Black gold gusher

Oil prices this week will remain near record highs -- and there is no relief in sight.

Some economists have suggested that oil prices could moderate, given that expectations of a US economic slowdown may dampening demand.  Indeed, oil touched a recent low of $86.24 per barrel on February 7, as both the International Energy Agency and the US government lowered their forecasts for global oil consumption this year. 

However, prices have since gained more than 15% -- crude oil has been consistently hitting new inflation-adjusted records, crossing the $100-per-barrel threshold this year and hitting $102 on February 27.  This has heightened concern among analysts that prices could remain exceptionally elevated even in the teeth of a US recession.

Both market supply and demand factors have played a role.  Emerging market demand has remained robust, even as oil stocks (measured as a proportion of OECD daily consumption) are at a three-year low.  This has left little buffer against a short-term supply interruption, meaning that geopolitical uncertainty and volatility of supply contribute to price spikes.  On this front, two factors should be closely watched: whether oil stockpiles increase, particularly in the United States, and output decisions, especially those at OPEC's meeting this Wednesday.

Another culprit is investor behaviour.  The perception of a tight oil market, and a dwindling number of attractive non-commodity investment options, means that speculators continue to pile into the black stuff.  This keeps oil futures high.

To some extent, consumers have been able to absorb these higher oil prices.  Yet they are finally beginning to feel the pinch, with gasoline prices predicted to hit $4 per gallon this summer.  This may be eating into US disposable incomes.  During the energy crisis of the late 1970s and early 1980s, US households spent 8% of their budget on energy; with technology becoming less energy-intensive, this fell to 4% in the early 1990s.  However, last December, energy’s share of disposable household income had climbed to 6.1% -- representing an annual increased expense of $200 billion.  US oil demand is declining as a result -- but hunger for black gold in China and India is likely to more than offset this fall.