Experts say supply and demand still driving oil prices

July 3, 2008
Despite the increasing focus on speculation as the reason behind skyrocketing oil prices, new reports indicate that heavy demand is what’s really pushing costs higher

Despite the increasing focus on speculation as the reason behind skyrocketing oil prices, new reports indicate that heavy demand is what’s really pushing costs higher.

For example, according to a new report by the International Energy Agency (IEA), market fundamentals remain the main underlying factor behind high oil prices. “While we have seen some weakening in demand … supply constraints, refinery limitations and continued demand growth in key emerging markets will maintain pressure in the market over the medium term,” said Nobuo Tanaka, IEA’s executive director, in a press conference this week in Spain.

The group, in its just-released third annual “Medium-Term Oil Market Report” (MTOMR), said OPEC [the Organization of Petroleum Exporting Countries] production is at record highs and non-OPEC producers are working at full throttle, but stocks show no unusual build. “These factors demonstrate that it is mainly fundamentals pushing up the price,” Tanaka added.

“Rising world demand, lagging growth in supply, and tight spare production capacity are the main drivers of these [oil price] increases,” noted Red Cavaney, president & CEO of the American Petroleum Institute (API), in a letter to Congress this week. “Speculation – whatever its impact – currently reflects the view that tight oil markets will continue for the foreseeable future.”

IEA’s Tanaka said oil supply growth deriving from a concentration of new project start-ups during 2008 and 2010, allied to weaker economic growth, may have the potential to increase spare capacity in excess of 4 million barrels per day (b/d). However, this expansion slows from 2011 onwards when global demand growth recovers, leading to a narrowing of spare capacity to minimal levels by 2013.

He added that, since the 2007 MTOMR, significant downward revisions have been made to both non-OPEC supplies and OPEC capacity forecasts. Project delays averaging 12 months, coupled with global average decline of 5.2% - up from 4% last year – are the factors behind these revisions. “Over 3.5 million b/d of new production will be needed each year just to hold global production steady,” Tanaka said. “Our findings highlight again the need for sustained, and indeed, increased investment both upstream and downstream, to assure that the market is adequately supplied.”

“We recognize that the solution to this problem is multi-faceted,” said Tim Lynch, senior vp with the American Trucking Assns. (ATA), in a recent speech. “We need a broad relief agenda that includes increasing domestic oil production to address the escalating cost of fuel and relieve the financial hardships of the trucking industry and all drivers.”

Whatever the root cause of the jump in oil prices, stressed Lynch, something must be done soon to establish economic stability within the trucking industry. “The trucking industry is experiencing the highest prolonged fuel prices in history,” he said. “For most motor carriers, fuel has surpassed labor as their largest expense. It currently costs $1,400 to fill a typical tractor-trailer’s fuel tanks.”

Lynch added that, according to research firm Avondale Partners, in the first quarter of 2008, nearly 1,000 trucking companies with at least five trucks failed. This represents the largest number of trucking-related failures since the third quarter of 2001. In another report, the U.S. Department of Labor said that for-hire trucking companies decreased payrolls by over 10,000 during the first five months of this year.

View more Fleet Owner news relating to alternative fuels, fuel conservation, fuel economy and diesel fuel prices.

About the Author

Sean Kilcarr | Editor in Chief

Sean previously reported and commented on trends affecting the many different strata of the trucking industry. Also be sure to visit Sean's blog Trucks at Work where he offers analysis on a variety of different topics inside the trucking industry.

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