Cheap Oil?

on December 25, 2014 at 2:00 PM

U.S. Government Releases Over $5 Billion In Aid For Home Heating Bills

Enjoy it while it lasts 

When oil prices went from where ever they were to $100 and above, everybody said oil is expensive. Consumers and oil importers complained when it hit $115 in July 2014. Gradually, however, everyone got used to $100+ oil. In the past couple of months, oil prices have plunged, hitting low $70s in Nov 2014. And now everyone is talking about cheap oil, and speculating about who are the winners and the losers – or how long the party will last.

As reported in The Economist, 25 Oct 2014, it is not the first time oil prices have gyrated with little warning and even less logical explanation – of course analysts never miss the opportunity to explain how and why it happened, usually claiming that they saw it coming.

“In early October (2014) the IMF looked at what might happen to the world economy if conflict in Iraq caused an oil-price shock. Fighters from Islamic State (IS) were pushing into the country’s north and the fund worried about a sharp price rise, of 20% in a year. Global GDP would fall by 0.5-1.5%, it concluded. Equity prices in rich countries would decline by 3-7%, and inflation would be at least half a point higher.”

“Is it still advancing? Russia, the world’s third-biggest producer, is embroiled in Ukraine. Iraq, Syria, Nigeria and Libya, oil producers all, are in turmoil. But the price of Brent crude fell over 25% from $115 a barrel in mid-June (2014) to under $85 in mid-October, before recovering a little

Oil 1

Source: The Economist, 25 Oct 2014 based on data from EIA, Deutsche Bank & Bloomberg

For now, of course, oil importing countries and their consumers are elated while oil exporters, especially the cash starved OPEC block, are not. Few in the West are shedding any tears for the latter. Nor is there much sympathy for countries such as Venezuela or Libya who continue to subsidize oil consumption for no good reason other than the fact that they would probably face riots if they cut the subsidies.

Oil 2

Source: The Economist, 25 Oct 2014 based on data from IEA World Energy Outlook EIA

Looking longer term, there are hopeful signs that oil consumption, like coal consumption, will eventually reach a peak and begin a gradual decline. Whether at $75 or $115, oil is expensive and should be used more sparingly. And finding, refining and transporting it to markets are likely to get more expensive still, and more carbon-intensive.

Several trends are likely to help the eventual arrival of peak oil – nearly all coming from the demand-, not supply-side:

  • Electrified transportation increasingly powered from low carbon resources;
  • More efficient cars that go farther on a unit of energy; and
  • More efficient urban planning that reduces overall need for transportation.

In the mean time, there are forces already in play that are likely to lead to higher oil prices in the near future. The International Energy Agency (IEA), for one, is already predicting a 10% drop in US shale oil investment in 2015 as a result of falling oil prices. In other words expect lower investment followed by lower production rates leading to higher oil prices.

For now, however, enjoy the cheap oil.

Published Originally in EEnergy Informer: The International Energy Newsletter December 2014 Issue.