Amid yesterday’s selling of equities and fresh worries over subprime mortgages, you might have missed the latest from the International Energy Agency. Stockpiles of crude in developed countries is poised to drop to the lowest levels in 10 years, the group warned. The solution, as if you didn’t already know, is that OPEC will need to come to the rescue by pumping more oil.
“Preliminary data suggest that OECD stocks have fallen by over 1.26 million [barrels per day] over the first two months of the year, and could be heading for the largest first quarter stock draw for over 10 years,” the IEA report advised, via Reuters. “In reality, stock trends and prices are signaling that higher OPEC exports will be needed in the months ahead.”

As it happens, OPEC is scheduled to meet in Vienna tomorrow to discuss anew the group’s output plans. Reports are circulating that the group’s preference is for keeping output steady. So much for a rescue plans. For example, Shokri M. Ghanem, head of the National Oil Corp. of Libya, said according to AP via the International Herald Tribune: “I don’t think there is a real need for doing anything.” The article also quoted oil analyst Kamel A. Al-Harami, former president of Q8, the retail arm of the Kuwait Petroleum Corp.: “I think [OPEC is] comfortable … because prices are at [an] acceptable level.”
Weighing the foreseeable future for oil prices probably depends on the crowd’s outlook for economic growth in the U.S. and the world. As economies slow, so too does the growth in oil demand, perhaps to the point of an outright decline. Absolute drops in oil consumption aren’t common, however. The United States, the single largest user of oil and the biggest importer of crude, consumed a slightly lower amount of oil in 2003 and 2005 vs. the respective previous years, according to BP data. But you have to go back 1990 and 1991 to find annual declines of more than 1%, based on average daily consumption. In fact, during the 40 years through 2005, U.S. consumption on an annual basis dropped on nine times.
Globally, oil consumption is even more biased to the upside. The last time the planet’s collective appetite for crude fell was 1993. In the last 40 years, annual declines for the world slipped only eight times.
With that in mind, the OECD projects that economic growth for the G7 nations will slow in this year’s first quarter and then pick up speed in the second quarter. “Global rebalancing is under way,” Jean-Philippe Cotis, OECD Chief Economist, said yesterday at a press conference in Paris. “The U.S. expansion has shifted into lower gear and the robustness of the recovery in Continental Europe has been confirmed. Meanwhile, growth in much of Asia is holding up well.”
In other words, don’t hold your breath for an imminent decline in global oil consumption. OPEC’s influence, in short, continues to strengthen.


  1. Jordan Bryant

    Economists have a term for products that carry out the same functions; they call them substitute goods. If X and Y are substitute goods and the price of X goes up. The quantity demanded for X should go down and the quantity demanded for Y should go up.
    Examples, margarine and butter, petro and natural gas used for heating.
    Ideally, if the market could obtain a stable price, it does not matter if it’s high or low, the quantity demanded could adjust reasonably to the market price and substitutes would come about. The problem is that OPEC controls the worlds oil supply which leads to price fluctuations and unstable supply forecasts, If OPEC did not control the production of crude oil. The market could actually find an accurate price for oil, so the price could eventually rise to an adequate price to attract substitutes.
    If that would happen, and lets say the price continues on the steady upward trend. Substitutes would make their way to the market and bring forth competition.
    The problem lies in the fact that the alternatives to oil are not as energy efficient or price effective as the fossil fuel.
    Ethanol’s efficiency pales in comparison to oil. Also, the sheer amount of energy it takes to produce ethanol is absurd. Hydrogen is equally affected by price and technology. Will Americans pay an astronomical price for a hydrogen car that does not have the extensive infrastructure to support it?
    Americans have a one track mind when it comes to energy production they think the net effect on the environment starts and ends at the energy source that is being utilized in the vehicles tank. But in all reality to understand how ethanol and hydrogen is being produced. One needs to look at the energy it takes to produce those fuels.
    Let’s take a look at the process of creating Ethanol produced from corn. Sadly, we forget that around 70% of all electric power is generated in America is produced by coal; A highly pollutive source of electric power generation. That electric power is need to help power the machines that create the fertilizer and production of fertilizer requires fossil fuels. The same electricity is needed to power the automatic sprinkler systems that help to water the corn. The tractors, planes, and various other machines used to tend the field run off of fossil fuels. Let us not forget about the trucks that are needed to ship the fuel.
    Also, I didn’t touch on the strain on the economy and environment. The demand for corn has increased the price of corn and it has globally affected families in Latin American; countries that depend on corn as a staple food source. Ethanol also requires an immense amount of water that is depleted from our important sources of ground water. America would also require more farm land and that would lead to a higher deforestation rate.
    After listing these facts, I feel that we are trading pollution from car emissions for pollution from farming.
    Finally, ethanol is not an environmental net gain CO2 is still being released into the atmosphere. CO2 is still being produced, but in a more expensive manner at a slower rate. If one takes that into account, one can see that ethanol is not the solution just another fissure in the broken system of energy dependence on fossil fuels.
    Sadly, ethanol is currently being propagated by ethanol firms like Archer Daniel Midland as “The new way forward for a cleaner, greener, and independent America!” Ahh, that warms my little heart. But look at the source of this propaganda ethanol companies that stand to make a substantial profit off of government subsidies and grants.
    Hydrogen looks promising in some aspects, but recent studies show that it is not ready for practical use. The problem lies in the fact that hydrogen lasts 7 to 9 days in the automobiles fuel tanks. Bad enough our engines are fuel inefficient, it’s another thing for our fuel tanks to be fuel inept.
    Also, the process of creating hydrogen results in more CO2. If hydrogen is to be fuel efficient it requires a special pressurized tank or a tank to keep it liquefied. The extra energy required to keep the hydrogen liquefied or pressurized decreases the fuels energy efficiency and increases the costs. Obviously if one’s car needs extra energy just to maintain the fuel integrity the fuel efficiency will go down dramatically.
    Hydrogen embrittlement, hydrogen affects various alloys and renders them fallible. This problem creates cracks that accumulate over time that can lead to leaks and high maintenance fees. To counteract this effect on the fuel tank costly insulation must be installed in the fuel tank. Finally, setting up this infrastructure requires a herculean effort of resources, man power, and commitment. The costs of setting up this infrastructure, let alone the cars that are capable to handle this new fuel seems like a daunting task for the free market economy. Car companies are not willing to take the risk of producing a car that is only effective in certain areas of America, and completely useless in others.
    Why would anyone switch to the hassles of hydrogen when one could just bite the bullet and pay high gas prices?
    Economists are now facing a dilemma in the market system. What will happen to the state of economics and this capitalist system that depends so heavily on oil if it cannot counter act the problems of peak oil and increasing energy demand? What will happen if we cannot find an abundant and efficient substitute for oil?
    This is a harsh reality that our generation is facing, and it’s up to us to figure out how we can defeat this oil addiction. We all realize that innovation takes time; if we looked back 60 years ago to the first computers we would not be able to tell the difference between a 1940s punch card computer and a gigantic filing cabinet on steroids.
    We as Americans need to realize that innovation takes time and we need to first change the ways we live, before we count on technology to save us from this dilemma.

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