Exhibit A: Oil Prices, Global GDP, Net Oil Exports
The chart above shows oil prices, net oil exports (data here) and world GDP, quarterly from 2002:Q1 to 2008:QII. The data for OECD world GDP and oil prices are from Global Financial Data (subscription required). Oil prices are on the right scale in $/bbl., and world GDP and net oil exports are on the left scale, both expressed as an index equal to 100 in 2002:QI. The graph above was inspired by the CFTC report and graph of world GDP and oil production, featured on this CD post. I added oil prices and used net oil exports (from Net Oil Exports) instead of oil production.
Bottom Line: The graph shows that world GDP, net oil exports and oil prices were all increasing at about the same rate from 2002 to early 2006. Starting in about mid-2006, the three series started to diverge as world GDP continued to increase, but net oil exports started to decline. It was at that point of departure in 2006 between global output (GDP) and the global supply of oil that oil prices started to rise significantly (see shaded area).
Although the decline of the dollar and the increase in speculative activity might have played relatively minor roles in the run-up of oil prices, the main contributing factor to high oil prices over the last two years appears to be the supply-demand imbalance that started in mid-2006. With the significant increase in world output and the accompanying increase world demand for oil and energy interacting with a flat and/or falling world supply of oil, there was only one direction for oil prices to go. Up. Nothing mysterious, nothing nefarious, and nothing to do with speculators. Simple supply and demand. Period. In other words, Occam's razor.
4 Comments:
Genuine question: why was the price rising when production and growth were rising in tandem? Did traders see and anticipate the problem? If so, then why didn't our policy makers and legislatures? OK, the last question is not so genuine and has an obvious, funny answer.
Possible answer to Marko: The price in the graph is in terms of US dollars. The US trade-weighted exchange rate has been falling steadily since about 2002, where the graph starts, so that may be the answer. The rate of fall of the exchange rate did not change in 2006, so the kink in the path of oil's price in that year reflects a force other than the movement of the exchange rate.
My own question: At the simplest level, it is true that there is no puzzle in the behavior of oil's price. Demand continued to rise, and supply stopped rising. But my question is, Why did the supply stop rising? Possibilities include continuing disruption in Nigeria and incompetence in Venezuela. My understanding is that Iraq's supply has been increasing in the last few years. I don't know the details of the petroleum market, so I don't know what caused the sudden halt to the growth in oil supply. Does anyone reading this have an answer?
professor perry, as a global economist, what should we do? revoke all our trade agreements with china and india until they stop subsidising oil (and mineral) prices?
from experience, i know you won't answer me. why?
how can you approve of the global trade situation when it is so f***ed up?
if trade was really free, how different it might be. no currency manipulation, no subsidies. shoot, we might as well go for trade embargoes. what's the differance? i know, you won't answer.
Net export oil decline does not imply decline in oil supply...there is something that does not work with this explaination.
Walter
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