The recent run-up in oil prices to $84 barrel is being blamed on an increase in Chinese oil imports. In December, Chinese imports of crude oil rose to 20 million tonnes, or the equivalent of 4.7 million barrels a day. Recent purchases of African crude have been especially high, with purchases by Asian markets reaching 1.9 million barrels a day in early January, up from 1.58 million barrels a day in December.

Increases in Chinese oil demand shouldn't be too surprising, given how rapidly personal auto sales have been increasing. The Chinese purchased 13.6 million cars and light trucks last year, compared to 10.4 million for the USA--they are now the world's #1 auto market. We should not be surprised if this demand continues to grow and exert upward pressure on prices.

The increase in Chinese purchases has been clear for some time, as has their agreement with Saudi Arabia to increase purchase levels. As a result the world is rapidly returning to the production levels that were achieved before the financial recession.

Figure 1 Oil supply - demand - price chart, Jan. 2002 to Nov. 2009. See text for explanation. Click to enlarge and open in separate browser window.

In February this year, global oil production / demand hit an interim low of 84.0 million barrels per day (mmbpd) and the average price of West Texas Intermediate (WTI) that month was $39.16 / bbl. Since then, demand has recovered to 85.9 mmbpd in November and the average price was $78.08 / bbl. A rise in demand of 2.3% has led to an oil price rise of 99.4%.

Full explanation of the chart and a discussion of what 2010 might have in store is below the fold.

Standard economic principles have demonstrated that price is a function of supply and demand. The same is true for the recent  oil prices fluctuations we have witnessed over the last few years, namely the equilibrium between supply and demand. However, the following conundrum has not been resolved: are oil prices high due to greater demand or too little supply? This ambiguity allows for vastly divergent interpretations of the same data and depending on the agenda you are trying to push, will easily support either. 

Lately, the concept of "Peak demand" has been suggested in a multitude of recent articles that unfortunately do not qualify their analysis of the status quo. Some suggest that we are willing to and capable of moving away from oil. Are we?

A few years ago, some analysts lectured us about the effect of oil prices on the creation of new oil supply. Now that this argument has clearly failed, they have decided over night that we don't need oil anymore. In this debate, it is important to distinguish between demand (what you want or need) and consumption (what you get based on your ability to buy). Following this logic, consumption is "satisfied demand". Conversly, we can define the "unsatisfied demand" or "excess demand" that has been suppressed. Below the fold, I'll show that the key driver behind the price increase since 2002 has been excess demand combined with unresponsive supply.

This is a guest post by Chris Cook. Chris is Former Director of the International Petroleum Exchange, and is now a Strategic Market Consultant and commentator.

Clearly manipulation has been going on in the global market in oil – there's nothing new about that – it's what intermediaries who transact for profit do and have always done. Indeed, some market wags say that trading could be defined as “acceptable market manipulation”. But until the last few years what consenting adults were doing among themselves in the oil market didn't really affect the man in the street.

But things have changed. We have now reached the culmination of a process of financialisation of the oil market to a degree where the market has become entirely sociopathic. It now operates to the detriment of consumers and producers alike and for the benefit of the intermediaries who control the market.

How did we get here? Who's doing it? How are they doing it? And what can be done about it?