Monday, June 29, 2009

$70 Oil, but Where’s The Demand?

From the Wall Street Journal's Real Time Economics blog:

Rising oil prices — the great villain of 2008 — are back, but this time markets are cheering.

Oil futures jumped over $71 a barrel this morning, boosting shares of Exxon Mobil and Chevron – and the Dow overall — as investors looked towards the rally in recent months as a bullish sign that demand is returning to an ailing global economy.

Or is it?

Separately today, the Paris-based International Energy Agency slashed its forecast for world oil demand over the next five years, saying that by 2013 global demand will average 87.9 million barrels a day, 3.7% fewer than it expected in December and 7% fewer than it expected last July. The group predicts oil consumption will fall by 3% this year, the sharpest decline in a quarter-century, after averaging about 2% growth annually over the previous decade.

Why all the fuss over oil demand? Because it’s critical to know what’s behind rising oil prices. If it’s demand — if nations like the U.S., China and India are consuming more oil because they’re building infrastructure and powering factories — then indeed higher prices are a bullish sign for global economic growth, even if it means some grumbles at the pump....MORE