The Marketplace Report: Behind the Oil Price Spike

Alex Chadwick talks to John Dimsdale of Marketplace about what's behind the recent spike in oil prices, which reached a record high of $65 a barrel in trading on Wednesday. One central reason: Non-OPEC countries are falling short in the amount of oil they're expected to pump.

ALEX CHADWICK, host:

Back now with DAY TO DAY. I'm Alex Chadwick.

Some good news and some bad news today for the future of oil prices. First the bad. The price of a barrel of oil reached historic highs today, above $65 a barrel on the New York Mercantile Exchange. That could change before the markets close, but clearly this means the cost of filling up at the corner gas station will not be coming down anytime soon. And the good news about oil--for that we go to "Marketplace's" John Dimsdale in Washington.

John, what have you got?

JOHN DIMSDALE reporting:

Well, the International Energy Agency, which is the Paris-based monitor of world energy markets, released its monthly forecast of oil demand today, and the IEA is predicting a drop in demand for the rest of the year. Now more accurately that means that oil demand will be rising less than expected for the year as a whole. Earlier estimates had the world's use of oil increasing as much as 150,000 barrels a day more than the IEA is now projecting. This is largely due to an expected drop in demand in China. There are signs of weakening economic growth there.

And there was also some other good news, at least a little bit. According to the IEA world stockpiles of oil and gasoline rose during the first half of this year, despite the high prices. That's not the case in the US where gasoline inventories have been tightening recently. But worldwide, there's been a small increase in stockpiles, and that should ease some of the fears about tight supplies.

CHADWICK: I hear stories like this, John. I always think what about the law of supply and demand. Why don't prices actually go down?

DIMSDALE: Well, basically crude oil producers are stretched to the limit. In fact, the IEA also reported today that non-OPEC nations--and that's like Russia, Norway and the United States--aren't delivering as much oil as they had promised. That's contributing to the tight supplies. So the IEA is lowering its projected output from non-OPEC countries for the rest of the year. They expect productions levels to improve in 2006, although there are plenty of analysts that are skeptical of that. There's just really little extra capacity in the system. In fact, I heard that there's only one country with any ability to ramp up oil production, and that's Saudi Arabia.

CHADWICK: Well, what kind of effect do you see--these persistent high oil prices--on the economy? Not good, I suppose.

DIMSDALE: No, although so far American consumers seem to be taking them in stride. The government's retail sales report was out this morning, and it showed a nearly 2 percent increase. That's not quite as much as expected, but it's healthy growth. The question is how long these shortages last. New refinery capacity is in the pipeline. It's going to take a couple years. High oil prices do make alternative fuels and conservation a higher priority, so it's a question of whether the laws of supply and demand can take their course.

Coming up later today on "Marketplace," a look at why American museums are having a hard time recruiting new leaders.

CHADWICK: Thank you, John. John Dimsdale from public radio's daily business show, "Marketplace," produced by American Public Media.

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