High oil prices are back, as forecast for global demand rises

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There are two ways one can interpret the International Energy Agency's first increase in its oil demand forecast in 10 months.

Those who see a dark cloud would note the rising price of oil and it's likely drag effect on the U.S. and most of the global economy. Oil has shot through $70 per barrel, rising 66 cents to $71.99 Thursday, as traders and investors anticipate a return to oil demand increases outpacing supply increases -- once again pressuring the safety cushion between supply and demand.

Those who tend to look on the bright side would see the IEA's forecast rise as a sign that aggregate demand and commercial activity is increasing -- or at least that the decline in demand has bottomed -- which suggests the end of the global recession is near. If that's the case, that's good news for corporate revenue and earnings.

Rising U.S., China consumption seen

In its May report, the IEA increased its oil demand forecast by a modest amount, 120,000 barrels per day (bpd), to 83.3 million bpd, led by increasing consumption in the U.S. and China. Still, the IEA forecasts that global consumption will decline 2.9 percent in 2009 – the largest drop in oil consumption since 1981 – a period also plagued by a pronounced recession.

Further, the IEA said oil's 100 percent increase in price in about six months is being largely driven by that changed investor sentiment regarding the economy: actual oil demand conditions have not changed by a statistically significant amount during that period. What has changed is the belief that demand will rise on a recovering global economy.

"The bull-run appears largely driven by perceived global economic recovery, with prices also recently underpinned by rising refinery throughput. OPEC's late-May decision to maintain current production targets added further support to markets," IEA said.

The other major energy commodities Thursday also continued their large run-up on the IEA's announcement. Wholesale unleaded gasoline rose 3 cents to $2.04 cents per gallon, heating oil climbed 2 cents to $1.85 per gallon and natural gas rose 1 cent to $3.72 per million BTUs.

However, as most investors know, the rise in oil prices -- and the likelihood of the return of sustained, high oil and gasoline prices -- does not affect all nations equally.

Oil-producing nations, such as Saudi Arabia, Russia, and Venezuela, like high oil prices, as it is a major revenue source in their economies. That higher revenue makes it easier to fund the government spending programs, and also assists in economic development. In particular, Russia built up large hard currency reserves during the last oil boom, and will add to them in this one.

Conversely, oil-consuming nations don't like high prices. High prices do generally provide incentives for conservation, but if the price rises too high, it cuts into GDP growth by increasing consumer spending and business costs. Many economists say if oil remains above $60, with average U.S. gasoline prices at or near $2.75 to $3.00, the U.S. economy faces the risk of a prolonged recession into 2010, or a double-dip recession.

Economic Analysis: Again, there's no shortage of oil -- inventories are brimming, globally, it's just that investors are piling into oil futures on rising demand sentiment. Therefore, it appears high oil prices have returned for the foreseeable future. Once again, that underscores the need for a U.S. energy policy geared toward increased efficiency and conservation: without it, many Americans will be left with inadequate disposable income -- a net-negative for the U.S. economy.


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