Oil Prices, Global GDP, and Net Oil Exports

The chart above shows oil prices, net oil exports (data here) and world GDP, quarterly from 2002:Q1 to 2008:QII. The data for OECD world GDP and oil prices are from Global Financial Data (subscription required). Oil prices are on the right scale in $/bbl., and world GDP and net oil exports are on the left scale, both expressed as an index equal to 100 in 2002:QI.

The graph above was inspired by the CFTC report and graph of world GDP and oil production, featured on this CD post. I added oil prices and used net oil exports (from Net Oil Exports) instead of oil production.

Bottom Line: The graph shows that world GDP, net oil exports and oil prices were all increasing at about the same rate from 2002 to early 2006. Starting in about mid-2006, the three series started to diverge as world GDP continued to increase, but net oil exports started to decline. It was at that point of departure in 2006 between global output [GDP] and the global supply of oil that oil prices started to rise significantly (see shaded area).

Although the decline of the dollar and the increase in speculative activity might have played relatively minor roles in the run-up of oil prices, the main contributing factor to high oil prices over the last two years appears to be the supply-demand imbalance that started in mid-2006. With the significant increase in world output and the accompanying increase world demand for oil and energy interacting with a flat and/or falling world supply of oil, there was only one direction for oil prices to go. Up. Nothing mysterious, nothing nefarious, and nothing to do with speculators. Supply and demand. Period. In other words, it's Occam's razor.

Comments

[Nawar Alsaadi:]

Your observation Mark is right on target, I believe many analysts focus on oil production rather then oil exports, while it is oil available for export that determine the oil price in the international markets and not oil production.

Often we see a decline in oil exports after a country production peaks, such as in the UK, Mexico and Norway, however a more troubling trend is the decrease of exports in countries with growing production such as Oman, due to high internal consumption, Oman oil production grew by 5.1% in the first five months of 2008, however oil exports dipped by 5.1% due to the economy growing at a fast 12.9% due to high oil prices:

www.tradearabia.com/ne...

A more significant player which experienced a dip in oil exports of late is Russia, Russia now is experiencing a flat to slightly decreasing oil production for the first time in 10 years, Russia has played a key role in supplying the world markets in the last few years, however flat to decreasing production will have a major impact on Russia’s oil exports, as internal consumption roars ahead, an example of that, is Russia becoming Europe biggest car market (ahead of Germany) for the first time ever, due to 40%+ car sales growth in 2008.

Regards,
Nawar

2008 Jul 28 05:26 AM

[Chuck Okie:]

Thanks for the net exports perspective; fits within my qualitative understandings.

Conceptually speaking, if annual production declines worldwide were 4%, annual world world production needs to increase ~ 3.4 MMBOPD. Some of the largest fields are declining more than that and the Saudi's recent increases ~ = the increase in their internal comsumption over the last year. New production is coming online but has been and will be hampered by delays, all while production declines.

My predictions aren't any better than anyone else's, even though I have good domestic and international experience / credentials, both directly and indirectly for all of my life. But in actions vs words, I have a larger percentage of my children's trust in commodities than the WS recommended 5%. But I also balance that out with a heavy cash position, foreign and domestic, and bonds.

2008 Jul 28 11:19 AM

[Loup-Garou:]

An extremely helpful article. The chart is breathtaking.

If you believe that in the oil markets prices are set at

the margins, then higher prices can be anticipated.

2008 Jul 28 02:37 PM

[kebu77:]

Anyone interested in future oil export availability, Google: "export land model" - - exports peak before overall world oil production.

2008 Jul 28 04:09 PM

[LilBob:]

I have a hard time accepting the notion that an increase in world GDP correlates directly to the price of oil, because so much of the increase in value related to increased Economic output is linked to the growth in professional services; especially in the fields of medicine. If we lived in a world where all anyone did was make widgets and try to outdo each other in the manufacture of said widgets, your argument would make sense. It takes roughly the same amount of electricity to power the machines and lights in a small hospital as it does to power a small shopping mall, and yet the value of the Economic Output from that hospital (If we were to measure in $psf) is many times higher.

PhD or not, this sounds like more pro-high oil price garbage to me.

Day-traders should give up on this one. The relative threshold of elasticity for gasoline consumption is in the range of $3.85 USD/gallon of 89 octane unleaded. That's the neighborhood where you'll find the oil companies dealing.

2008 Jul 28 07:58 PM

[oiler1930:]

Speculative booms invariably require some form of cash input. Our cash used to be gold and silver, while today we have fiat money with faith holding it up. When the money supply has a major increase with no offsetting increase in quantity of items of trade, prices are the quotient of money over quantity of goods.

When some folks rant about Arab Oil being the villains, and others say Saudi oil is in fourth of fifth place, with Canada and Mexico being first and second, and Venezuela, Nigeria and Saudi Arabia trailing, the fundamental factor in obtaining imports, for buyers, is to keep transport costs down. Costs on the margin spread to the totality of worldwide production, adjusted for grade of crude, and are pretty much based on landed prices of crude that can be piped to Cushing Oklahoma for delivery against crude contracts. Domestic consumption in producing nations reduces availability for export.

Liquid fuels are ideal for transportation energy, since very little weight is needed to contain the fuel, compared to coal or natural gas. During WW II, German vehicles were fueled with gasified coal or wood in a furnace mounted in the back of the vehicle; our EPA would not permit such a substitute here.

The economics of health care constitute a minefield to discuss. Typical company plans cover the first $2,000,000 net over deductables for the lifetime of employed individuals; I would not care to experience that much misery. Readily available statistics on health care costs are difficult to navigate and I have not taken the time to study same. Adam Smith would be able to make a quantitative assessment of the value added by restoring an individual to good health for the balance of such a one's life; Smith was scornful of the nobility who kept large retinues of servants in totally non-productive status. Trade is necessary to provide what is needed where not domestically available; if trade overall is not reciprocated, some folk have to do without.

Apologies for the parabolic comments.

2008 Jul 28 11:08 PM

[rbblum:]

As the number of net oil exporters diminish how likely will it be to experience an economic energy war (of sorts) and what will the likely significant aspects look like in macro and micro economic considerations.

2008 Jul 28 11:16 PM

[Krakatoa:]

the best article i read today.

2008 Jul 29 12:20 AM

[oiler1930:]

rbblum

Desert Storm responding to the invasion of Kuwait and the current event in Iraq come to mind as economic wars, not to mention German occupation of Roumania and Japanese seizure of Indonesia, both for sources of oil

2008 Jul 29 12:29 AM

[Femme roumaine:]

why was the price rising when production and growth were rising in tandem?

Mar 27 09:51 AM