05 June 2009

What drives current oil prices?

Some people will tell you that resurging growth in the Chinese economy is pushing oil prices up and will sustain high oil prices into the future.

That’s an interesting notion given the demand statistics.  take a look at daily consumption figures from nationmaster.com.  The figures here jive with a commentary by CBC Radio’s business consultant during an interview with On the Go’s ted Blade’s Thursday afternoon.

Now admittedly they are from 2007 but they show that American daily oil consumption is about thee times that of China.  Those figures have changed relatively over the past couple of years since both the American and the Chinese economies have taken a hit and the hits are connected.

There’s still an oil glut on the world markets, by the way, despite cuts in production at OPEC.

So why are oil prices high?

It seems that prices are relatively high for the same reason that helped drive oil to historic highs last year.  A weak American dollar coupled with questions about the American economic recovery are pushing speculators into the oil markets again. 

At some point, though, the markets will correct, just as they did last year. High oil prices will delay the American recovery and likely exacerbate the demand versus supply imbalance. In a world of tight money, the world can only sustain that situation for so long. 

At that point, just as in the mid-1980s, expect a second downward drop in oil prices after the initial steep slide.

Closer to home, that likely means any hopes of oil powering the provincial budget out of deficit might be a bit premature at best.  At worst, a dramatic drop in oil prices – like say to about half where it is now – or a delayed American recovery will only increase the deficit problem in the years ahead.