The leaders of Opec (Organization of Petroleum Exporting Countries) must be breathing a lot easier. In January, when price of crude dropped to $51 (Rs2,091) a barrel, the producer cartel’s latest target of $60 looked too ambitious. But, since then, the price has jumped by 30%. The three factors that determine the oil price are now all working in the producers’ favour.
First comes supply, which briefly slipped out of Opec’s control. The February production cuts seem to have worked. More durably, the cartel’s position is strengthened by the limited ability of many producers to ramp up output. Too many state-controlled companies are either inefficient—think Venezuela and Mexico—and too much oil is in politically unstable regions—think Iraq and Nigeria.
Then there is demand, which has held up well. Worldwide oil usage increased by 1.1% in 2006, according to the US Energy Information Administration (EIA). That may not sound like much in a year of 4% GDP growth. But under the circumstances—an average oil price 20% higher than in 2005 and a big US effort to substitute ethanol for oil—it was a good show.
Since 15 January, the price of Brent crude oil has risen from $51 per barrel to $68. The EIA expects demand to increase by 1.8%, and expects the supply/demand balance worldwide to tighten from an excess of 0.1 million barrels per day of supply in 2006 to an excess of 0.7 million barrels per day of demand, in 2007. That rate could endure or even increase, as rapidly growing China and India account for a larger share of world demand.
Finally, there is money, which helps bring supply and demand into balance. One reason that the sharp oil price increase hasn’t had much effect on consumption is the ease with which consumers have found the funds to pay up. The financial markets are still supportive of the oil markets. Despite increases in overnight interest rates, the global financial system remains awash with liquidity, much of it provided by cash-rich oil exporters.
So what happens next? As long as the world economy stays strong and the discipline of Opec remains fairly tight, the price of oil isn’t likely to fall in a hurry. Indeed, spikes are quite possible. A global economic slowdown could be the fastest way for customers to get the upper hand.