Rising Petroleum Prices Fail to Prompt Increase in Refinery Output
As oil prices soared to record levels in recent years, basic economics suggested that consumption would fall and supplies would rise as producers drilled for more oil.
But as prices flirt with $120 a barrel, many energy experts are becoming worried that neither seems to be happening. Higher prices have done little to suppress global demand or attract new production, and the resulting mismatch has sent oil prices ever higher.
That has translated into more pain at the pump, with gasoline setting a fresh record of $3.60 a gallon nationwide on Monday. Experts expect prices above $4 a gallon this summer, and one analyst recently predicted that gasoline could reach $7 in the next four years.
A central reason that oil supplies are not rising much is that major producers outside the OPEC cartel, like Russia, Mexico and Norway, are showing troubling signs of sluggishness. Unlike OPEC, whose explicit goal is to regulate the supply of oil to keep prices up, these countries are the free traders of the oil market, with every incentive to produce flat-out at a time of high prices.
But for a variety of reasons, including sharply higher drilling costs and a rise of nationalistic policies that restrict foreign investment, these countries are failing to increase their output. They seem stuck at about 50 million barrels of oil a day, or 60 percent of the world’s oil supplies, with few prospects for growth.
“According to normal economic theory, and the history of oil, rising prices have two major effects,” said Fatih Birol, the chief economist at the International Energy Agency, a group in Paris that advises industrialized countries. “They reduce demand and they induce oil supplies. Not this time.”
With tight global supplies, geopolitics continue to play a big role in pushing up oil prices. On Monday, oil futures closed at $118.75 a barrel, up 23 cents, on the New York Mercantile Exchange, after strikes by oil workers in Scotland and Nigeria that shut down nearly 1.7 percent of the world’s daily production.
Countries outside the Organization of the Petroleum Exporting Countries have been the main source of production growth in the past three decades, as new fields were discovered in Alaska, the North Sea and the Caspian region.
But analysts at Barclays Capital said last week that non-OPEC supplies were “seemingly dead in the water.” Goldman Sachs raised similar concerns in March, saying that growth in non-OPEC supplies “can no longer be taken for granted.”
At the same time, oil consumption keeps expanding. Global consumption is forecast to increase by 1.2 million barrels a day this year, to 87.2 million barrels a day, with much of the growth in demand coming from China, India and the Middle East, according to the International Energy Agency.
In the United States and through much of the developed world, the higher fuel prices have led drivers to reduce their consumption, and gasoline demand is expected to drop this year. But that drop will be more than offset by the rise in energy demand from developing countries. In the next two decades, demand is projected to jump by 35 percent.