countries, whose own economies would be imperiled by a drawn-out recession. Oil demand in rich countries has crashed since the onset of the economic crisis last year, and is now at its lowest level since about 1981, according to the Paris-based International Energy Agency. U.S. oil inventories — the stored surplus — this month reached its highest level since the 1980s. And about 2.6 billion barrels are currently stored in commercial tankers around the world. “There is some risk we will run out of storage space in the next four to six weeks,” says Simon Wardell, Director of Global Oil at IHS Global Insight, an energy forecasting company in London. To oil-rich countries that possibility evokes grim memories of 1998, when the Asian economic crisis sent demand plummeting, driving world oil prices down to $10 a barrel. “If we run
out of storage it could prompt a collapse in the price,” says Wardell. Oil producers might then choose to dramatically cut output in order to run down the surplus.

Despite such dangers, investors and oil producers are betting that global demand will roar back, apparently hoping that the recession has already hit bottom. Over the past two months, investors have plowed billions of dollars into oil futures. If the U.S. and other major industrial economies rebound, oil supplies could be depleted, because the recession has prompted producer nations to freeze hundreds of projects to open new oil wells or upgrade existing ones. In the oil-rich Niger Delta, a major Nigerian government offensive against rebels has seriously disrupted production for several weeks. Venezuela’s Oil Minister Rafael Ramirez said in Vienna that his country could not afford to invest in major new oil exploration unless prices rise further. “We need a level of at least $70 [a barrel] to recuperate investment,” he said Thursday. Muhammed Al-Zainy, senior energy analyst at the Center for Global Energy Studies in
London, says oil demand could increase quickly once the recession ends, especially as China has begun to build up its strategic oil reserves. “We think the price is going to go up gradually,” says Al-Zainy.

For those feeling the pain at the gas pumps, however, there is one piece of good news. Oil is unlikely to hit $147 a barrel again — at least not during the coming decades. The U.S. Energy Information Administration said Wednesday that oil prices would likely rise to $110 a barrel by 2015 and $130 a barrel by 2030. By that time the world oil markets might once again follow the normal rules of economics.

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