Strategic Briefing | 3.29.12 | Oil Supply & Demand

A rational reason for high oil prices
James Hamilton (Econobrowser) | Mar 28
“There is no rational reason for high oil prices,” writes Ali Naimi, Saudi Arabian Minister of Petroleum and Mineral Resources, in today’s Financial Times. Well, I can think of one– if oil prices were lower, the world would want to consume more than is currently being produced.

Oil prices fall as supplies grow
Associated Press | Mar 28
Oil prices dropped 2 percent Wednesday amid indications that Western nations may be considering a release of oil reserves onto the world market. In the U.S., the supply of oil is already ample, and growing.
US Republicans seek drilling boost if oil reserves tapped
Reuters | Mar 28
Republicans in the U.S. Congress are proposing measures that would require President Barack Obama to allow more domestic oil production if he decides to tap emergency oil reserves. The proposals are unlikely to become law, but they give Republicans another opportunity to slam Obama’s energy policy as consumers fret about high gasoline prices leading up to November’s presidential election.
France Joins U.S. and Ponders Tapping Strategic Oil Reserve
The Wall Street Journal | Mar 28
France said it is in talks with the International Energy Agency about tapping emergency oil stockpiles, joining the U.S. and U.K. in pondering such a move amid concerns that tensions with Iran could tighten oil supply.
Saudi Arabia says will act to push down oil prices
AFP | Mar 29
Saudi Arabia will act to bring down oil prices, Saudi oil minister Ali Naimi said in the Financial Times newspaper on Thursday as concern grows that rising energy prices are hurting the world economy. Saudi Arabia “would like to see a fair and reasonable price that will not hurt the global economic recovery, especially in emerging and developing countries”, the minister wrote in a column. While the market is “fundamentally balanced” Saudi Arabia “will use spare production capacity to supply the oil market with any additional required volumes”, the minister said.
Monthly Oil Market Report
Opec | Mar 2012
World oil demand is forecast to grow by 0.9 mb/d in 2012, unchanged from the previous report,
following marginally decreased growth of 0.8 mb/d in 2011. The weak pace of growth in the OECD economies is negatively affecting oil demand and imposing a high range of uncertainty on potential consumption growth. Although US economic data points toward a better performance, the situation in Europe along with higher oil prices has resulted in considerable uncertainties on the future oil demand for the remainder of the year.
Did Libya’s Oil Bubble Burst Already? | Mar 28
Libyan crude oil production has witnessed a notable uptick since major combat operations ended last year. In mid-2011, at the height of the international conflict, it looked as if the loss of Libyan crude oil could unravel any hopes of a global economic recovery. Crude oil prices have in general increased during the first four months of 2012, though some optimism was expressed because of Libya’s return. With Tripoli headed for its first free election in 40 years, however, nothing is certain regarding the former OPEC giant.
What can the oil futures curve tell us about the outlook for oil prices?
Dan Nixon (Bank of England) | Mar 2012
Large movements in the oil price have had significant effects on UK CPI inflation over the past few years. In order to produce an inflation forecast, it is necessary to assume a path for oil and other commodity prices. The Monetary Policy Committee assumes that oil prices follow the path given by market futures prices when deciding their central projections for CPI inflation and GDP growth. This article considers arguments for and against using the futures curve as an assumed path and describes some of the other indicators used by the Committee in assessing the outlook for oil prices.
Modeling Peak Oil and the Geological Constraints on Oil Production
Samuel Jovan Okullo (VU University Amsterdam), et al. | Mar 2012
Geological constraints are considered in the context of a Hotelling type extraction-exploration model for an exhaustible resource. It is shown that such constraints, in combination with initially small reserves and strictly convex exploration costs, can coherently explain bellshaped peaks in natural resource extraction, and hence U-shapes in prices. As production increases, marginal profits (marginal revenues less marginal extraction cost) are observed to decline, while as production decreases, marginal profits rise at a positive rate that is not necessarily the rate of discount. A numerical application of the model to the world oil market shows that geological constraints have the potential to substantially increase the future oil price. While some non-OPEC producers are found to increase production in response to higher oil prices induced by the geological constraints, most producers’ production declines, leading to a lower peak level for global oil production.

2 thoughts on “Strategic Briefing | 3.29.12 | Oil Supply & Demand

  1. David Deeb

    Is demand worldwide driving higher oil prices? In other words is classic supply and demand no longer working to bring oil prices down worldwide? David Deeb

  2. David Deeb

    Could there be domestic politics involved for American big oil companies? Do these companies generally support republican candidates with a much higher percentage of financial support? Is possible that an American corporation would risk damaging thier nation’s economy for political reasons? What other explanation could there be in the face of a surplus and lower demand?

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