Oil thirst easing, high prices not just speculation: IAE

The day after after the oil price topped 107 dollars a barrel for the first time, the IEA said: "We are in an era of higher oil prices. "So if we look at 100 dollars per barrel of oil we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of this decade."

The IEA said in its monthly report that it was holding its estimate for world oil demand this year at 87.5 million barrels per day "with downward pressures from weaker economic growth in the OECD mostly offset by stronger former Soviet Union (FSU) projections." This estimate was an increase of 1.7 million barrels per day or 2.0 percent from demand in 2007 which grew by 1.1 percent. World supplies of oil rose by 185,000 barrels per day in February to 87.5 million barrels per day but an increase in output by the Organisation of Petroleum Exporting Countries in January had raised the base line of comparison.

However, "seasonal limits on OECD production and steady OPEC output may flatten global supply over the next two months." Supplies by OPEC had fallen by 120,000 barrels to 32.1 million barrels per day in February. OPECs spare capacity remained at about 2.0 million barrels per day. Growth of overall oil demand in the OECD was expected to come almost solely from demand for fuel from the transportation sector, but even this growth should be weaker than in the past as a result of "slowing economic activity, notably in the US, and higher oil prices," the IEA said.

Stocks held by industry in advanced countries covered by the Organisation for Economic Cooperation and Development increased by 32.6 million barrels in January to 2.617 billion barrels or 52.9 days of consumption. But production of refined products "remains under downward pressure" because refiners were having difficulty making an adequate profit and because of operating problems.

The IEA analysed the forces at work behind the record oil price and the explanation often given, notably by politicians and OPEC members, that it was the fault of speculation. The agency, an offshoot of the OECD, noted one explanation that a "wall of money" had flowed into commodity and oil markets in response to US monetaery policy and the fall of the dollar.

Another factor had been a recent decision by OPEC to continue its production levels, and not organising a formal meeting until September despite high prices. "The market is concerned that producers are more inclined to react to price declines than price rises," the IEA said, asking: "Have the price moves been irrational?" Under the circumstances, stock building by consumers seemed to be a rational response, it said. It noted the view of Saudi Arabia that the oil price would not go below 60 dollars per barrel because other sources of fuel cost this much and "only a protracted and severe recession" could drive prices lower than this.

However, many Gulf producers had production costs of less than 10 dollars per barrel. "The profit margin is huge," the IEA said but access to reserves was constrained, "traditional economics is turned on its head" and "the point is that the price baseline has shifted." On speculation, the IEA observed: "In 2003, moves above 30 dollars per barrel were widely cited as speculative and irrational. Now they are seen to reflect the increasing cost of accessing and developing reserves. If it was a speculative push in prices, the speculators were right."

Some academics put the long-term price of oil at three to four times development costs which had risen to 10-30 dollars per barrel and up to 64 dollars for US offshore oil. The IEA qualified this approach, however, saying that "even if cost inflation and a weakening dollar put further upwards pressures on the oil price, we have a duty to ensure that the impact of these is not exaggerated."

Given the "current precarious state of the global economy", the IEA said it was vital for producers and consumers to work together to ensure that the right market signals emerged "ensuring that supplies will be there when needed."