Think “supply” and then “glut” and we are supposed to understand why the price of oil has plunged. But, like all statistics, it might not be that simple.
Where are we going? To 800,000 barrels of missing oil each day.
The Missing Supply
Oil markets look to the International Energy Agency (IEA) for supply and demand data. On the supply side, the IEA depends on how much the 34 OECD (mostly developed economies) nations say they produce. However, for the rest of the world it is a different story. Thinking of OPEC (the Organization of Petroleum Exporting Countries), China and other developing nations, the IEA has no reliable way to collect its data.
So, although the IEA uses its best judgement to calculate the oil supply, they have to estimate. And those estimates include oil that they cannot find.
These are their numbers for 2015:
- 96 million barrels = daily world production
- 1.9 million barrels = surplus (no demand for that amount)
- 1.1 million barrels = surplus that is in 770,000 barrels of onshore storage and 300,000 barrels in pipelines and ships.
- 800,000 missing barrels a day = 1.9 million barrels surplus minus 1.1 million barrels we can identify.
Where are those 800,000 barrels??
Some analysts think they might not exist.
Our Bottom Line: Supply and Demand
Referring to the oil supply glut, the director of the Bureau of Economic Geology at the University of Texas, Austin, said, “Sheikhs and shale caused this, They are both producing more oil. That is the fundamental driver.”
To show that a “sheikhs and shale” supply glut has depressed the price of oil, we just need to shift our supply curve to the right. (IEA estimates indicate also that demand has shifted to the left but that is a story we will save for another day.):
Our lower equilibrium price (above) corresponds to what has really happened:
But what if that glut is actually less than we think???
