Oil prices defying gravity

Every time we stop at a gas station we are astonished at the high price we have to pay for gasoline. Despite recent declines and all the negative factors, the basic fundamentals for the industry appear to be ignored, almost defying gravity.

Several years ago, this columnist met an acquaintance at the Toronto Airport. He was just returning from a trip to Saudi Arabia where he had the opportunity to meet the Saudi oil minister. At that time the oil price was selling at about $30 a barrel. And the official predicted that it would fall to $5 before prices stabilized. That was very wide at the mark as prices declined only moderately before they gradually moved higher. That should serve as an admonitory lesson for all about the hazards of forecasting oil prices. Of course, there is the possibility that price projection was made to scare off competition.

Nevertheless, one can marshall facts nowadays and attempt to make an educated guess about the future of oil prices, at least over the next couple of years.

Given the sluggish growth of the major developed nations’ economies, oil demand and prices should be falling. Instead, while they are down from their peak last summer, oil prices are remaining at high levels, unjustified by underlying criteria, and are vulnerable to a sudden reversal.

A forecast from the Organization of Economic Co-operation and Development presents an ominous picture. According to that group, the leading industrialized nations, those who are the principal consumers of oil, should experience almost no growth, or perhaps lower than 2% annually. Even Germany, the strongest economy in Europe, is generating little growth, and the United States, at the best, will show only a fractional gain. Even booming China will slow.

Oil traders in the financial community have been inclined to shrug off all of that, so prices remain stubbornly high. The imminent return of Libya’s one million barrels a day production, and the inevitable expansion of Iraqi oil are treated with disdain. It is worth noting that Iraq formerly was the world’s third largest producer, and certainly a gradual restoration of output from there should be anticipated.

Asian nations are likely to increase their consumption of oil. Still, the other purchasers of oil, who utilize about half of the globe’s oil exports, are expected to falter as their markets stagnate. Too, rising output from our oil sands and from Brazil and Colombia will add to a price pressure. Furthermore, oil in strategic reserves are abnormally elevated.

 It must be acknowledged that energy longer term is becoming more strategic and less cyclical from a demand standpoint, but with fewer signs of supply disruptions from the Arab world, a noteworthy decline in oil prices is a logical probability.


Bruce Whitestone