With the world economy so weak, why are oil prices so high?
Economic crisis grips Europe, slow growth plagues the United States, and China’s breakneck expansion shows signs of a slight slowing.
Yet the global price of oil might set a record this year as consumption creeps up and world output struggles to keep pace.
The Energy Information Administration said this week that the average retail price of regular gasoline is the highest ever recorded during Thanksgiving week, 49 cents a gallon more than this time last year. AAA says this year motorists are on track to pay a record $490 billion for gasoline, burning a hole in consumers’ pockets.
Recently, prices at the gas pump have tapered off. AAA says that gasoline prices have dropped about 12 cents in the past month to a nationwide average of $3.33 a gallon for regular, giving holiday motorists some reason to give thanks.
But this season is usually a period of relatively weak gasoline demand, and retail gasoline prices are still high by historical standards in the United States. Although U.S. motorists seem to change their driving habits most when gas prices near $4 a gallon, the EIA statistics show that consumption this month has been as low as or lower than any November since early in the previous decade.
Moreover, the prices of other petroleum products have been heading higher. With cold weather starting to set in, home heating oil prices stood at $3.94 per gallon as of Nov. 21, an increase of 83 cents a gallon from a year earlier, the EIA said. The higher prices will primarily affect homeowners in New England, where heating oil is still commonly used.
Diesel prices have climbed, which analysts said was a sign of improved economic activity and constraints on refiners because of the government’s low sulfur requirements. A recent Barclays Capital report said that total miles driven by U.S. truckers was up 3.5 percent over the year before.
Diesel prices Wednesday stood at $3.98 a gallon, up 13 cents from a month ago and up 80 cents from a year ago, AAA said.
Diesel prices, closely linked to the trucking business, suggest a disconnect between the economy and the glum mood of consumers.
“The sentiment indicators are gloomy, but the production indicators are pretty good,” said Adam Sieminski, chief energy economist at Deutsche Bank. “If you add up what consumers are spending, the numbers are higher than last year. If you ask them how they feel, they say ‘terrible.’ ”
Behind the retail prices of petroleum products lies a global crude market that is still roiled by geopolitical turmoil and economic uncertainty.
The benchmark West Texas Intermediate crude oil this year has averaged more than $94 a barrel, only slightly below the record year of 2008 before the recent recession, and nearly 50 percent more than levels just five years ago. The more widely used benchmark Brent crude in London has cost more than $100 a barrel since early February. On Wednesday, it fell $1.81, or 1.7 percent, to $107.22 a barrel for January delivery after pessimistic economic signs in Europe.
But world crude oil prices have been propped up in part by the continuing absence of about 1 million barrels a day of high-quality, low sulfur Libyan crude. With the end of months of fighting in Libya, that output is returning, but gradually. Some uncertainty also remains about whether the new government can maintain stability, Sieminski said.
At the same time, global demand for oil is still rising, albeit modestly. The International Energy Agency, in its last market report, forecast that global oil demand would rise to 89.2 million barrels a day in 2011, up about 1 percent, or 900,000 barrels a day, over last year. The IEA expects demand to edge up another 1.3 million barrels a day next year.
All this has taken some of the slack out of the world oil market. There is slightly less excess production capacity, and developed countries have been drawing down inventories. The IEA says that in September, industry stockpiles in the member countries of the Organization of Economic Cooperation and Development fell below the five-year average for the third straight month, the first time that has happened since 2004.
Although Saudi Arabia increased its production slightly to make up for some of the Libyan shortfall, the quality of the extra Saudi oil available did not match that of the missing Libyan oil, and many companies did not buy any.
The appointment of Ben Yezza as Libya’s oil minister has provided some encouragement that Libya can recover quickly. Yezza previously served as chairman of a partnership between Italian oil giant ENI and Libya’s national oil company.
But uncertainty over Iraq and Iran also hangs over world oil markets. International allegations that Iran continues to work on a nuclear weapon have heightened concerns of military confrontation, adding a risk premium because oil prices would soar if an attack took place on Iran’s nuclear program.
Moreover, Iraq is bickering with Exxon Mobil, which has been working on a service contract to boost production in the giant West Quarna 1 field in southern Iraq. Plans call for a 1.85 million barrel a day increase in output by 2015, one of the world’s best prospects for new production. But Iraq’s government is threatening to punish Exxon Mobil for signing a production-sharing deal for exploration in the Kurdish north. Iraq is also quarreling with other international firms.
Some leading investment banks have been advising clients that oil prices will remain strong, and to some extent that sentiment can be self-fulfilling and reinforce prices by bringing more money into oil markets.
“Despite the notable slowdown in global economic growth, we continue to expect that oil demand will grow well in excess of production capacity growth,” a Goldman Sachs report said this week. “In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply.”