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Oil markets face production shortfall in second half

A gas pump is seen hanging from the ceiling at a petrol station in Seoul June 27, 2011.

Jo Yong-Hak/Reuters

The International Energy Agency may not have a solution but no one can accuse them of no longer understanding the gravity of the problem.

In their June report, the IEA warned that unless OPEC could increase production by at least 1.5 million barrels a day, world oil demand is going to surpass available supply during the second half of the year.

It means if there is not enough supply to match the 89 million barrels of oil the global economy is expected to burn every day, world oil prices have only one direction to go.

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With no obvious end in sight to the Libyan conflict, and sectarian violence against oil fields and refineries suddenly on the rise in Iraq ahead of the scheduled U.S. troop withdrawal, the prospects are not promising for OPEC to increase supplies. This is even more evident given the region's largest producer, Saudi Arabia, has little more to offer other than unwanted sour, heavy oil to add to the global supply mix.

At the same time, emerging power shortages sweeping across Asia will boost oil demand even when most major Asian economies are slowing, including the continent's largest two economies, China and Japan. While an economic slowdown normally tames oil demand, both countries now face acute power shortages that will compel them to burn more diesel fuel to compensate for reductions in other forms of power generation.

In China, widespread drought earlier in the year has constrained hydroelectric power, while nearly two-thirds of Japan's nuclear power plants are currently, and for the foreseeable future, off-line, boosting that country's appetite for diesel by hundreds of thousands of barrels a day.

With Brent crude prices having crossed into triple-digit territory since the beginning of the year, fuel and power shortages are popping up around the world with increasing frequency. And they are beginning to exact a heavy economic toll.

In Pakistan, power shortages have ground the economy to a literal halt. Meanwhile, Japanese companies have already been ordered to cut back their power consumption by 15 per cent this summer. And China is bracing itself for the worst power shortages since 2004, which triggered widespread economic disruption.

With the prospect of even a tighter oil market over the balance of the year, the IEA is warning motorists in member countries to get ready to pay more at the pumps. And the IEA has already suggested it might release additional oil from its strategic reserves to moderate further price increases.

But considering the recent release of 60 million barrels from member countries' strategic stockpiles could barely hold down Brent world oil prices for more than a week, the IEA may have to come up with something a little more substantial the next time than the fuel equivalent for another 16 hours of world oil demand .

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About the Author
Jeff Rubin

In his follow-up to his award-winning and number one best-selling first book Why Your World  Is About To Get A Whole Lot Smaller, former CIBC World Markets chief economist Jeff Rubin asks a fundamental question: “What will it be like to live in a world without growth?”The end of cheap oil means the end of the easy answers to renewing prosperity. More

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