Monday, June 30, 2008

BIS study reveals fundamental oil lie

The Bank of International Settlements published its 78th Annual Report. In a few paragraphs among its section about Emerging markets economies is a summary of global oil demand growth. Contrary to what the diverse punditry is saying oil demand in China has grown by an average rate of 6.7percent between 2001 and 2007. While this seems fairly large demand for oil was even larger at an 7.6 percent growth rate annually between 1991 and 2000. At the same time demand growth in North America and OECD Europe has contracted from 1.4 to 1.3 and 0.9 to negative 0.2 respectively. Total global oil demand remained relative stable throughout this time period from 1.4 to 1.6 percent growth annually. Moreover global oil stocks have broadly remained stable at about 100 days of forward demand in the last twenty years according to BIS and IEA. Another argument for higher oil prices is spare capacity. It is true that it has declined at the beginning of this decade but it has since risen to about 3 million barrels per day according to OPEC's most recent estimate. Oil has reached a record price of $143 and at the same time it is clear from this study and others that this price spike is hardly based on fundamentals whatsoever.

from the report:
Even as demand has grown, supply constraints in some countries have boosted oil prices, despite increases in OPEC supply. According to current investment plans, Saudi Arabian production capacity is projected to increase from 10.5 million barrels per day (mb/d) in 2005 to 12.5 mb/d in 2009. By contrast, non-OPEC oil supply has been held back by the high costs of increasing capacity. For the four largest private sector oil companies outside OPEC, the cost of developing new oil reserves rose by between 45 and 70% over the period 2003–06. The costs of expanding production capacity for these oil companies are much higher than in Saudi Arabia or the United States. Overall spare capacity in the oil industry fell from around 5 mb/d in 2000 to a low of 1 mb/d in 2005, before recovering to 2.2 mb/d in 2007. Research indicates that low spare capacity contributes to higher oil prices. It limits the scope to increase production in order to offset rising demand pressures or disruptions to supply. It also means that larger oil stocks are required to smooth priilce fluctuations. However, global oil stocks have broadly remained stable since the early 1990s (Graph III.5, left-hand panel). The effects on prices have been exacerbated by geopolitical tensions and lower average oil inventories in some major oil-consuming countries.

click to enlarge

source: III. Emerging market economies
BIS 78th Annual Report, 30 June 2008

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