Home > Algerian politics, Arab revolutions, Economie > Pourquoi le prix du baril de pétrole défie la loi de l’offre et de la demande?

Pourquoi le prix du baril de pétrole défie la loi de l’offre et de la demande?

I was going to write a post on the topic of oil prices, but Fareed beat me to it. The simple puzzle presented in the column below is that commodities prices are subject to the supply and demand rule. Constant supply, and a drop in demand would lead to a drop in the price. The question is why don’t we see this adjustment in the oil market. After all, the economies of China and India are cooling down (which is not good for reasons i will tackle in my next post), and the economies of the eurozone are on life-support literally. You add winter and the fact that people drive less during this time of the year, and the real demand for  oil is at a lower level compared with this past summer or with the summer prior to that. However, the price of the barrel is at $113, which is twice the price it was trading at 5 years ago when the global economy was booming and the demand for at all time high. The question is, why? What is driving oil prices up in a time of a low demand? This what Fareed tries to explain and i wholeheartedly agree with his analysis

Why oil prices will stay high

By Fareed Zakaria

The next time you pay $3.50 dollars for a gallon of gas, stop and think about a basic rule of economics. When demand is low and supply is strong, prices should fall. Right?

Now apply that to oil. People drive less in the winter. The American economy is slow. The Euro Zone has stalled. China and India are slowing down. So demand for oil worldwide is low. So why is oil trading high at $113 a barrel, more than twice the price it was trading at five years ago when the global economy was booming? What in the world is going on?

There’s a school of thought that suggests the global economy is doing better than we think. China and the U.S. are proving resilient to Europe’s problems and so traders are expecting renewed demand in the world’s two top economies. But another school of thought argues we’re in the midst of a bubble. Speculators have been driving up the price of oil and eventually it will crash.

Now I think that the economic fundamentals really can’t justify oil prices at their current levels. The real driver of high oil is not the stuff you find in the business section of the newspaper – the demand for oil in India and China. It’s on the front page: Global politics.

You see, traders worry about risk. And the biggest risk to oil supplies is the threat of war in the Persian Gulf. Meanwhile, in Nigeria mass protests are raising worries about the supply of fuel from there. Venezuela is in a slow-motion collapse because of Hugo Chavez’s mismanagement. There have also been protests in Russia, the world’s top oil producer. And remember the fallout of the Arab Spring – Libya’s oil production in 2011 was severely curtailed. Iraq continues to disappoint with its oil output and its recent political tensions certainly haven’t made things any better.

So a mix of war rhetoric and local troubles in key oil states are factors driving up the price of crude. And that translates to higher prices at the pump. Now that logic suggests that prices will fall when the news calms down.

But perhaps not. Perhaps oil producers want these sky high prices. Usually the major oil producers understand that keeping prices too high in the short term means people start finding alternatives to oil. They start driving more efficiently; they start looking for alternate energies. But this time, oil states face crucial challenges. Look closer at the Arab Spring. The only oil rich country that has been forced into regime change is Libya. Why? The Gulf states lavish subsidies and salary increases on their citizens. They’ve upped spending to record levels to suppress any popular discontent.

I saw some striking numbers this week: Look at the “break-even” costs for the world’s top oil producers. That is the minimum price at which these countries need to sell oil so that they can balance their budgets.

Russia now needs oil at $110 a barrel to manage its finances. For Iraq, the number is $100. Even Saudi Arabia now needs oil to trade around $80 a barrel just to balance its budgets. The numbers are also high for Algeria, Qatar, and Oman. Only a decade ago Saudi Arabia was able to balance its budget with oil prices averaging around $25 a barrel.

So now it is in these countries’ interest to keep oil prices high, which they do by curtailing supply in one way or the other. This is perhaps the most lasting impact of the year of global protest: High oil prices.

So, the bottom line is an oil crash seems unlikely. Even though the engines of global growth are sputtering, be prepared for a period of expensive commutes. Maybe it’s time to trade in your Escalade for a Prius.

  1. March 27, 2012 at 10:19 am

    The only oil rich country that has been forced into regime change is Libya. Why? The Gulf states lavish subsidies and salary increases on their citizens. They’ve upped spending to record levels to suppress any popular discontent.

    I don’t understand the link between the the Libyan crisis and the subsidies in Gulf countries. Could you clarify please?

    Also, one question I would like to have an answer for is whether oil prices might provide indication on peak oil? Every now and again, we get a flurry of analyses to the effect that peak oil has been surpassed, followed by apocalyptic forecasts. What goal do these types of analyses serve?

    As for the author’s point about the dynamic behind oil prices going up in recent years, I think this is good news because it will make alternative sources of energy more attractive and will force people to seek less energy-consuming alternatives in their daily routines.

    • March 28, 2012 at 1:15 am

      Peak oil is a major guess-game. Nobody really knows whether there is enough underground or not. When you talk to engineers whose job is looking for new resources, what they tell is that there are regions (countries) that have reached their peak. There is nothing down there but a couple of more decades (that’s hardly enough if we take into consideration that oil consumption has dramatically increased recently because of China). However, there are countries that are not that tapped, like the Stans region.

      As for oil prices increasing, i share your opinion. It is the only way (with subsidies) to really help the development of alternative energy sources.

  2. January 19, 2012 at 5:46 pm

    also speculation help raise the price of oil out of the 3 dollars or so that you pay 1 dollar goes to speculators.
    every oil is not the same depending on the amount of sulfur in the oil so it may need more refining

    • January 20, 2012 at 8:49 pm

      It is well-known (and has been well-published) that speculation is integrated in the security premium in each barrel. What is more surprising, according to the new data, is that the break-even cost (and that’s the real value that we need to pay attention to not the price of a barrel on the market) for major oil producers has increased dramatically. According the 2011 figures, Algeria needs a $96 barrel to break-even, Saudi Arabia $80, UAE $82 and so on. Only Qatar and Kuwait are below the $50 threshold, everyone else is above $80. These indicators are going to force the oil market to be at least at moving-average of these levels regardless of the supply-demand function and the security situation.

  3. Reverber
    January 18, 2012 at 8:58 am

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