Thursday, March 5, 2009

Is Fuel Price Yo-Yo Broken?

I've posted on the yo-yo before. Basically it was a simple peak oil-based supply and demand system that had some logic to it. Speculation aside, it helped explain how and why oil was rising towards $150 last summer, and to a lesser extent why it began to fall off from its high of $147. But when demand started cratering in the fall, though the y0-yo effect would have predicted it, it had little to do with the high price of oil. The drop in prices turned out to be connected more closely with the sharp global economic downturn that became visible to the mainstream in 4Q08, and that signalled an almost unprecedented drop in demand. 6 months in, and we're seeing the next major snap of yo-yo take shape.  The WSJ reports that there are:  
mounting signs that the economic crisis and lower oil prices are shuttering projects around the world. OPEC countries—which meet next week to consider another output cut—have voluntarily slashed production by around three million barrels a day since last fall.  But the big and lasting cuts are coming in non-OPEC countries, where companies are postponing or canceling projects in droves. Bernstein Research said this week that non-OPEC oil production could fall by 2.5 million barrels/day over the next year.

A drop that steep,  analysts say, would more than make up for the steep fall in global oil demand. PFC Energy said in a report this week that it expects non-OPEC supply to continue to droop next year, losing an additional 460,000 barrels a day. Oil gurus at Barclays Capital predict that the fall in demand will become “less precipitous in coming months, while the supply-side contraction starts to bite and the impact spreads out from the physical markets.” Translation: Higher prices.
This time it's not rising demand that's looming (though many wish it were); it's falling supply that's going to drive the price up. I see a future yo-yo post on a reaction to higher prices in the form of more oil development. How it plays out timing-wise vis-a-vis a global economic recovery is the real wild card.

Photo of ancient Yo-Yo player: Wikimedia Commons

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