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World: Can Oil Prices Fall, Given The Rapidly Rising Demand?

  • Mark Baker

World oil prices are high, and oil consumers like Europe and the United States are complaining. They are putting pressure on oil producers to increase supply and ease price pressures. But there's not much that can be done in the short term. Oil supplies are tight and demand remains unexpectedly strong.

Prague, 25 May 2004 (RFE/RL) -- Big oil consumers like the United States and the European Union are becoming increasingly nervous over what they see as excessively high world oil prices.

Average oil prices have risen to more than $40 a barrel in recent days -- prices not seen since the first Gulf War more than a decade ago. The rise is threatening to scuttle a global economic recovery before it can even get started.

In the United States, the run-up in oil is forcing gasoline prices sharply higher. Americans -- who are highly dependent on their cars -- are so sensitive to gasoline prices it might even cost President George W. Bush his reelection in November.
"I would say it's quite likely that in the medium term -- over the next two to three or four years -- prices will indeed flip back into the mid-20s range [$22-$28 dollars a barrel] on the basis of what we know about growing non-OPEC supply."


U.S. Secretary of the Treasury John Snow has been blunt in recent comments. He told an international gathering of finance officials over the weekend that a price of $40 for a barrel of oil was "unwelcome:"

"Current energy prices are unwelcome. We'd like to see energy prices recede. It's important that energy prices -- since they play into the growth rate for the global economy -- be at a level that complements growth," Snow said.

He and his colleagues in the EU, Japan and other major consumer areas would like to see prices fall to $22 to $28 a barrel. This is a price band that producers like the OPEC oil cartel say they aim at as fair to both producers and consumers.

But are the high oil prices here to stay? Has demand outstripped supply so much that average prices -- for example, of $25 a barrel -- are no longer realistic?

RFE/RL posed that question to oil demand and supply experts at the International Energy Agency (IEA) in Paris. The IEA closely monitors developments in the oil market and publishes each month the highly influential "Oil Market Report."

Antoine Halff is an IEA specialist in oil demand. He declined to comment directly on oil prices, but sounded downbeat about a drop in prices. He tells RFE/RL that global demand has risen unexpectedly rapidly in recent months and is unlikely to slow anytime soon.

"We've been through a period of a few years when oil demand growth was quite slow. And some analysts had speculated that we had entered a new era of slower growth in oil consumption and with the changes in the economy and so on. But this year, [we have] seen a return to a very steep pace of growth in oil consumption," Halff said.

Halff says the biggest factor in demand these days is China and its rapidly growing economy. The economy of the world's most populous country is now rising at an unprecedented rate of almost 10 percent a year. The IEA estimates this translates into increased Chinese oil demand of as much as a million barrels a day.

Oil suppliers -- both inside and outside OPEC -- have tried to raise output to meet this demand, but Halff says China's need for oil shows no immediate signs of abating.

"If you hadn't had the increase in Chinese demand that we've experienced in the past few months, it's quite likely that the increase in non-OPEC supply would have been enough to push the price down and it would have put pressure on some OPEC members to defend their market share and it would have translated into a decrease on the call on OPEC [and lower prices]," Halff said.

Halff says another big factor is the United States, where a recent, relatively rapid economic recovery is pushing up demand for diesel fuel. This is used by trucks to ship goods around the country.

David Fyfe, Halff's colleague at the IEA, appears less pessimistic on price. He agrees that demand from China could keep pressure on prices keen. But he points to rising output from non-OPEC countries -- particularly Russia and West Africa -- that he says could eventually dampen price pressures.

"I think there is a danger in extrapolating $40-a-barrel prices. We're in a fairly tight market. We're in a fairly jittery market at the moment, but the fundamentals of supply and demand, with fairly buoyant non-OPEC supply growth this year and for the next two to three years, suggests to us that that tightness in the market should ease," Fyfe said.

Non-OPEC producers include Russia, the Caspian states, and major suppliers in Northern Europe, West Africa, and North America. They account for around two-thirds of world oil output.

"I would say it's quite likely that in the medium term -- over the next two to three or four years -- prices will indeed flip back into the mid-20s range [$22-$28 dollars a barrel] on the basis of what we know about growing non-OPEC supply," Fyfe said.

That says little, however, about the short term. Prices in the past two days alone have jumped some $2 a barrel -- amid growing concern over tightening supplies. Whatever happens, it looks like a long, hot summer for oil consumers and a boom for producers.
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