When the price of a commodity rises, economists tell us, demand eventually goes down. But with oil prices setting new records, there’s apparently no let-up in demand from gas-guzzling drivers, businesses posting strong growth around the world and investors betting that crude prices are headed even higher.
Since a low of roughly $50 a barrel in January, crude oil prices recently broke through $78, setting a new record. On Wednesday, oil prices took a breather — and speculators took some profits, pushing prices lower. But with global demand for oil showing no signs of easing, that pullback could be short-lived.
The latest numbers from the U.S. Energy Dept. added fuel to an already hot oil market. Weekly numbers released Wednesday showed that oil stockpiles dropped by 6.5 million barrels — nearly 10 times the drawdown analysts had expected. The big drop in inventories came as U.S. refineries recovered from a series of outages that left them struggling to keep up with demand for gasoline and other refined products. With refiners back up to speed, and gasoline supplies building, pump prices have begun falling as the end of the summer driving season approaches.
"The gasoline market is dropping because refineries are coming back," said Peter Beutel, an oil analyst at Cameron Hanover. "At the same time that that increases the supply of gasoline, it also increases the demand for crude oil."
Even before gasoline prices eased from record highs this summer, the spike in pump prices didn’t slow American drivers’ demand for fuel. Consumers are burning through some 9.7 million barrels of gasoline a day — up from a seasonal low of 8.8 million barrels in February and higher than last summer’s peak demand.
With the U.S. economy rebounding sharply from a slump at the start of the year, businesses are also hungry for oil to fuel their expansion. That economic growth is expected to continue; the Energy Dept. recently said it’s calling for "much faster demand growth in the second half of the year than seen recently."
Demand for oil is growing even more rapidly outside the U.S. — especially in China (up 6.1 percent this year) and the Middle East (up 4.5 percent), according the the latest month forecast by the International Energy Agency.
But in the short term, new supplies of oil aren’t coming on line as fast as demand is increasing. The Organization of Petroleum Exporting Countries is pumping slightly less than it did last year after agreeing to cutbacks that took effect Feb. 1. The cartel meets again in September to review quotas.
Even without quotas, output from key producers has been strained. Venezuela’s move to take over oil production and restrict foreign investment has put a crimp on oil exports. U.S. imports of oil from Mexico, a major U.S. supplier, were down 13 percent through the first four months of the year. Ongoing attacks and sabotage by militants in Nigeria have cut production and exports there. And oil production in Iraq is still below pre-invasion levels, falling short of projections from oil ministry officials. Shipments have also been curtailed on continuing attacks on pipelines to oil export facilities.
High oil prices — and the billions in profits that they have generated for private oil companies — should be encouraging more exploration and discovery of new sources of crude. But, with many oil-rich regions torn by war or controlled by governments hostile to western investment, new oil discoveries have been slow in coming. The IEA recently forecast an increase in non-OPEC supplies this year of less than 1 percent.
Meanwhile, demand is expected to rise by 2.5 percent next year, according to the IEA. One reason high oil prices haven't slow the growth in demand is that the global economic impact has been somewhat muted by the weakness in the value of the dollar compared to other major currencies. Since oil is priced in dollars, the dollar’s slide makes oil cheaper for buyers paying with stronger currencies.
Oil prices have also been pushed higher by another wave of investment in the futures market by money managers who are convinced the recent run-up is oil prices will continue. Investors this month at New York Mercantile Exchange's oil pits boosted their “long” positions — betting that prices will rise — to record highs.
As usual, market watchers are divided on where process will go from here. With underlying strong demand and tight supplies, some see the market poised to break $80 a barrel — and possibly move higher from there.
"(Oil prices have risen) without any geopolitical events and without any real actual weather events that would hinder any supply disruption,” said John Person, president of NationalFutures.com. “If we get any type of event right now that would cause such a supply disruption for a very short period of time, this market is on the verge of a pop at least over $80, $85 in the next few weeks.”
But not everyone is convinced process will continue to rise. Last year, a huge flood of speculative investment sharply reversed course when prices began to drop, accelerating the decline.
Over the longer term, some analysts maintain that high prices will encourage conservation and slow the growth in demand. And high prices should eventually increase investment in new production, according to Beutel.
“I believe in the capitalist system,” he said. “ So I believe that the price mechanism will encourage supply, and will discourage demand. That's why I think, long-term, that this price will come down."