All data in this piece are from, or derived from, the Energy Information Administration of the United States Government.

There is a distinct impression from the outpourings of wisdom on and gnashing of teeth over oil prices that demand - China is often cited - is the number one driver behind crude's appreciation. James Picerno over at the Capitalist Spectator quotes a Barclays Capital analyst saying as much. Here is a snapshot of the demand data:

Exhibit 1, Oil Demand, Millions of barrels per day:



Chinese demand is hefty and not a one-off event: year to date 2004, China's consumption has increased more than 23% compared to 2000; and its share of the total oil patch has moved from 6.2% to 7.6%.

It's a fair assumption then, that production volumes have not kept pace with this growth in demand. Indeed, that's often been the supporting idea to the demand argument; as has been the view that exploiting new oil reserves in deep water is uneconomic, even at today's prices. Here's some production data:

Exhibit 2, World Oil Production & Demand, Millions of barrels per day:



*"Production" includes crude, natural gas plant liquids, other liquids and refinery processing gain
**2004 "Demand" uses Q1 data

Odd, isn't it? Production supply is running ahead of demand for the first time since 2000 and yet the oil price is spiking. It's not easy to argue "terrorist premium", "Iraq", "Nigeria" et al since none of these are particularly new phenomenon. There is always something going on. So from where might the roots of the spike be drawing sustenance?

Inventory drawdown seemed a good candidate. Unfortunately, OECD inventory has in fact risen year-over-year to May 2004. Which brings us to:

Exhibit 3, Oil Refining Capacity & Demand, Millions of barrels per day



2004 is the first year over the last five that refining capacity is less than demand. It's not merely that demand has risen, or that there is a bottleneck. Global refining capacity has dropped every year since 2000.

The scribe is not an oil analyst. Nuance in the sector is usually lost on him. Nonetheless, the key to oil's rise appears to be the contraction, in world terms, of refining capacity. Refiners, it would seem, are not convinced oil price rises are sticky enough to render the capital expenditure required in plant profitable (if NIMBY/environmental interests cleared them to build in the first place, that is). And why should they? The oil price, inflation adjusted and in 2004 dollars, has averaged $35.58 since 1970.

$60, here we come.

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