What oil prices below $70 mean in the long run

Due to the economic crises around the world oil prices halved over the past two months. Indeed, after nearing $150 in July, they are now back to below $70.

You may think that high oil prices won’t happen ever again and that we can keep on relying on this fossil fuel. But beware : the Daily Green explains this is only temporary.

Indeed, even if speculation and demand in rich countries dropped, Asia still buys the same quantities and political unrest still looms in oil-producing countries.

Here goes the full article :

How quickly things change. In July, the price of light, sweet crude oil surged to $147 per barrel. The investment bank Goldman Sachs had projected two months earlier that the price could hit $200 per barrel in as little as six months.

(…) In the eternity of the last several weeks of economic turmoil, energy largely disappeared as the lead campaign issue. The price of oil has fallen by more than half. Gasoline prices have dropped below $2.50 per gallon across the nation’s heartland. OPEC’s barons of price rigging are holding an emergency meeting this week.

Can we cross oil overdependence off our enlarged list of things to worry about? Not a chance. Just as beginning investors are counseled to avoid obsessing over the short-term ups and downs of the stock market, our thinking about energy should not be pulled this way or that in response to price fluctuations.

In the long run, overdependence on oil is still a high-risk proposition, and carefully drawn measures to diversify our energy menu should remain a high priority. Here’s why:

A prolonged slump, with low demand and relatively slow prices, could set the table for high prices when the economy recovers. In the face of price volatility, oil producers uncertain whether projects will pay may cancel them, exacerbating supply-demand imbalances when demand surges again.

Moreover, big, easy oil fields are increasingly difficult to find and costly to produce. Asian demand for energy hasn’t gone away.

The geopolitical snares of oil dependence haven’t gone away either. The Middle East is still prone to violence and weighed down by misrule. The Niger River Delta is still a cauldron of unrest and sabotage. And Vladimir Putin is still a power-hungry jerk.

The brittleness of the oil market is a sign of an impending energy transition. We’ve gone through this before. In the 19th century, wood and whale oil gave way to coal and petroleum. In the mid-20th century, natural gas and nuclear largely muscled oil out of the power generation game.

What the nation’s energy economy will look like on the other side of economic turmoil and oil overdependence cannot be predicted precisely. It’s safe to say that the transition will take some time. Fossil fuels are deeply wired into the nation’s economy and there are no obvious magic arrows in the quiver.

The best way forward through economic uncertainty and energy transition is to use energy less wastefully.

As energy economist and geophysicist Peter Tertzakian wrote in his 2006 book, A Thousand Barrels a Second :

Those of us who save money through conservation or efficiency, take advantage of new approaches, and weather the storm will be helping ourselves and our families. At the same time, we will be helping our country become more secure, economically stable, environmentally sound, and competitive — a healthier, more prosperous, more opportunity-rich place to be.”

3 thoughts on “What oil prices below $70 mean in the long run”

  1. Of course it’s only temporary.

    Other bloggers have made the point that we shouldn’t be like the sharemarkets, carried away with every daily movement of price and production and interest rate. In planning our personal lives and the future of our societies, we must look to the long term and its trends. And those trends can’t be seen just by laying out lines on graphs.

    There’s a story about the turkey who wondered if his owner cared for him, so he decided to note down how much he was getting fed. Sure enough, every day he was getting fed more and more. “Obviously my owner cares deeply for my welfare,” he said, “and obviously things can only get better for me.” Then he reached a new part of the graph he hadn’t extrapolated, and became someone else’s dinner. Woops.

    Oil is a finite resource. Unlike iron or phosphorous, we can’t recycle it – when we burn it, that’s it, gone forever. It took hundreds of millions of years to create that oil, and we’re burning it in decades. So at some point the stuff will run short. At some point our turkey is off to be cooked.

    The oil will never actually run out, but there’ll be less of it than we want, and it’ll get more and more expensive. So we’ll want to use it in ways which allow for reuse and recycling, like making plastics – we won’t be keen to use it in ways that mean we can’t use it again, like burning it.

    It’s prudent, then, to plan for a world where we cannot burn oill. Whether that world comes in ten years or five hundred doesn’t really matter. It’s going to be forced on us, so we may as well plan for it. It’s like when you know you’re going to lose your job, you can look for a new job while you’re still employed, or look for a new job when you lose this one.

    It’s a lot easier to do things by choice than be forced to do them. That’s the sort of mindset we need, rather than panicking when the price rises and going back to sleep when it drops. Just steadily work for a world where we don’t burn oil – or coal and natural gas, either. Those are going to run short, too.

  2. Once again Kyle I agree a 100% with you.

    Peak oil is near us or we have already reached it. This is why we have to work on efficiency and conservation as well as on alternatives…

    Have a great weekend ! 😉

    edit : our good friends at the OPEC decided to cut their production by 1.5 million per day. No doubt that with that oil prices will go a bit up. So wait and see !

  3. I don’t think they’ll rise much in the short term. In previous recessions the US lost about 5% of its oil demand immediately, and another 5% for each year of recession. Its oil demand earlier this year was about 21 Mbbl/day. So the recession will already have knocked off around 1Mbbl/day of demand, and as it goes on another 1-2Mbbl/day of demand will go.

    Even if other countries don’t have their own recessions, they’ll have somewhat lower growth due to drops in US demand for their products – especially China and Japan. Thus their demand for oil will drop a little bit, too – another 1-2Mbbl/day around the world.

    That 3-5Mbbl/day demand lost around the world will be offset a bit by demand picked up by lower prices. A few countries like Cuba generate electricity with oil, you might be able to drive less but you can’t really have less lighting and telephones and so on. And there’s a small amount of variable demand from things like those rickety old buses you see all over Africa, travelling on very irregular schedules, depending on the local price of fuel. So another 1-2Mbbl/day of demand will be added from that.

    The net effect will be about a 1-5Mbbl/day drop in demand for oil over the next year or two. This should keep prices low overall. I mean, that’s the general trend, though – it’s just not possible to make predictions on what’ll happen month-to-month. In the long run, over many years it’s just going to go up as it becomes more scarce.

    And a lot depends on other things like how we address climate change. Lower demand for fossil fuels could make a transition to renewables easier in that we say, “well, look here, we’re using less fossil fuels already, I guess it really is possible! And with all these crazy prices, wouldn’t it be better to have a steadier supply of energy?”

    But it could also make a renewable transition harder as we say, “but we’re poor now! We can’t afford it!” Yep, we can afford $2,000 billion to bail out the world’s incompetent bankers, but can’t afford $500 billion for renewables. Hmmm.

    Who knows.

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