Oil prices rise as world walks supply-demand tightrope.

Author:Yoder, Jesse
Position::World Report - Statistical data

The world is walking a tightrope of oil supply and demand. Today, supply exceeds demand by a very small amount. This difference is small enough that a major disruption in supply can further tip the balance in the direction of demand.

More importantly, the trend is toward flat to declining supplies and increasing demand. Given this, the possibility exists that worldwide demand will exceed the available supply in the foreseeable future. At that point, the difference has to be made up by increasing supply, reducing demand, or by drawing on available reserves.

The balance between oil supply and demand has a direct effect on oil prices, and most of the advanced economies of the world depend on having an adequate supply of oil. The world's oil comes from many different countries with differing political and economic structures and alliances. Major sources of oil include countries as diverse as Canada, Iran, Iraq, Mexico, Venezuela, Russia, China and Saudi Arabia.

While the need to keep oil flowing from the Middle East to the United States may not have been the primary motivation for the wars in Iraq in 1991 and in 2003, it certainly played a role in the decisions to undertake these wars. Every country has a vital need for oil and any threat to a country's oil supply can be perceived as a threat to that country's security.

The price of oil is normally measured in terms of the price of a barrel of crude oil which contains 42 gallons. Even this pricing figure is not exact since different oils from different parts of the world have different prices at any given time. As a result, certain crude oils tend to be used as "benchmarks" for the price of oil as a whole. These include the price of West Texas intermediate (WTI) Crude Oil (United States), Brent crude oil (Europe and Africa), and Dubai and Oman crude oil (Middle East). Of course, there is also a difference between what oil is selling for at any given time, and the futures price.

The strongest reason for the high price of crude oil is the balance between supply and demand. Supply exceeded demand by less than 1 MMbpd in 2012. However, many of the upward fluctuations in price are due to actual or perceived threats to the oil supply from the major oil-producing countries. When the oil supply is threatened from any major oil-producing country, prices typically rise on fears of reduced supply.

Comparing crude oil production with petroleum demand by geographic region not only shows how tight the balance is between supply and demand, it also explains a lot about the current oil market. The following table makes such a comparison. Note that while 2013 data is available for oil production, the latest year available for petroleum consumption figures is 2012.

To better understand the implications, it is important to be aware that North America includes the United States, Canada and Mexico. Since the numbers for the United States are of special interest, it is worth comparing oil production and consumption just for the United States.


Looking first at the U.S. table, it shows that the consumption of petroleum liquids declined by about 1 MMbpd from 2008 to 2012. This is a significant reduction, brought about by increased efficiencies in the use of petroleum liquids, greater use of natural gas and a slow move toward alternative energy.

The table also shows U.S. oil production increased significantly from 2009 to 2013. This is due to superior oil drilling technology, to increased drilling offshore, and to the advent of shale oil. All of these factors are causing an increase in total U.S....

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