According to a recent report, Saudi Arabia plans to raise its oil production by 500,000 barrels a day beginning in July. This is on top of last month’s 300,000 barrel a day increase. If the July production increase occurs, this will put Saudi Arabia at an incredible production rate of 10 million barrels of oil per day. With oil prices up 40% in 2008, and global aggregate demand increasing at record levels, it is clear that oil prices are heading in one direction: up. Saudi Arabia, the world’s largest oil producer is currently working furiously on an ambitious expansion program of their oil industry which, according to estimates, will raise their daily output levels to 12.5 million barrels.
Recent price declines reflect a slight, and temporary, decline in global oil demand. And in each price decrease, several analysts are quick to call the end of the oil “bubble.” Unfortunately, the globe is not experiencing a commodity bubble, but rather, global demand is outpacing supply. And much to all of our dismay, the current global demand trend is long-term. High oil prices are due to market fundamentals. It is the height of economic ignorance at this stage to blame them on a “greedy” oil industry or speculative bubbles. Get used to high oil and commodity prices. There will be dips in prices. But the long-term trend is up.
