Monday, April 13, 2009
Article: IEA Cuts Oil Demand Forecast to Lowest in Five Years
IEA Cuts Oil Demand Forecast to Lowest in Five Years (Update1)
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By Grant Smith
April 10 (Bloomberg) -- The International Energy Agency expects global oil demand to decline by 2.4 million barrels a day this year, about the same amount that Iraq produces, as the economic slump reduces consumption to the lowest since 2004.
The adviser to 28 nations cut its 2009 forecast for an eighth consecutive month, slashing last month’s estimate by 1 million barrels a day, or 1.2 percent, to 83.4 million barrels a day. The IEA also said oil supply from outside the Organization of Petroleum Exporting Countries will drop this year...
Future Supply Constraint
Over the next five years global supplies will be “severely constrained by today’s lower prices and lower investment,” the report said. Spending on new production will likely be constrained by around 20 percent this year...
Need for OPEC oil
“In response to weaker demand Saudi Aramco cut the May price for its flagship Arab Light to all regions for the first time in five months,” the IEA report said, referring to prices announced by the Saudi state-run oil company on April 5.
In general, the demand has dropped because of the following factor:
-Economic downturn: According to IEA, worldwide gross domestic product has dropped by 1.4%, causing the demand to drop by 2.8%. As income decreases, the ability of consumers/producers alike to buy the good will decrease, hence there will be a rightward shift in the demand curve (i.e. a leftward movement down the supply curve).
Also, the second part of the article stated that the future supplies will decrease due to today's "lower prices and lower investments". This is true because:
-Lower prices: Producers receive less profit, hence less income --> less ability to produce more goods to sell in future and reap more profits.
-Lower investments: Due to the instability of the economy, investors are holding back their money. This causes a reduction in the capital--Rmb that an economy's potential growth depends on its stock of capital in the present day such that there will be more output with an increase in the capital today (rightward shift of PPC curve). With a reduction in investment, there will thus be a reduction in the maximum possible amount of profits reaped from selling the output.
In the last part of the article, it mentioned that a producer will be cutting the price of the oil in hope of increasing the demand for oil. This is because the law of demand states that an inverse relationship exists between the price of a good and the quanitity demanded for the good, ceteris peribus. Hence a decrease in price will lead to an increase in quantity demanded for oil, thus the total revenue of the producers will increase.
Bernice (:
Updated.
Posted at: 4:25 AM
