The price of crude oil "plunged" Tuesday morning, dropping more than $6 a barrel. Although there's a certain amount of cognitive dissonance associated with the idea that $139-a-barrel-oil constitutes a "low" price, the ostensible reason for the sharp drop bears examining.
Here's how the Wall Street Journal framed it:
OPEC gave a downbeat outlook for world oil demand in coming months amid faltering world economic growth and increased fuel conservation, signaling the group may not see a need to pump any more oil through the end of the year.
The words "downbeat outlook" would seem to suggest that world oil demand is declining, but what's actually happening, at least according to OPEC's Monthly Oil Market Report for July, is that the rate of oil demand growth is slowing. Big difference.
According to OPEC, average oil demand growth over the past 20 years added up to 1.2 million barrels per day (mb/d). But in 2008, demand growth grew by 1 mb/d. And in 2009, projects OPEC, demand growth will slow to 0.9 mb/d.
But OPEC also predicts that non-OPEC oil supply will grow by 0.9 mb/d in 2009, and if you throw in biofuels, non-conventional oils (such as Alberta's oil patch) and OPEC's production of "natural gas liquids," you end up with another .66 mb/d.
Which means, says OPEC, that for the first time since 2002, demand for OPEC's oil will decline by 700,000 barrels a day. Since OPEC also predicts that by the end of 2009, OPEC production will grow by 1 million barrels per day, the implication is that the global supply and demand equation will fundamentally change in the months to come.
Even if OPEC didn't boost production, something along these lines was bound to happen. For now, oil demand growth, even if slowing, is primarily driven by economic growth in emerging economies such as China, Brazil and India. But even these new powerhouses cannot keep steaming ahead as the real price of oil continues to break records. Energy trading speculators should be nervous. At some point, the price of oil is going to snap, and someone is going to get stuck with the hot potato -- high-priced oil futures that no one wants to buy.
How far down the price will go is still anyone's guess. There's also a good question as to whether OPEC's estimates of non-OPEC oil supply growth (as well as its own production increases) can be relied on. A cynic might suggest that the thrust of the current report is merely aimed at heading off Western pressure to boost production.
But the really big picture here is that for the world as a whole, oil demand is not declining in absolute terms -- it's still growing. Ben Bernanke noted in his testimony to Congress Tuesday morning that "Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil." So far, all we're seeing is a relatively slight deceleration of that growth. But if the price of oil does drop significantly, we could well witness a re-acceleration that suddenly overwhelms the theoretical production increases OPEC is promising.
Bottom line: As each day goes by the world consumes more oil than it did the day before, even if Americans are hopping on the bus and eschewing their beloved SUV-enabled lifestyle. So the long-term prognosis for the price of oil? Up, up and away!