Demand, not speculation, is driving oil prices, agency says

Jul 1, 2008, 12:02 GMT

Paris - A growing demand for petroleum products by developing nations is the main factor behind the soaring cost of crude oil, the International Energy Agency (IEA) said in its Medium- Term Oil Market Report, issued Tuesday in Paris.

'We believe the primary driver of current high oil prices is strong demand growth in a number of highly populous countries, relative to the limited supply growth seen over the past few years,' the IEA said.

'If supply is constrained and demand is increasing, prices have to rise.'

As for the theory that financial speculators were behind rising oil costs, the IEA said, 'There is little evidence that large investment flows into the futures market are causing an imbalance between supply and demand, and are therefore contributing to high oil prices.'

Speculation can contribute to temporary price distortions, the Paris-based agency said, but there was no evidence to support the suggestion that it had caused oil prices to double over the past year.

Developing economies, such as those of China and India, were responsible for the surge in oil demand 'with 90 per cent of the growth spread between Asia, South America and the Middle East, reflecting the improving wealth and accelerating energy use in several high-population countries,' the IEA said.

The agency also noted that, as a result, oil prices looked like remaining high or climbing higher in the medium term.

'Global oil product demand is expected to grow by 1 per cent per year on average over the next five years, rising from 86.9 mbpd (million barrels per day) in 2008 to 94.1 mbpd in 2013,' the agency said.

'The pattern of growth is diametrically opposed to the trends in supply.'

In addition, supply will likely tail off shortly after 2010, just as global economic growth is forecast to pick up again, the IEA said.