Oil price rises break market rules?

A graph with OPEC production versus price per barrel since the 70s is interesting. There have been times when production has been reduced by war or embargoes and, in accordance with market forces, reduced availablility (or the fear of it) has produced higher prices per barrel.

However, since 1985 there has been a general growth in OPEC output (quite a steep hill). As you'd expect, prices have dropped as a response and were a reasonable $10 per barrel as recently as 1999...

Then the rules of supply and demand stopped applying.

Growing OPEC output has, in fact, been accompanied by climbing prices. This could be failure to keep up with demand from China, India and other industrialising countries. But, as I say, production from OPEC as a collective (Iraq belongs to OPEC) has been ratcheted up ever since 1985 to deal with this kind of demand.

So what explains the anomaly that OPEC output is now climbing steeply and having no downward effect on the price of oil?

Surely the answer is - the rising price is being fuelled by speculation that oil companies won't be able to keep up with demand.

But why would anyone speculate on this basis unless they actually thought the oil industry capacity to deliver was in decline? Would you bet on the price going up if you felt that pumping more Iraqi oil would solve the shortage of supply?

It does look to me like a lot of investors have reached the conclusion that oil is very soon, if not already, flowing at the fastest rate possible, given existing and potential sources. Generally depressing news about the lack of discoveries of new easy sources of oil (nothing major since the Caspian) does concur with this view.

The chart I refer to is the 'OPEC Production & Crude Oil Prices' at this useful site.

Ends | 4 August 2006

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