The Future of the Global Oil Market
By Sarah Emerson, prepared for EPRI, December 2007
SUMMARY: The price of crude oil has doubled in 2007 and is very close to $100 per barrel. Net exporting countries have benefited from the windfall as they have accumulated "petrodollars." In the meantime, however, the U.S. dollar has depreciated significantly in 2006 and 2007, so those petrodollars do not buy as much as they did two years ago. Indeed they buy about 25 percent less than they did in 2005.1 Even so, with oil prices as high as $100, the amount of petrodollars flowing into the global economy is enormous. Some estimates put that amount at $4 trillion dollars as of the end of 2007.2 So, the global oil market is resting on the three-legged stool of high oil prices, a weak dollar (in which most oil sales are denominated) and the unprecedented flow of petrodollars into investments around the world. At first glance, the numbers for each leg of the stool are striking: the oil prices are at record levels, the weak dollar is at record levels and the magnitude of the petrodollar investments is tremendous. At second glance, the stool appears to be relatively sturdy. The weak dollar cushions the impact of the high oil price, at least outside of the U.S., the petrodollars provide liquidity in investment which helps grow the global economy and the high oil prices encourage marginally more efficient consumption. In short, the status quo, as shocking as it seems to longtime observers of the oil markets, may be sustainable for some time.