354. OIL SUPPLY & DEMAND VS. PRICES
Lately there's been a lot of debate here and elsewhere about whether oil prices are being determined by fundamentals -- i.e. by supply and demand -- or by financial flows (i.e. dollar weakness, inflation hedging, speculation, hoarding). So let's take a look at the actual figures for world supply and demand from the IEA. These figures are taken from P. 51 of the IEA's 11 April 2008 Oil Market Report, available as a pdf here.
For each time period below, the figure on the left is demand, and the figure on the right is supply, in millions of barrels per day.
2004: 82.5, 83.4
2005: 83.9, 84.6
1Q06: 85.6, 85.4
2Q06: 83.6, 85.1
3Q06: 84.6, 85.7
4Q06: 85.6, 85.4
2006: 84.9, 85.4
1Q07: 86.1, 85.6
2Q07: 85.1, 85.2
3Q07: 85.6, 85.2
4Q07: 87.1, 86. 5
2007: 86.0, 85.6
1Q08: 87.3, 87.3
Now, let's compare these figures against the graph of oil prices:
1) For the years 2004, 2005 and 2006, oil prices rose consistently despite the fact that there was no shortage, and supply was more than adequate to meet demand. The surplus of supply over demand was 0.9mbd in 2004, 0.7mbd in 2005 and 0.5mbd in 2006. The theory that oil prices rose in this period due to demand exceeding supply doesn't hold water. The figures clearly state otherwise. Supply substantially exceeded demand the whole time.
2) In 2007, there was a genuine shortage of oil. Demand exceeded supply by 0.4mbd, so a price rise was justified on fundamental grounds.
3) In the first quarter of 2008, demand remains strong but IEA stats show there has been a large surge in supply which is enough to meet that demand:
In 1Q08 (Jan, Feb, Mar), WTI spot prices fluctuated up and down, but started and ended the period around $100/barrel. That would seem to accord with the fundamentals. Supply and demand were balanced during the quarter at 87.3mbd.
Finally, since the beginning of April, oil has shot through the roof like a rocket. Was that justified by the fundamentals? We don't know yet. The 11 April 2008 OMR (P. 3) says: "This report projects April and May oil balances tipping towards a supply surplus." Another data point:
A decline in China's oil imports in April, the first year-on-year drop in 18 months, also raised questions over demand. China is the world's second-largest oil consumer after the United States. [...] China's April crude oil imports fell by 3.9 percent from a year ago to 3.47 million bpd, and were also down from the record of 4.07 million bpd in March, official Chinese data showed.SourceI'll revisit this as the figures are updated, but, at the moment, the "demand is overshooting supply" theory looks pretty unlikely as an explanation of the feverish price behavior in April.