Fundamentals of supply and demand no longer apply to oil markets

| 5/29/2008

According to the U.S. government, the law of supply and demand is no longer working when it comes to oil markets.

Most OPEC members would like to see lower prices, but there is little they can do as the market is responding to factors beyond supply and demand, a senior Gulf OPEC source told Reuters.

If those fundamentals dictated the price, oil would cost around $60 to $70 a barrel, the source said.

The Wall Street Journal reported that fresh information from the U.S. Department of Energy shows that the amount of oil shipped by the world’s top exporters actually fell by 2.5 percent last year. At the same time, global demand was up sharply, and the price of oil shot up nearly 60 percent.

On Thursday, May 29, oil prices were falling in New York trading while the price of diesel remained at a national average of $4.74 a gallon, unchanged from Tuesday.

Also on Thursday, Indonesia’s energy minister, Purnomo Yusgiantoro, was scheduled to sign a decree withdrawing his country from OPEC, according to media reports. Indonesia was the only Southeast Asian country in OPEC. The country will save about $3.1 million in annual membership fees, but that isn’t the primary reason for its withdrawal.

Bloomberg reported that aging oil fields and declining production have combined with increasing demand to tip Indonesia’s oil import-export equation to the import side. The nation, a member since 1962, has been considering leaving the body for the past three years.