When might oil prices recover? An important question – and not just for oil producers. Higher energy prices could choke off any global economic recovery. That, indeed, is the main reason why Opec decided this weekend against trying to force prices up by cutting back output. Nevertheless, many in the industry, including Opec, still believe that $75 a barrel remains oil’s “correct” long-run price, compared with less than $45 now. That could be wishful thinking.This year the world is forecast to consume some 85m barrels of oil a day – about 1m bpd less than last year. But in the 1979 oil price shock, demand shrank by 2.5m bpd in the first year, and then fell for another two years. That alone suggests the effects of this recession are still to play out. Meanwhile, on the supply side, spare production capacity is rising. Saudi Arabia is adding about 2m bpd, Brazil another 500,000bpd. Refining capacity is also on the up in China and the Middle East. This reduces the probability of supply bottlenecks, and of price spikes. At the very least, it removes a risk premium from the market – another reason for prices to stay low.

EDITOR’S CHOICE
Opec decides against further supply cuts – Mar-15Opec expects demand for its oil to shrink – Mar-13In depth: Oil – Feb-24IEA cuts non-Opec oil supply forecast – Mar-13Opec keeps output plans opaque – Mar-12Oil-rich nations ‘seek majors’ expertise’ – Mar-10Furthermore, the shape of demand is changing. Oil is used mostly for transport, with almost a third accounted for by intra-urban commuting. Yet the traditional global car industry looks finished. Gas-guzzling is out. Credit Suisse reckons efficiency standards enacted by the Bush administration will shrink US gasoline use by 2 per cent a year. The shift to hybrid cars will remove a further chunk of demand. Even China wants to reduce its energy intensity by 20 per cent by 2010. Combine that with the new US standards, and world demand would fall by about 6m bpd. That is a massive amount, equivalent to three quarters of Saudi Arabian output. Oil prices could remain lower for longer than many seem to think.