Kate Mackenzie Demand rebound: Everyone, calm down

Ed Morse, managing director of LCM Commodities, is one of the few oil market pundits saying oil prices will not shoot up at any sign of demand.

Writing in the upcoming September/October issue of Foreign Affairs, he cites several reasons, according to Reuters:

One is demand suppression, as a result of those high prices last year:

“One extraordinary lesson of the last 60 years is that after every spike in oil prices, demand growth flattens considerably.”

And demand recovery will be slow:

As consumers scale back consumption, global oil demand will probably grow 1 to 1.3 percent a year, versus a growth rate of 1.5 to 1.8 percent last decade, wrote Morse, a former U.S. State Department energy official.

Another reason is Saudi Arabia’s efforts to increase its oil production capacity – after upgrades to its Nuayyim, Shaybah and Khurais fields, it can now theoretically produce record levels of 12m barrels per day.

Still on Saudi Arabia, Morse believes the swing supplier of Opec doesn’t want prices going so high they threaten a world economic recovery – that wouldn’t help anyone:

“Saudi Arabia appears to want to keep oil prices between $40 and $75 a barrel in order to promote global economic growth and limit the revenues of rival producers while nonetheless adequately funding its own budget.”

As Reuters notes, this is in sharp contrast to the likes of Goldman Sachs, which predicts underinvestment in production and a growing population will see a return to 2008‘s commodities price squeeze.

Goldman: Commodity 2008 redux coming (FT Alphaville, 08/06/09)
What is happening to Saudi oil production as Khurais comes onstream? (FT Energy Source, 11/06/09)