If demand for oil is low, why aren't prices falling?

Uncertainty about the global economic recovery means that the market is unusually unpredictable right now.

Seth Perlman/AP/FILE
In this June 17 photo, a Huck's gas station manager, who declined to give his name, changes numbers on the price sign outside the Springfield, Ill. station.

The global recession is putting a dent in the world's demand for oil, but that won't necessarily mean low prices for energy consumers.

Instead, what may lie ahead is a period of volatility – as oil markets adapt to uncertainties in the post-recession economy.

The International Energy Agency (IEA) pointed to unusually high uncertainty in a five-year forecast Monday. The agency said it expects global oil demand to rise about 0.6 percent a year through 2014 – slower that its previous mid-range forecast had called for. But it also said that, depending on the strength of the economic recovery, annual demand for oil could rise anywhere from 0.4 percent to 1.4 percent a year after the current year.

The forecast also calls for slower growth in supply as well as demand. And for this year, the report says, demand is still in the process of falling for a rare two-year stretch. All this makes it very tricky to predict prices – the market's barometer of supply and demand.

“The global financial crisis has turned the economic landscape upside down," Nobuo Tanaka, executive director of the Paris-based group, said in a statement. Both the oil and natural-gas markets "face enormous uncertainty surrounding the timing, pace, and extent of any economic rebound.”

Oil markets are often volatile, and now that could be the case for political as well as economic reasons.

Monday, for example, the oil rose nearly $2 in price to more than $71 a barrel, due to rebel attacks on oil installations in Nigeria.

Another case in point: Iraq is seeking a significant expansion of its oil production to 4 million barrels per day in the next few years – an ambitious goal that will depend partly on the stability of the fledgling government in Baghdad.

Political forces could also affect production in a range of other important oil-producing nations, such as Iran.

Oil prices have already been on a wild ride in the past couple of years. After soaring last summer, they crashed back to earth as tough times caused consumers to pare back on everything from plane trips to goods that travel on container ships. Still, since February, oil prices have started marching upward again as traders anticipate the recession's end.

China's growing demand for oil could push energy prices higher in the years ahead, says Paul Ting, a US-based energy analyst. As of May, imports into China have risen to account for 57 percent of the nation's oil use. That makes China about as import-dependent as the US, which was importing 55 percent of its oil in the first half of June.

Even as emerging nations consume more oil, supply is also growing. The IEA predicts that oil supply capacity will be 4 million barrels a day higher in 2014 than it was in 2008. But that's about 1.5 million barrels per day less than forecast in the previous outlook a year ago.

There are some risks to the world economy from either strong or weak oil prices.

High prices could crimp an economic recovery. Low prices could hinder the rise of alternative fuels, discourage conservation, and discourage oil companies from expanding their production capacity.

"A return to razor-thin crude oil spare capacity and resultant price volatility are in the interests of neither producers nor consumers.” Mr. Tanaka said.

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