Oil Pricing and Politics

by McQ | August 13, 2008 11:11 am

You may have noticed recently, that oil prices have gone down. As you might imagine, there’s no magic involved, no conspiracies and nothing particularly profound which has caused this to happen. In fact, it is a result of more supply than demand[1] at this moment because use, on a world-wide basis, has temporarily fallen.

Global oil demand for this year is expected to stand at 86.9 million barrels a day, unchanged from the previous month’s forecasts, the IEA said in an August monthly report. Oil supplies, on the other hand, are expected to remain strong. The world produced 87.8 million barrels of oil in July, up 890,000 barrels from the previous month, the IEA said.

“The slowdown in demand related to the general economic downturn and high oil prices is becoming increasingly evident,” the IEA said in the report. “Consumers clearly are reacting by a change in [driving] behavior.”

I seem to remember, for instance, that Americans cut their driving mileage by 4 billion miles one month. That has been one reason, among many, that supply has temporarily outstripped demand by about about a million barrels a day.

It is also a reason, other than the obvious one, that tapping the Strategic Petroleum Reserve will have little or no effect on pricing at the pump, and certainly no lasting effect. It also makes the case that speculation isn’t driving pricing (crude was trading at a $114 a barrel this week).

So two of the Democrats primary “solutions” (beside inflating your tires properly, of course) to the gas price crisis are really non-starters.

However (there’s always a however), such a condition (higher supply than demand) is a temporary one. And while demand in developed countries seems to be falling, or at least remaining steady, it is expected that developing countries will continue to increase their demand for oil. The IEA’s estimate for non-OECD countries is about 3.8%.

So what does that mean for usage?

Although the IEA didn’t change this year’s outlook for oil demand, it said consumption in the next year will increase to 87.8 million barrels, up 70,000 barrels from the previous month’s forecast.

That is exactly what it estimates the world is producing right now. So? So expect prices to go back up a bit. And expect that if everything remains peaceful and there are no disruptions in production. And we all know that’s going to happen, right?

Demand in developing countries is still strong, geopolitical tensions in Nigeria and other countries could still disrupt supplies, and Hurricanes Bertha and Dolly, although did little damage to oil facilities in the Gulf of Mexico, “flagged a vigorous start to what could be an active autumn storm season.”

The point? Well two points really. As mentioned, the Democratic solutions would have no effect on pricing as is obvious. Secondly though, prices are going to go back up when demand resumes its rise. USA Today points out that demand for smaller cars[2] has already fallen off as gas prices have dropped this past month.

Apparently $4 a gal. is the pain threshold for most Americans and below that, they seem less concerned with gas prices.

What does that mean politically then? With this current drop in oil prices look for a couple of things in the coming months. One look for Democrats to try to run a bluff and claim credit for the price decrease due to their threat to tap the SPR and regulate speculation (a bit like Obama’s claim that Democrats being elected in ’06 is what turned Iraq around). I’d expect them to paint this temporary dip in demand as a more permanent one which would preclude any need to drill on an extensive basis. Two, I’d be willing to bet that Congress will authorize some very limited drilling in some areas offshore (to appease those who want to see more drilling and protect Dems in districts demanding it), but extend the ban on most drilling when September 30th rolls around, citing the drop in price as the reason.

Three, look for prices to increase again on or about the November election as the world catches its collective breath and we see demand again surge.

And finally, four, come January we will be in exactly the same situation we are now with even less hope that extensive drilling will become a reality.

All speculation on my part (a type of speculation that Congress thankfully can’t regulate – yet). But having watched the maneuvering by Pelosi, Reid and company these last few months, it is a very plausible scenario. If it plays out that way, our energy deficit will continue to mount, prices will continue the rise and we may reach the point, barring some energy miracle, where a certain segment of the consumer market can no longer afford the cost of energy. But Dems will have won the political battle won’t they? That’s something.

  1. it is a result of more supply than demand: http://www.marketwatch.com/News/Story/oil-fundamentals-ease-high-prices/story.aspx?guid=%7B33A3F240%2DDE5D%2D46BE%2D9552%2D441766AFD6C3%7D
  2. demand for smaller cars: http://www.usatoday.com/money/autos/2008-08-12-small-cars-gas-prices_N.htm

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