10 Jul 2008

The logic of leaving oil in the ground

Daniel Gros

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This Commentary by CEPS Director Daniel Gros asks what is behind the ever-increasing price of crude oil? He argues that the supply of oil today will increase only if tomorrow’s price is low relative to the price today. This implies that China influences oil prices today not so much because (as is often asserted) Chinese demand is high today – China currently accounts for less than 10% of global consumption of crude – but because demand in China is projected to increase so much in the future, fuelling expectations of higher prices and thus leading producers to lower their rate of extraction today.