The next oil price shock
A few years ago I made a graph illustrating my view of the timing of future oil price shocks. I've updated that graph to reflect the current price, but I haven't changed my mind about the timing of the next blow-up. Here it is.
This is not a "price" graph—nobody can predict future oil prices. It's simply a schematic showing that—
- demand surges cause oil price shocks (the peaks)
- oil price shocks cause recessions and force reductions in demand (the troughs)
- the average price of oil goes up over time (the ascending blue line)
Informally, we can say there's been an oil price shock when the real (inflation-adjusted) price goes over $100 per barrel and stays there for at least 2 months. I have the next spike occurring in 2012 ± 1 year.
I'm going to do a lot of hand-waving here. If somebody can predict how the global economy is going to perform over the next 2-3 years, they should step forward now. Perhaps it is easier to state what we don't know than what we do know—
- How will Europe's sovereign debt crisis (in the PIIGS) affect the Eurozone economy as a whole? And thus its oil demand? The IMF says the European crisis is a boon for emerging markets.
- How serious is the Chinese housing bubble? If the bubble bursts, what will happen to China's economy?
- Will there be a double dip recession in the United States? If so, what will happen to its already weak oil demand? Otherwise, I expect little change from current levels.
- Japan? I expect little change there.
Both the International Energy Agency and Barclays, a prominent oil analyst firm, are bullish on oil. In fact, if they weren't so confident that oil demand in the developing countries—the so-called BRICs (Brazil, Russian, India and China) plus the Middle East—is surging, I would have changed the 2012 forecast to 2013. Here's the Financial Times on April 13.
On the demand side, the IEA said the world’s oil need in 2010 would rise to higher levels than previously thought, with much of the growth from Asia and the Middle East. World demand will hit 86.6m barrels a day this year, up from 84.9m in 2009, and above the record 86.5m b/d demand of 2007, the report said.
Other analysts agreed. “Non-OECD demand is growing at a phenomenal pace,” said Amrita Sen, analyst at Barclays Capital.
China imported 4.95m barrels of oil a day in March, a 14 per cent increase from the previous month, according to data released by the Chinese customs bureau.
[My note: China's oil demand was 8.12 million barrels-per-day in April, which is well below its all-time record of 8.5 million set last February. China's oil production has been around 3.75 million barrels-per-day (xls file) for some time now.]
However, many analysts warned that the higher
growth may not be sustainable because it is being driven by government stimulus programs. Even the IEA acknowledged that prices may be higher than market factors justify.
“While some see recovering demand having been sufficient to support the $70-80/bbl prices evident in the last eight months, they nonetheless raise questions over the sustainability of prices markedly higher than those levels,” the IEA said.
It's quite amazing that the IEA has pegged 2010 world oil demand higher than it was in 2007 when the last oil price shock got going. Frankly, I don't believe it. Still, there's a smallish chance they're right, in which case the next oil shock will likely occur in 2011.
You can see the considerable uncertainty in the FT's report. Apparently, the Kuwaiti oil minister predicts that China's oil imports will be 7 million barrels-per-day by 2015! That's an additional 2-3 million barrels daily. Believe me, if that prediction comes to pass, we will never reach 2015 without a tremendous, very destructive oil price spike.
We don't know when the next oil shock will arrive but we do know it's just a matter of time before the next one shows up. I continue to be astonished that most American economists and all American policy-makers ignore the dangers posed by future oil prices. But then again, if you can ignore the biggest property bubble in human history, you can ignore anything.
Here's a Barclays analyst saying the oil demand picture is improving.
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