Fundamentals Still Point to Price Volatility
Posted September 17, 2008 at 4:29 pm 
Filed in: It is quickly becoming out of style to talk about high and rising oil prices. As of midday today (Wednesday, September 17), the price of a barrel of benchmark West Texas Intermediate oil was down to $96, reflecting a steep decline in oil prices that began just a few short weeks ago.
As hard as it is to believe, it looks like the fall in oil prices has probably taken a lot of the pressure off U.S. lawmakers to deliver serious energy policy before the November presidential election. If the ‘heat is off,’ so to speak, that is a most unfortunate case of perception becoming reality. Because the fact of the matter is that all of the trends that created this summer’s perfect storm are still in place and will remain so for the foreseeable future.
In their weekly Energy Charts, our friends at ARC Financial take note of a recent report from the International Energy Agency (IEA) that updates the IEA projection for oil supply and demand in 2008. According to IEA, supply from non-OPEC countries will only increase by about 275,000 barrels per day in 2008. New production from Russia and Central Asia has been slow to come online, and production declines have been significant in Mexico, Norway, and the UK. Meanwhile, demand for oil in the world’s emerging markets will grow by 1.4 million barrels per day in 2008, while demand in the world’s most developed economies will actually shrink by 600,000 barrels per day.
And there have been few better examples of the pervasive threats to global oil security than the alleged PKK attack on the BTC oil pipeline in Turkey that stranded nearly 1.0 million barrels per day of global crude supplies in August. The BTC again found its way into headlines during the recent Russian incursion into Georgia, during which Russian bombers reportedly attempted repeatedly to destroy key segments of the pipeline.
Looking into the future, the Department of Energy recently forecast that sometime around 2020, the world’s emerging economies will surpass the advanced economies as the world’s largest consumers of oil. OPEC will need to invest trillions in production capacity to meet this demand, and non-OPEC nations will be increasingly forced to rely on expensive unconventional supplies (like biofuels, coal-to-liquids, and oil shale) in order to keep up.
The bottom line is that while oil prices are down today, they won’t stay that way for long.
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