Oil Production versus Price

Data: Courtesy of U.S. Energy Information Center

For the oil price to be stable, it is essential that supply and demand for oil remain roughly in equilibrium. In the past, OPEC has controlled sufficient supplies of oil to allow it to manage the oil price to achieve the economic interests of its key members. The more recent increase in oil production from Russia and the U.S. has reduced OPEC’s market share to a point where OPEC now represents only about 35% of global production, compared to approximately 70% in the 1970’s.

As can be seen in the chart above, the supply and demand curve has been reasonably stable over the past two years, except for the disruption caused by the closure of many economies for COVID 19 in the first quarter of 2020. More recently, demand has slightly exceeded supply but that is expected to reverse as supply increases into 2022.

The result of the recent surge in demand over supply, has been an increase in the oil price from the mid $50/bbl. range in the first quarter of this year, to over $70/bbl. West Texas Intermediate (WTI), the U.S. benchmark measure for the oil price, hit $80 per barrel this month. The upward pressure on oil prices is likely to continue until equilibrium is restored. As OPEC continues to have productive capacity shut-in, the current higher oil prices will almost certainly bring this supply to market. The expected increase in production from OPEC countries should help reestablish balance. The higher price will also incent U.S. frackers to increase supply. Together with other producers, this is expected to bring the supply/demand situation back into equilibrium and the oil price will likely settle back into the $60/bbl. to $70/bbl. range.

As higher energy prices are a significant contributor to inflation, the eventual return of balance in energy markets should soon help suppress the more fervent expectations of rampant inflation or stagflation.

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