Oil's Murky Math

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Outside the OECD, where the growth is, countries either don't want to divulge data for strategic reasons, or haven't yet developed the systems to collect and compile the necessary numbers. The Joint Oil Data Initiative, an organization launched jointly by producing and consuming nations in 2002, is supposed to improve matters. But the group acknowledges on its Web site that "the database is still far from perfection."

China, which has grown into the world's second-biggest oil consumer after the U.S., stands out as a particular problem. Just ask Eduardo Lopez, who tries to dope out the China market as the senior demand analyst for the Paris-based International Energy Agency, an affiliate of the OECD. He says China does not report demand, leaving him and others to figure it out from data on production, trade, and inventories. What's more, he says, "there are thousands of so-called teapot refineries all over China" that are technically illegal and therefore left out of China's official statistics.

Making his job even more trying, China appears to be creating a strategic stockpile of oil, but has never acknowledged it, Lopez says. If Lopez and others are underestimating how much oil China is squirreling away, then they're inadvertently overestimating true global consumption, and vice versa if they've overestimated China's stockpiling.

Speculation, Too

Many other countries aren't much better. Lopez says Russia produces "awful data" and demand statistics are patchy in countries like India and Indonesia. On the supply side, OPEC nations don't report their output reliably, sometimes because they don't want to officially admit they're producing above OPEC's quota. That leaves the agencies relying on unofficial "tanker trackers" like Lloyds Maritime Information Services and Petro-Logistics SA, a tiny company that operates upstairs from a grocery store in Geneva, Switzerland. OPEC members also jealously guard critical data about when new fields will begin production and how quickly existing fields are declining, says Matt Cline, an economist for the U.S. government's Energy Information Administration in Washington.

What makes good information so important in the oil market is that both the supply and the demand for oil are extremely inflexible, especially in the short term. That means even a small, unanticipated shortfall in output—from, say, strife in Nigeria—or a bigger-than-expected rise in consumption can send prices through the roof. On the other hand, prices can plummet if demand growth drops because of an economic slowdown or production jumps because some delayed project finally comes on line.

One indication of uncertainty is the extreme range of bets being made in the oil options market. On May 13, bulls were willing to pay around $1.40 per barrel for a "call" option that will pay off if oil goes over $200 a barrel by next February. Bears, meanwhile, were paying about the same amount for a "put" option that will be in the money if oil goes below $84 by then. Larry Chorn, chief economist of Platts, the McGraw-Hill Companies' (MHP) energy information unit, says the actual costs incurred in producing the most expensive oil is only around $70 or $80 a barrel, meaning that about $50 of the current price represents "the market's risk premium plus speculation."

In other words, there's a big slab of unknown built into the price of oil. Lots of people will confidently predict where prices are headed next, but most of them, including the bulls, have been wrong more than once. Truth is, the world is almost as starved for information as it is thirsty for oil.

Coy is BusinessWeek's Economics editor.