Are the Low Prices Here To Stay?
It’s looking like 1998 at the pump.
Oil prices started plummeting six months ago, and really took a nosedive since October. So why, after steadily staying between $80 and $110 a barrel for the last five years, has oil suddenly dropped below $50 a barrel?
Here are three major reasons:
1.America’s oil boom. American oil production is at a 30-year high and now the U.S. is the world’s largest oil producer, surpassing Saudi Arabia. This was largely spurred by fracking and technological advances in ways to find and drill hard-to-extract crude. The explosive growth in U.S. oil production happened so fast that even Goldman Sachs under forecasted.
2. OPEC has kept pumping. Many believed that after prices began to drop that OPEC, the cartel of countries that supply 40% of the world’s oil, would cut down on production to force prices up. But they didn’t and that was a bit of a surprise.
Some analysts think this is a deliberate price war designed to squeeze out U.S. shale oil drillers (OPEC has denied this). Others think OPEC is taking its cue from the 1980s, when OPEC’s cutbacks failed to reverse a similar dip. Either way, there’s growing discontent between smaller member countries like Venezuela and Algeria, which are scrambling to balance their budgets with no national oil revenue, and Saudi Arabia, which can weather the low prices with a cash surplus that is estimated to be over $740 billion.
3. Demand is low. Weak global economic activity, increased fuel efficiency, and shifts to other fuels or forms of energy has lowered demand. Even China’s oil consumption has slowed after soaring in the late 2000s.
So who are the winners and losers of these low prices?
Domestically, the energy sector is bracing for some pain. Drilling for shale oil is expensive and falling prices could cause cash-strapped drilling companies to become unprofitable or unable to obtain crucial loans to stay in business. Some say 20,000 jobs could be at risk. Low oil and natural gas prices also mean there’s less motive to invest in renewable energy and gas-efficient cars. Sure enough, recent reports show a major uptick in SUV purchases while hybrids like the Volt have been staying on the lot.
However, low prices at the pump are generally good for individuals, leaving more cash in our wallets and potentially increasing consumer spending. It also helps a number of major American industries like airlines, automakers and even corn farmers.
Will prices stay low?
Late this week, OPEC’s secretary general Abdullah al-Badri told the World Economic Forum in Davos, Switzerland that oil prices “will stay for another month at this low price, but I’m sure the price will rebound.” The former president of Shell Jon Hofmeister agrees, believing that gas prices will jump back up to $80-$90 a barrel this year.
A recent article in The Economist, however, estimates the low prices could last until 2020. Even Carl Icahn, a big investor in the energy sector including offshore drilling company Transocean, thinks prices will continue to go down in the near-term.
“Barring a sudden spike in demand or a major supply disruption from one of the big oil producing countries, prices may stay low for a protracted period of time,” says ZEITGUIDE friend Dean Schaffer of Coral Reef Capital.
“Basically there is a big game of chicken between US oil producers, OPEC and other oil producers. Until someone blinks and takes production offline these low oil prices could be the new normal. We likely won’t see oil price highs like over the last five years anytime soon.”
This week we’ve posted a sample selection to give you a glimpse of what our 2015 is all about.