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A Week in the Coverage of Oil Price and Response: A Demand – Supply Equilibrium Shift

March 29, 2012

This week has seen a flurry of articles exploring the shifts in the balance of the oil market, and the economic implications and response options.  Over the last few years there has been a growing mainstreaming of the proposition that elevated and volatile prices are here to stay.  Economic weakness in the OECD has not translated into an oil price slump, as before.  The issue is receiving increased scrutiny by commentators at present due to the current high pump prices, and the political ramifications in an election year…. not to mention possible impacts of market disruption due to events in the gulf.

In one, Daniel Ahn at the Council on Foreign Relations looks at the rationale for another intervention by the Strategic Petroleum Reserve, in conjunction with other OECD nations.  The prospect for this was first raised on the back of David Cameron’s visit to Washington.  Ahn convincingly argues the reason for which such an intervention might be made, (a tactical response to a short-term spike) and the rationale for holding inventory, but outlines why the direction of the market at present is not particularly clear.  Diminishing inventories point to an interpretation of future weakness, as does a softening in Asian demand.  Data deficiencies and market opacity make it difficult to properly identify and interpret signals.

In another, Martin Wolf at the FT also decries short-term policy shifts in the US in response to high prices, but he cautions against the macro-economic implications of sustained and volatile prices, and argues for pushing increased energy efficiency to improve resilience.  He blames existing and persistent stagnant supply, buoyant demand, and unrest for sustained high prices.  He recommends an increased level of taxation on oil imports for the US in order to shift the benefits of US oil consumption towards US Treasury and away from OPEC.

This latter argument of the need to increase resilience is perhaps the core remaining argument in favour of continuing to support clean tech.  Energy efficiency and renewable energy technology and systems will marginally reduce aggregate exposure to oil markets.  Steve Levine at the Oil and the Glory at Foreign Policy magazine explores the theme of the implications of an abundance of US oil and gas – a situation which some are now describing as a result of oil and gas shale and Canadian tar sands.  In one, he cites the potential for a reduction in petro-state power yet a re-calibration of the US economy towards less value-add activity.  In another, he reflects on whether clean-tech will receive less interest.  There is the prospect that increased production may not necessarily translate into reduced prices, but that increased supply is in any event moving the focus of clean-tech companies towards near-term price parity.

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