Sir, It is deeply disturbing that the UK energy and climate change secretary, Chris Huhne, believes that the current price of oil does not “reflect the realities” of supply and demand (“UK and Saudi Arabia call for calm in oil markets”, FT.com, April 4).
His argument is that “there is no shortage of supply, and yet the price has remained high”. But there is a clear shortage of supply and it is getting worse despite Saudi Arabia’s assurances to the contrary.
Oil demand is growing strongly and supply has not kept pace. The oil market started to tighten well before the Libyan crisis removed 1.7m b/d of global oil supply. In 2010, world oil demand grew by 2.8m barrels per day (3.3pc) while supply rose by only 2.2m b/d (2.6pc), leaving a 600,000 b/d gap that was filled by drawing on commercial inventories.
This year, oil demand – led by China – has continued to grow at a much faster rate than non-Opec supply, and Opec – led by Saudi Arabia – started to fill the gap. But with Libya now unable to export, the gap between supply and demand widened again and there is no sign yet that Saudi Arabia has boosted production by enough to compensate.
Opec crude production fell by 900,000 b/d in March, compared with February when Libya was still producing.
Oil markets may not be perfect and the high concentration of oil reserves and spare capacity in the hands of a few Middle Eastern Gulf countries means that they can never be truly competitive, but they do obey the laws of supply and demand. The oil price is high because the world economy depends on oil for transport, and Opec producers are determined (and able) to extract the maximum economic rent for this vital commodity by restricting supply.
Saudi Arabia is the only country able to fill the gap created by Libya, but the kingdom is reluctant to boost output strongly for fear of undermining oil prices and its revenues.
With inflation and import bills rising rapidly because of higher oil prices, Chris Huhne should urge the Saudis to boost output in order to demonstrate that the laws of supply and demand do indeed apply to the oil market, rather than colluding in a myth that justifies inaction.
David Long,
Director, Oxford Petroleum Research Associates,
Oxford, UK