With oil trading under $40 and threatening to unhinge the entire industry from Texas to Russia, analysts the world over are working overtime to predict what happens next. Some, like financial investment firm Goldman Sachs, say the price could go as low as $20 per barrel because of a major supply glut evidenced by the scores of full oil tankers anchored off the coast of the United States and elsewhere. At the same time, others suggest the next spike to $100 could be just around the corner.
This week the Organization for the Petroleum Exporting Countries (OPEC), which essentially controls the supplies behind the majority of the world’s oil production and has thus far refused to reduce oil output, released a report indicating that low oil prices are here to stay and that it could be at least two decades before prices return to triple digit levels:
The OPEC published its World Oil Outlook 2015 (WOO) in late December, which struck a much more pessimistic note on the state of oil markets than in the past. On the one hand, OPEC does not see oil prices returning to triple-digit territory within the next 25 years, a strikingly bearish conclusion. The group expects oil prices to rise by an average of about $5 per year over the course of this decade, only reaching $80 per barrel in 2020. From there, it sees oil prices rising slowly, hitting $95 per barrel in 2040.
Long-term projections are notoriously inaccurate, and oil prices are impossible to predict only a few years out, let alone a few decades from now. Priced modeling involves an array of variables, and slight alterations in certain assumptions – such as global GDP or the pace of population growth – can lead to dramatically different conclusions. So the estimates should be taken only as a reference case rather than a serious attempt at predicting crude prices in 25 years. Nevertheless, the conclusion suggests that OPEC believes there will be adequate supply for quite a long time, enough to prevent a return the price spikes seen in recent years.
Part of that has to do with what OPEC sees as a gradual shift towards efficiency and alternatives to oil.
On the surface the current environment suggests that OPEC’s assessment may be somewhat accurate. Yet, one can’t help but think that maybe OPEC is playing mind games with the U.S. shale industry, which blossomed over the last few years as prices skyrocketed, creating more demand for jobs, housing and arguably being the single biggest economic driver since the crash of 2008.
With the shale industry now in shambles and many companies heavily indebted and holding on for dear life, OPEC may be signaling that they and they alone will control the price of oil going forward. It is quite possible that their intended goal is to force U.S. shale producers to close up shop because it will not be cost-effective for them to continue operations.
That, of course, bodes well for middle east and African producers in OPEC, who have seen some of their market share stripped during the North American oil resurgence in recent years. But as Art Berman recently pointed out via Zero Hedge it appears that the entire industry has lost its mind and the current over-supply could well be a transient event.
All it would take is the right shooting war or geo-political crisis and the tables will turn almost instantaneously:
All oil producers are losing money at current prices but companies and countries are producing at high rates. Indebted conventional and unconventional players need cash flow to service debt so they are producing at high rates. OPEC is producing at high rates to maintain or gain market share. Everyone is acting rationally from their own perspective but from a high level, it looks like they have all lost their minds.
Peak oil is not about running out of oil. It is about what happens when the supply of conventional oil begins to decline. Once this happens, higher-cost, lower-quality sources of oil become increasingly necessary to meet global demand.
Tight oil has bought the U.S. another decade or so of additional oil supply but, as peak oil predicted, at a cost. The technology behind tight oil has also made it the world’s most expensive barrel. As all of this sinks in, perception will start to change. Analysts and investors will begin to see that data points more toward long-term scarcity than toward long-term abundance of oil supply.
The U.S. is far more economically vulnerable and dependent on foreign oil today than when crude oil export was banned 40 years ago. The world has finite oil resources and the production party of the last 5 years has accelerated the timing of peak global production. A shooting war in the world would bring all of this into instantaneous focus if the data presented here has not.
For the astute observer it appears that the price collapse in oil was nothing more than machinations by the global oil cartel. Price swings, even significant price swings, are to be expected. Follow the money and the timing of the most recent oil collapse for example, and you’ll no doubt notice that prices happened to markedly buckle at almost the exact same time the United States initiated economic sanctions on Russia.
To put it in perspective, in July of 2008, just before the crash, oil prices were so high, supplies so tight and the crisis so severe that Speaker of the House Nancy Pelosi called on President Bush to tap America’s Strategic Petroleum Reserves. At the time a gallon of gas averaged over $4 and the price of oil peaked at $145 per barrel.
Six months later oil was trading at $30.
So, the question remains, is OPEC’s analysis legitimate or are the low price estimates intentional with the goal of scaring non-OPEC producers out of the market?
Whatever the case, we find it difficult to believe oil prices have finally stabilized, especially considering geo-political tensions and the disheveled state of the global economy.
One crisis is all it will take for oil to hit triple digits again and there is a strong likelihood that such an event will take place well before OPEC’s 2040 target date.