As the oil price headed for $130 a barrel last week, George Bush headed to Saudi Arabia looking to squeeze some more barrels out of Saudi King Abdullah Al Saud.
He was wasting his time.
Eventually – and after Bush had left, Abdullah said he’d increase production to 9,450,000 barrels per day. But given that Saudi Arabia produced 350,000 barrels per day less in January and February than its average level in 2005, that hardly counts as much of a victory, nor one likely to take much strasm out of the oil price. No surprise then that since Friday the oil price has smashed through the $130 barrier.
Which brings us to the question of where is the oil price headed next?
T. Boone Pickens, the oil industrialist turned corporate raider came out of the woodwork this week and said $150 a barrel was on its way, only a week after Goldman Sach’s said we’d see $200 within the next 6 months to 2 years. The oil price responded, and notched up a couple of more dollars a barrel in what looks like an inexorable march upwards.
$200 a barrel anyone? Don’t bet on it
The fact that Boone Pickens said to short the black stuff in February is now conveniently forgotten by anyone riding on the back of this hot market. “The weakest quarter is the second quarter. We’ll drop $10 or $15 a barrel in the second quarter”, he told CNBC then. “I think we’ll be back above $100 in the second half of the year.” Now though, supply can’t keep up with demand, he says. It’s the fundamentals, stupid.
But, when speculators corner a market, fundamentals go out the window. And they’ve got this market right where they want it.
Prices have been on the up due to a myriad of factors, including a sliding dollar making it cheaper to buy oil for anyone outside the US, but especially worries over supply not keeping up with soaring global demand. As James Hamilton, professor of economics at the University of San Diego points out on his blog econbrowser, China’s oil consumption has risen at a 7.2% annual compound rate between 1990 and 2006.
But the recent run up in the oil price looks completely unjustified, if demand from emerging markets really is one of the key drivers.
Why? The US economy is slowing, which should take the wind out of the sails of the recent run up. According to the International Energy Agency, oil demand from the OECD will fall by 0.57 million barrels a day in the first quarter of the year because of high oil prices, but more importantly flagging economic activity.
The US uses 25% of global crude oil supplies at present, far ahead of the Chinese and Indian, meaning any immediate slowdown in the US economy will have a far greater effect on the demand side than the number of cars on Chinese roads. That’s because if oil does reach $4-$6 a gallon on US forecourts, you can be sure that Americans will start switching from gas guzzling SUV’s to something more economical.
And that will knock more than a couple of dollars out of the current price.