Supply V. Demand: False Perceptions That Impact Crude Oil Pricing

Crude oil, being the leading provider of energy on this planet, is closely monitored, forecasted and heavily traded in the world market. The International Energy Agency (IEA) is one of the noted agencies in charge of accounting for current supply and estimating oil future demand. As Sohbet Karbuz reports in his article, Confessions of a Statistician, the accounting of these fundamentals is complex, requires significant guess work and be subject to fraud and misreported information. This makes the ability to accurately estimate the overall demand difficult to quantify in advance. Karbuz explains that the price of oil can be influenced by inaccurate speculation. Is the demand for energy or oil outpacing the available supply? Errors and flaws in the auditing procedures of the IEA and other agencies with similar responsibilities, has had a significant effect on the perceived supply and demand of oil and thereby impacting the price per barrel on the world market.

Basic economics state that a change in the supply of a product or service can drive the cost up or down. The more of availability of a product or service generally means there is greater competition to sell these products. However, if the demand increases even as the supply increases, the net costs of the product may increase as well. In other words, even as supply increases, the demand outpaces the supply and thereby increasing the cost to the consumer. This is the scenario that oil markets must consider when buying and selling crude oil.

As more nations move into an industrialized economy, the world demand for oil increases. Other factors which can impact demand are colder than normal seasons, war, industrial growth spurts, and the increase in leisure time and summer travel. The total supply of oil is a comprised of the number of barrels oil producing countries can provide plus the available stocks sitting in storage either on land or at sea in transit. There just as many variables which could affect the world’s supply. These include but are not limited to accurate account of the available stockpiles in storage, geopolitical tensions, foreign exchange markets, production disruptions due to natural disasters and even the weather. It is these elements that the IEA must accurately account for when determining current and future supply and demand forecasts (Karbuz, 2006).

One prime example of accounting errors in the IEA came a 1999 Oil Market Report. The report determined that there was a net shortage of oil to meet the expected demand. In effect the report suggested that there were millions of barrels of oil missing from the world market.

“The Oil Market Report of the IEA was blamed for the price panics of 1999. The report went under attack when it showed 1.9 Mb/d stock built and miscellaneous to balance for the year 1998 in its Annual Statistical Supplement - the perceived existence of ‘missing barrels” (Karbuz, 2006)

Investigation into the report had many third party auditors questioning the accuracy of the statistics. First, the auditors believed that there was an over estimation of the production estimates for the previous months and years. Second, they questioned the shortage was