Oil Analysis

This morning the US Secretary of Energy, Sam Bodman, offered his analysis of today’s high oil prices. Short version: don’t expect anything to change soon.

WASHINGTON (Reuters) – U.S. Energy Secretary Sam Bodman said Wednesday it will take years to close the gap between increasing world oil consumption and the ability of oil producers to meet that demand.

“I think we’re going to be measuring this in years, not in months,” he said in a speech to the National Petroleum Council.

Bodman pointed out that before 2004, world oil demand grew annually at a rate of about 1 million barrels per day. But last year, it rose by about 2.7 million bpd.

“Worldwide, the supply of oil is having considerable difficulty keeping pace with growing demand,” the energy secretary said, adding that a large part of the increase in oil demand is due to strong economic growth in countries like China and India.

I can’t say that I disagree with him, except in one crucial respect: his comments seem to imply that he thinks oil prices will fall in coming years as supply catches up with demand, while I think it much more likely that in five years oil prices will be higher than they are today.