Given how fast and furious oil prices rose in late 2007 and 2008, it seems hard to believe that May witnessed the sharpest one-month rise -- up 30 percent -- in the last ten years. But that's what happened, and in trading on June 1st, the price of crude hit $68 a barrel, the highest point in seven months. That's still only half of last July's $140 peak, but enough to start dragging attention away from ailing banks and carmakers and back to the big story of the 21st century: energy.
Cue the head of the International Energy Agency, Nobuo Tanaka worrying that "a rapid increase in oil prices may have a negative effect on the economic recovery."
Er -- what economic recovery? Despite all the hype about economic green shoots, it's hard to explain the current rise in prices as directly related to increasing demand. The U.S., as James Hamilton reports, is consuming 2 million barrels a day less than it was two years ago. Most Western industrialized economies are still contracting.
China's oil consumption grew in April for the first time in six months, and a report that manufacturing activity grew for the third straight month there has been cited as the reason for Monday's oil price rise. But even in China, demand for oil is not growing because of economic growth. Zhang Guobao, head of China's National Energy Administration, says that countries around the world have been taking advantage of low prices to build up their oil inventories, reported the Wall Street Journal on Monday, but that can't last forever:
"Most countries' crude-oil inventories are already full. It will be difficult to continue increasing reserves in the second half of the year at the same rapid pace. Analysts should pay attention to this phenomenon when analyzing oil prices," said Mr. Zhang...
(Two weeks ago, the Wall Street Journal reported that Google Earth satellite photos "show a marked increase in oil-storage construction [in China] over the past few years.")
Meanwhile, energy watchdog Robert Rapier reported that on a recent trip to Amsterdam he saw "19 oil tankers parked off the coast in the North Sea.... [that] are being used for floating storage due to the glut of oil in the market." The traders leasing those tankers are betting that the price of oil will be higher in the future -- a position supported by futures prices and OPEC's apparent current ability to hold the line on production increases.
So if economic growth doesn't explain the price rise, is it fair, this time around, to argue that speculators sitting on oil in conjunction with OPEC cartel machinations is sending American gasoline prices spiking just in time for summer road trips? Maybe. But by that same logic, we might expect that the current boomlet in prices will be short-lived. There are only so many tankers around that can be used for storage, and it costs a pretty penny to lease them. Sooner or later, they will have to unload, flooding markets where there just isn't that much demand. The fundamentals, at this moment, don't seem to support a robust market.
The story is different in the long run -- if and when global economic growth resumes. Then the same old fundamentals that dominated last year's boom come back into play: declining production from existing fields, higher costs of developing new sources of oil, demand sure to rise in China and India. China, it should be noted, just registered its fifth straight month of record auto sales. Against those constraints, even the current price of oil is still low. And that, writes Hamilton, could explain why OPEC is having no problem maintaining production limits -- it's pretty clear that oil tomorrow will be worth a lot more than oil today, so why not just leave it in the ground?
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