Rising demand for oil could lead to global double-dip recession

Many are forecasting higher oil prices next year, due to increased global consumption and decreased output from Libya and other oil-producing nations. That could threaten global economic recovery.

Madrid

When the global economy slows, one of the few bright spots for consumers is a little relief at the pump, with gas prices falling in response to slowing demand. But this time around, oil prices look set to stay firm, and perhaps rise, through a stagnant growth cycle.

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Warning bells are sounding from commodities analysts and institutions like the International Energy Agency, which advises industrialized economies.

So far, demand for oil products is slowing in tandem with global economic growth, especially in OECD countries, which explains why the average price for a gallon of gasoline in the United States has fallen 30 cents to $3.67 from three months ago.

But it?s unlikely that they?ll drop much more. In fact, oil prices could rise even as industrial production stagnates in major industrialized countries like the US. That?s because global oil production is not growing fast enough to offset supply cuts ? namely from Libya - and consumption is increasing in emerging economies like China.

The IEA in its August oil market report released Wednesday cut its demand outlook for the remainder of 2011 by a measly 60,000 barrels per day. That?s a drop in the bucket compared to 90 million bpd of demand. For 2012, it raised its forecast by 70,000 bpd. Both revisions take into account the latest market turmoil and growth forecasts. Year on year, global oil demand will rise 1.2 million bpd in 2011 and 1.6 million bpd in 2012, according to the IEA.

For industrialized economies, rising demand is coming at the worst time possible, with governments running out of stimulus options and the prospects for economic growth and job creation looking grim.

Diane Munro, senior oil market analyst in the Paris-based IEA, says that oil prices usually fall in a recession ? setting the stage for eventual economic recovery by reducing the cost of a major business input. But this time around she thinks that slow economic recovery ?will outpace any price relief at the pump. The income effect will outstrip any relief.?

Supply, meanwhile, will increase nowhere near as fast as demand. Non-OPEC oil supply will only rise by 0.4 million bpd in 2011 and by 1 million bpd in 2012, the IEA predicted. OPEC countries don?t appear to have the capacity to meet rising demand, despite Saudi Arabia pumping at the highest level in 30 years.

That indicates oil and pump prices will rise, increasing the risk of a global double-dip recession.

?You?ve had a price correction,? says Harry Tchilinguirian, a London-based senior oil market analyst with BNP Paribas. ?However in the end the factors that led to the recent run-up in prices are still with us. The issue is whether we will have enough oil when the time comes. That is not evident. Oil prices will very likely rise again to $100 bpd [from the current $80 bpd].?

?What this means for the average consumer is first and foremost that we?re likely to see gasoline prices contained at their current levels for two or three months, but they will increase again toward the end of year, with a threshold of $4 a gallon,? Mr. Tchilinguirian says.

Source: http://rss.csmonitor.com/~r/feeds/csm/~3/UFrZ4r4dOXM/Rising-demand-for-oil-could-lead-to-global-double-dip-recession

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