• 2 minutes Oil Price Could Fall To $30 If Global Deal Not Extended
  • 5 minutes Iran downs US drone. No military response . . Just Destroy their economy. Can Senator Kerry be tried for aiding enemy ?
  • 8 minutes The Inconvenient Truth Of Electric Cars
  • 12 minutes The Plastics Problem
  • 23 mins SHALE MAGIC: Let the oil flow: US to lead oil output growth through 2030: ConocoPhillips chief economist
  • 30 mins To be(lieve) or Not To be(lieve): U.S. Treasury Secretary Says U.S.-China Trade Deal Is 90% Done
  • 4 hours Magic of Shale: EXPORTS!! Crude Exporters Navigate Gulf Coast Terminal Constraints
  • 3 hours Philadelphia Energy Solutions seeks to permanently shut oil refinery - sources
  • 3 hours IMO 2020
  • 14 hours Here we go folks, the wish of so many: Pres. Trump threatens to lessen US security role in Strait of Hormuz, unveils sanctions
  • 5 hours EIA reports 12 mm bbls Inventory draw . . . . NO BIG DEAL . . . because U.S. EXPORTED RECORD 12 MILLION BARRELS DAY OF CRUDE + PETROLEUM PRODUCTS ! ! ! THAT'S HUGE !
  • 4 hours Its called reality: Economic, policy challenges to make Asia's energy transition painfully slow
  • 3 hours Ireland To Ban New Petrol And Diesel Vehicles From 2030
  • 19 mins On the hobby side of things
  • 14 hours Looks like Trump is putting together a "Real" Coalition to protect Persian shipping lanes. Makes perfect sense. NO Fake "Coalition's of the Willing" UPDATE REUTERS Pompeo "Sentinel Program"
  • 16 hours Cap and trade: What could Oregon’s carbon policy cost you?
Alt Text

Expect More Bearish News For Oil

A very bearish inventory report…

Alt Text

Have Canadian Oil Prices Hit The Sweet Spot?

Canadian oil prices have recovered…

Alt Text

Middle East Torpedo Attacks Send Oil Prices Soaring

Oil prices jumped on Thursday…

James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

More Info

Premium Content

Lower Oil Prices

Like a roller coaster ride, 2011 saw oil prices climb gradually, only to fall dramatically this last week. Here I offer my thoughts on some of the key contributing factors.

Let's begin with the relation between oil prices and the exchange rate. If the dollar depreciates by 1%, the dollar price of oil would have to go up 1% to keep the price paid outside the United States constant. This is a bit simplistic, one reason being that there is usually some third factor, such as a rise in incomes outside the United States, that is causing a change in both real oil prices and the exchange rate. Different factors affect the two series differently, so one might see a 1% depreciation correspond to an increase in dollar oil prices of more or less than 1%, or sometimes even an oil price decline. Between September 2009 and September 2010, a 1% depreciation of the exchange rate was associated on average with a 1.3% increase in the dollar price of commodities like oil or copper. The dollar rose about 3.5% against the euro between Wednesday and Friday, and the 4.5% decline in the price of copper could be pretty well explained by the exchange rate alone based on the recent correlations (3.5 x 1.3 = 4.5). But something more is involved in the 11% drop in the dollar price of crude oil observed those same two days.

Looking at the broader trend, the price of oil shot up 19% in February and March, during which the dollar depreciated against the euro by only 3%. The exchange rate can account for only a small part of recent movements in the price of oil.

Actual oil price
Actual oil price and the value predicted by the exchange rate. Solid line: actual price of West Texas Intermediate (in dollars per barrel), Sep 1, 2010 to May 6, 2011. Dashed line: Sept 1 price times exp(1.3 times change in natural logarithm of exchange rate since Sep 1). Updates graph from Econbrowser Nov 10, 2010.

What I believe should instead be the first place to begin any discussion of recent oil prices is the broader global trend of supply and demand. The graph below plots world oil consumption over the last 15 years. This increased by 7.3 million barrels per day between 2000 and 2005, but by only 1.2 mb/d between 2005 and 2010. But very importantly, consumption by China increased by 1.7 mb/d between 2005 and 2010.

Total world oil consumption
Total world oil consumption, annual, millions of barrels per day, 1995-2010. Data source: EIA.

Please note the necessary implications of this arithmetic: if China is consuming 1.7 mb/d more, but the world as a whole is only consuming 1.2 mb/d more, that means that people outside of China, as a group, have decreased our consumption by 500,000 b/d over the last 5 years. And the first question to ask anybody who claims that the price of oil has been "too high" recently, is, how much of a price increase do you think would have been necessary to persuade consumers outside of China to reduce consumption by a half-million barrels per day over a five-year period?

I've been talking about global consumption, though the EIA also reports data on world production. It's not accurate to conclude that if reported production exceeds reported consumption, then there must be excess supply with the difference going into inventories somewhere. The two series are collected from different sources, and the difference between reported production and reported consumption is often just reflecting errors in measuring the two series. But it's interesting to note that, from production data, it looks as if we're finally lifting above the five-year plateau, with the latest production figures showing significant increases relative to 2005 in countries such as the U.S., Brazil, Russia, Angola, Iraq, Azerbaijan, China, and Canada far in excess of the declines in the North Sea, Mexico, Venezuela, Indonesia, and Saudi Arabia over that period.

Total world oil production and consumption
Total world oil production and consumption, annual, millions of barrels per day, 1995-2010. Data source: EIA.

We can also look at direct oil inventory data for the United States. The black curve in the figure below plots the average seasonal behavior of U.S. crude oil inventories. The green curve gives the values for 2008. Inventories were significantly below normal in the first half of that year, making it difficult to insist that the price at that time, though rising quickly and very high by historical standards, was higher than it needed to be to keep demand from outstripping supply. By contrast, the orange curve (2011 data) indicates that current inventories are currently well above normal, suggesting that, particularly given the recent production gains, a lower price would likely be consistent with the quantity consumed being equal to the quantity produced.

By. James Hamilton

Reproduced from Econbrowser




Download The Free Oilprice App Today

Back to homepage


Leave a comment
  • Anonymous on May 09 2011 said:
    James, I might have a bad day in front of me at the university, since I am going to come face to face with some fools for the first time in a month or so, but its not so bad that I believe that the price of oil is going to fall under $100/b and stay under that level.Those people in the OPEC building in Vienna are not going to allow that to happen if they can help it, and the feeling here is that they can help it. There are a couple of other things of importance where this issue is concerned, but I'll save those for later.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News