?Higher and lower oil prices may affect demand, but the effect will be very limited?
5 Dec, 2008 10:14 pm
Ali Hussain, oil consultant and former OPEC officer, answers Scitizen?s questions about the possible effect of OPEC measures on oil demand. He argues that OPEC is one factor in a complicated equation that includes economic recession and speculation, and that prices are not the determining factor in oil demand. (Special dossier - Oil demand around the world: suppression or destruction? 4/4)
OPEC’s influence is not on demand, it is on supply. OPEC’s oil constitutes around 40% of total global oil in the market. So if the OPEC reduces its oil supply, of course this will affect the prices: they will go up. If oil prices increase exceptionally high, of course there would be an impact on oil demand. But demand comes from the growth in the world economy, it comes from the usage of oil. Actually OPEC’s influence on demand is limited.
What have been the results of previous attempts of the OPEC to influence the market?
The last one was about a month ago, when OPEC decided to reduce its production by 1.5 million barrels a day, and in fact oil prices went down. They didn’t go up, because there are other factors in the market like speculation, expectation of what is going to happen to global demand in the future and so on and so forth.
So the action taken by the OPEC to reduce oil supply in the market in order to increase oil prices didn’t really have any effect, and oil prices continued to go down. When the OPEC was meeting, prices were around 60 dollars, prices now are around 54 dollars per barrel.
So they are many factors. One of the factors affecting oil prices and the international oil market has been speculation. Speculators have been speculating in the past (before the fall in oil prices) that oil prices will continue to go up, and oil demand will continue to go up, and this is why prices went into around 147 dollars per barrel. Now it is the other way round: speculators think the recession that is going to happen (and that already happened in the USA, Europe and Japan) will affect the demand for oil negatively, and this is why oil prices have fallen from 147 in July to about 54 now.
There are now two ideas in OPEC: some countries want OPEC’s oil production to be reduced in order to stabilise oil prices, and others say the market will take care of that. I believe that if prices go down further, OPEC will take certain actions to reduce their supply further, say one million barrels a day, something like that.
Do you think the slowdown in oil demand is structural or temporal, due to high prices of oil this summer?
No, I don’t think this is something to do with high oil prices. It has to do with the expectation of traders that demand may go down.
Oil is a strategic commodity that is required by the world economy and by the world industry, so there will always be demand for oil. Whether oil prices go up or down, there is an inelastic demand for oil: if prices go up demand will continue, it may decrease just a little bit. And it is the same when oil prices go down, the demand may not increase that much. Higher oil prices and lower oil prices may affect demand, but the effect will be very limited.
Interview by Olivia Sohr
Oil demand around the world: suppression or destruction?
“We could have a tighter market once again from around 2011 onwards” – Interview with David Fyfe, head of the Oil Market division at the IEA
A huge fall off in demand? “We actually haven’t seen it yet!” - Interview with Andrew Sutton, an oil market expert
China’s Oil Demand: Challenging the Conventional Wisdom, China and Demand elasticity, by Paul Ting, a top-rated oil analyst.