Opinion: Here’s what will send oil prices back up again
05 March 2015
by Martin Tillier of Oilprice.com
Oil’s rapid decline since August of last year has been dramatic. To listen to some commentators you would also think it is unprecedented and irreversible. Those claiming that oil will continue to fall from here and remain low for evermore, however, are flying in the face of both history and common sense. The question we should be asking ourselves is not if oil prices will recover, but when they will.
From June of 2014 until now, the price of a barrel of West Texas Intermediate (WTI) crude oil has fallen approximately 57 percent. As the chart below shows, there have been drops of a similar percentage five times in the last 30 years. The rate of recovery has been different each time, but recovery has come. In addition, since 1999 the chart shows a consistent pattern of higher lows. In other words, oil is a volatile market, but prices are in a long term upward trend.
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| Figure 1: Inflation adjusted WTI since Jan 1985. Chart from Macrotrends.net |
Charts can only tell us so much, however. Even a long term trend can be broken if fundamental conditions change, and that, say those predicting that oil will never recover, is what has happened. There is no doubt that supply has increased. Hydraulic fracturing, or “fracking” technology has unlocked reserves of oil and natural gas previously thought of as unrecoverable. Supply alone, however, doesn’t determine price. We must also consider demand, and that has been increasing too.
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According to this chart (above) from the US Energy Information Agency (EIA), demand has been increasing along with supply since 2010. Admittedly there has been a production surplus since the beginning of 2014 but that is nothing new and is forecast to be back in balance by the end of this year. The increased production, then, is in response to increasing demand; hardly a recipe for a protracted period of low prices. The supply situation makes it unlikely that the recovery will be rapid, but a gradual move up over the next few years is the only logical conclusion.
The low price brigade cites another factor in making their predictions, the rise of alternative energy sources. There is no doubt that there have been significant advances in that area, particularly in wind and solar power, but, according to the EIA, renewables currently account for 11 percent of the world’s energy consumption. That number will undoubtedly grow in the coming years, but, whether we like it or not, oil consumption still looks set to grow over the next few years. Fracking can fill some of that demand, but the simple fact remains that oil is still used extensively, and we are using more of it every year. The price simply cannot stay low for an extended period, but while it does it will delay research and infrastructure spending on renewables, slowing the pace of their adoption.
Any increase in price would be hastened by a decision from OPEC and Saudi Arabia in particular, to reduce production. Right now they say that that is not on the cards, and why would they cut back? Their attitude seems to be that the oversupply was not their doing, and as their oil is cheap to produce, they can sit back and watch those who did cause the problem, most notably the upstart American companies, suffer. OPEC has always played the long game and will undoubtedly do so again, but once the lesson has been taught the pressure to restrict supply somewhat will mount. Again it may take time, but it will probably come.
History tells us that the price of oil will bounce back, but so does basic logic. Oil is a finite resource that we are using at an increasing rate, and as long as that situation remains, the laws of supply and demand mean that the price must recover. That is a good thing. As long as oil remains cheap there is little incentive to invest in the alternatives that we will inevitably need someday, nor to reduce our consumption of what is essentially a dirty fuel source. So, enjoy low fuel prices while you can, but don’t expect them to last forever.
Source: http://oilprice.com/Energy/Oil-Prices/Heres-What-Will-Send-Oil-Prices-Back-Up-Again.html
History tells us that the price of oil will bounce back. If history was an accurate prediction of the market then all things replaced by technology would bounce back. There are many factors pushing down the price of oil. New ways of getting oil domestically which has so much oil in the US that according to sources they are running out of places to store it. When more efficient cars, they said years ago, reached 40mpg we would could exist off of local oil production. That was way before oil production from fracking. And as we all know more cars each year are exceeding the 40 mpg number. Because of the HIGH cost of gas people changed their life styles as well to not use as much gas. All these factors are going to keep oil cheap for the near future. In two years time if the BOLT comes out at a reasonable price point, or even a hydrogen car comes out, oil will be hit yet again. So oil may even fall further as technology and innovation rages on.
Posted by: D | 05 March 2015 at 07:18 AM
The "fundamental change" over looked in this analysis is efficiency improvements; which have become truly amazing. In the auto showroom in Europe there are many models with 70 to 90 mpg fuel efficiency. The other factor is wide scale substitution of hydrocarbon alternatives to crude oil; notably natural gas. Efficiency improvements combined with the rise of alternative energy sources have led to year over year consumption decrease of crude in the US for about 2 or 3 years. China appears to be adopting the electric car en masse with the electricity to be produced by solar, wind, and coal-no oil.
Posted by: nordic | 05 March 2015 at 09:00 AM
Prices will increase due to demand in the developing world.
Europe may have economical vehicles and America may have fracking, but the developing world won't be able to afford the most economical cars and so will just import as much oil as they can get.
The joker in the pack is pollution and whether this might cause a switch to electric cars. However, it won't help much in China as they generate so much electricity from coal.
And there is so much pent up demand in China outside the cities that even if the Chinese cities go to electric cars, the rural areas will stick with ICEs and keep demand up.
Posted by: mahonj | 05 March 2015 at 11:25 AM
@nordic
"The "fundamental change" over looked in this analysis is efficiency improvements"
huh, no. Efficiency improvements do not lead to consumption reduction but exactly to the opposite.
It's called Jevon's paradox, which applies amongst other things to energy.
Posted by: Toto | 07 March 2015 at 03:38 AM
Thanks for bringing up Stanley Jevons, so misunderstood by most conservationists these days. The cycle is driven by high prices leading to increased efficiency. Then that leads to more (not less) consumption, driving up prices and here we go again.
Bottom line is that not much will change until we get some international support (agreement would be too much to ask for) for carbon taxes, which needs the thorny issue of carbon content of imports to be addressed effectively.
Posted by: CJY | 07 March 2015 at 09:02 AM
Not another one of these Oil industry supporters warning those of us, whose cost of living is always so negatively impacted by the cost of fuel, that we can expect all that to revert to normal before long. They're always so smug-seeming about their predictions too. CJY is dead right, some international agreement on Carbon Taxes is called for, and ASAP.
Posted by: Peterww | 09 March 2015 at 05:02 AM
Unfortunately as a Chartist, the author reads his charts wrong.
There are two recent 'mountains' indicating gentle and similar patterns of price cresting and falls. A third pattern is likely to ensue that looks very similar. The first two patterns indicate a widening of highs and lows, to judge from the baseline of lows v. highs. This indicates price instability and a possible crash, not a breakout. In addition, the lows are fairly flat, while the highs are plateauing.
Conclusion: We are actually looking at $80 bbl over the next 3 years or more, with a high probability of an actual crash within that period of time despite the best efforts of arbitrageurs.
I would watch very carefully how the energy markets relate to those of currencies, treasuries, and commodities. A recession is not out of line even in the next 2 years.
Posted by: kalendjay | 16 March 2015 at 03:37 PM
The world of linear projections is correct... until it isn't. Early PHEV designs like the Volt showed that the US could use no OIL at all for Transportation, reserving it for higer uses like plastics, pharamaceuticals etc.
To do this, it would require most Transport to be PHEVs. The primitive, first generation PHEVs were only a tad too expensive, but newer generations with better components and better batteries are driving the price point toward equality, and its almost here now.
The Volt was a technological Tour de Force, illustrating that th USA could exist solely on the present volume of bio-fuel which is principally gasahol, a primitive first generation bio-fuel. It showed that we did not have to return to the caves and Western civilization can continue and will prosper.
The usage of OIL will plummet over the next decade, keeping prices low even as technology advance is increasing supply.
Increasingly it appears that Dr. Gold and the Russian petro-geologists are correct. Petroleum is not principally a fossil fuel, but is an endemic and Abiotic product of planetary geology, helping to explain the presence of vast quantities on Solar planets other than Earth, that harbor no life.
To all intents and purposes, pollution is the last generation's problem. ICEs now are as clean as BEVs. All it took was a 45-50 years of massive Research and Development. But it is done now, and the Third World will benefit for the First World showing how to do it and do it always cheaper. Indeed modern high efficient ICE designs can't afford to waste fuel creating pollution; and these clean designs will predominate even in the Third World.
Meanwhile progress continues on the real, genuine, Solar Power developments at Cadarache France. There the First semi-commercial Fusion Power plant construction is continuing, and more than half completed.
Posted by: D | 21 March 2015 at 08:20 PM