Oil prices

--oil price might remain low for a while because declining demand, spare supply capacity, and rising refinining capacity --increasing fuel efficiency alone might reduce daily consumption by 6 million barrels Published: March 16 2009 09:26 Last updated: March 16 2009 22:15 When might oil prices recover? An important question – and not just for oil producers. Higher energy prices could choke off any global economic recovery. That, indeed, is the main reason Opec decided this weekend against trying to force prices up by cutting back output. Nevertheless, many in the industry, including Opec, still believe that $75 per barrel remains oil’s “correct” long-run price, compared with less than $45 now. That could be wishful thinking. This year the world will consume some 85m barrels of oil a day – about 1m b/d less than last year. But in the 1979 oil price shock, demand shrank by 2.5m b/d in the first year, and then fell for another two years. That alone suggests the effects of this recession are still to play out. Meanwhile, on the supply side, spare production capacity is rising. Saudi Arabia is adding about 2m b/d, Brazil another 500,000 b/d. Refining capacity is also on the up in China and the Middle East. This reduces the probability of supply bottlenecks and of price spikes. This, at least, removes a risk premium from the market – another reason for prices to stay low. Furthermore, the shape of demand is changing. Oil is used mostly for transport, with almost a third accounted for by intra-urban commuting. Yet the traditional global car industry looks finished. Gas-guzzling is out; Credit Suisse reckons efficiency standards enacted by the Bush administration will shrink US gasoline use by 2 per cent a year. The shift to hybrid cars will remove a further chunk of demand. Even China wants to reduce its energy intensity by some 20 per cent by 2010. Combine that with the new US standards, and world demand would fall by about 6m b/d. That is a massive amount, equivalent to three quarters of Saudi Arabian output. Oil prices could remain lower for longer than many seem to think.