Hope for low oil prices, donít plan for it

Strong forces are at work to neutralise falling demand and plentiful supplies

An age-old question to which no one has a definitive answer, but which is continually asked, is back on the agenda. Is the price of oil headed inexorably downward? There are several reasons why this question is being asked. The overriding one is hope. After almost five years of triple-digit prices, the benchmark Brent crude oil price fell below $100 last month for the first time since July last year. Admittedly, it did not stay there for long, rising to over $100 days later, but the fact that it had slid by almost 20 per cent over the previous two months gave rise to the hope that prices were on a secular downtrend. This was particularly so because the current account deficit had ballooned to an unsustainable 6 per cent of GDP and the daily reports of a weakening oil (and gold) market provided the crutch the government needed to assure the credit rating agencies that the gap could, and would, be financed. There is, however, a more substantive reason why this question has resurfaced. It is because the fundamentals of demand and supply are pointing prices in a southward direction. Demand has slowed and supplies are projected to outpace demand.

Demand has slipped because of the recession in Europe, the anaemic growth in the US, a slowdown in China ó after more than two decades of double-digit growth, the Chinese economy sputtered to 7.7 per cent last year ó and improved efficiency and substitutability in energy usage. Citigroup has, for instance, projected that the cars that come into the market this year will burn 2.5 per cent less fuel than the cars that were produced last year and that natural gas will eat into oil's monopoly as a transport fuel. According to them, gas for mobility will replace 13.6 million barrels or 18 per cent of the current oil demand by 2025.

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