Recent jump in energy prices will not be sustained

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recent jump in energy prices will not be sustained

Insight and Analysis of Construction Industry Trends

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Jim Haughey

RCD Chief Economist

Oct 26, 2009

Energy inventories remain very high in spite of unexpectedly low accumulation in the last few weeks. This includes crude oil, refined oil products, natural gas and coal. Shut in OPEC production capacity is over 2 million barrels per day. Non-OPEC production is now rising, especially in the former Soviet republics, Brazil and even in the US. World oil consumption will be rising again by yearend after more than a year of steep decline but will remain in the depressed range over the next year. Assuming normal weather, there is little risk of a sustained spike in energy prices or a shortage that requires expediting.

But the situation changes beyond a year. An expanding world economy will gradually absorb both the inventory surplus and the reserve production capacity as soon as late 2011. This will make sustained energy price spikes again possible, as happened a few years ago at the peak of the world wide economic expansion. Until then, surges in energy prices should be temporary as frequently occurs in a volatile commodity market.

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