Oil Supplies 'Stretched to the Limit' Threaten Global Economy

Energy

Published: July 12, 2018 6:15 am

Last Updated: January 11, 2020 9:09 pm

The International Energy Agency (IEA) released its new reports on global oil supply and demand. It said that supply will be “stretched to the limit” due to a large extent on geopolitical challenges. The news means there may be another stiff headwind for the global economy.

Among the most significant factors undermining supply is a drop from huge producers Venezuela and Iran. Venezuela has infrastructure and economic problems. Iran faces sanctions that will limit its exports. This drop is due to the withdrawal of the United States from an agreement to curtail Iran’s advance in nuclear technology, which eventually could turn into a military threat. Offsetting this is an apparent increase in production in oil by Saudi Arabia, Russia and other Gulf states. The IEA’s analysts are not sure about the extent to which this will bolster supply.

Maintenance of oil facilities will drop supply as well, particularly from Canada and the North Sea. Oil workers in Norway are on strike.

In sum, the IEA’s management wrote:

Some of these supply issues are likely to be resolved, but the large number of disruptions reminds us of the pressure on global oil supply. This will become an even bigger issue as rising production from Middle East Gulf countries and Russia, welcome though it is, comes at the expense of the world’s spare capacity cushion, which might be stretched to the limit.

All this means that the cost of gasoline, heating oil, commercial gas (mainly used by airlines) and petrochemical prices will rise. While companies may see their bottom lines challenged, it is consumers who could be most badly battered. In the United States, gas prices already have risen to levels last posted four years ago. This, in turn, hits discretionary income, particularly among the lower and middle classes. That punches a hole in gross domestic product. The same factors will hold, more or less, across almost all major economies.

Higher oil prices almost certainly are around the corner, and with them, higher gas prices, which may trigger a global economic slowdown.

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