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By Robert Rapier on Apr 22, 2008 with no responses

Why Oil Prices Aren’t Going Down

I kept expecting a pull-back in prices at $90/bbl, then $100, then just watched as prices kept climbing to today’s level of $118. While I won’t be surprised if we do see a short-term correction, in the longer-term I suspect we will be going much higher. Why? Here is part of the reason:

Emerging Market Oil Use Exceeds U.S. as Prices Rise

April 21 (Bloomberg) — Traffic jams in Beijing and humming air conditioners in Dubai are replacing U.S. highways and suburbs as the driver of global oil prices.

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency in Paris. U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA says.

“The U.S. recession will be a footnote as far as the oil market is concerned,” says Jeffrey Rubin, chief economist at CIBC World Markets Inc. in Toronto, who has correctly forecast higher oil prices since 2000. “Supply isn’t growing and demand is growing robustly in the developing world.”

“The predominant market view is that the emerging economies will overcompensate for any possible demand slump in OECD countries,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt. “I couldn’t rule out that oil may go to $150.”

I see no relief in sight. Oil producing countries are growing their consumption at a very rapid clip. With oil prices where they are, money is flowing into the economies of oil exporters. As this happens, people are more prosperous. As people are more prosperous, they use more energy.

While I have sharply disagreed with oil geologist Jeffrey Brown (aka Westexas at The Oil Drum) over his analysis of Saudia Arabia, I think he had an important insight with his Export Land Model (ELM). This model essentially says that prosperous oil-producing countries will cannibalize their own production as the money flows in, leading to falling exports. Of course you can’t extrapolate this down to zero exports, or the money stops flowing in. But rising prices can compensate for falling exports to a large degree.