Lower for only a little bit longer?

Lower for only a little bit longer?

Most of the other opinion pieces that discuss the price of oil around this time of the year reflect on what happened in 2017 and try to predict what will possibly happen in 2018. This opinion piece written by Dr Marc Grownwald, senior lecturer in Economics at the University of Aberdeen Business School, looks back a little bit further, but also looks further into the future. Thus, rather than dealing with the short-run, the focus here is more the medium-run.

There are certainly some noteworthy short-term developments. The OPEC cuts deal seems to work; in response oil prices jumped over $60, rumors have it that this deal will be extended. An influence will also have the restart of refineries in the US gulf.

Whether or not oil prices are going to be “lower for longer”, however, is unlikely to be determined by these types of short-run events. One never knows what OPEC is going to do; and there are always other types of unexpected events. The main driver of prices in the near future, perhaps not next year, but the medium-run, is related to the reaction of the industry to the oil price slump witnessed back in 2014: the dramatic cut of exploration budgets. Admittedly, oil price declines like this one are essentially unprecedented. Thus, both the oil industry and economists, like myself, have to understand what is going on and what the consequences this will have. However some effects we observe already: the level of new oil discoveries is very low. This comes on top of the observation that the majority of recent discoveries are not as large as they used to be.

It is generally striking that there is this strong pro-cyclicality; if oil prices are high, there is a drilling boom, accompanied by an increase in drilling cost; now prices are low and drilling activity is low. It is certainly difficult to predict when this decline in discoveries will have an effect on global production; perhaps in 10 years, maybe earlier, maybe a bit later. To what extent a possible decline in production will affect oil prices certainly is also determined by demand. For 2018 projections seem to be optimistic, but certainly the future is uncertain and, ultimately, major global developments will determine future global demand. To a certain extent oil prices are also driven by expectation; thus, when will market participants understand what is going on and how will they respond?

It seems to be the case that there is an interesting feedback loop: drilling is high when the price is high, with higher future supply as consequence. Low prices have the effect just described. It certainly is also possible that this loop always existed but now it is more pronounced and results in larger oil price fluctuations. James Hamilton, economist at University of California at San Diego, said about the increase in the 2000s that this is one of the main drivers by unexpected increases in demand in combination with the inability of production to increase. Today tight oil producers are a new factor not present 10 years ago, but it cannot be ruled out that history repeats itself: perhaps oil prices are going to be lower only for a little bit longer.

Author
Dr Marc Gronwald

Search News

Browse by Month

2018

  1. Jan
  2. Feb
  3. Mar
  4. Apr
  5. May
  6. Jun
  7. Jul There are no items to show for July 2018
  8. Aug
  9. Sep
  10. Oct There are no items to show for October 2018
  11. Nov There are no items to show for November 2018
  12. Dec There are no items to show for December 2018

2016

  1. Jan
  2. Feb There are no items to show for February 2016
  3. Mar
  4. Apr There are no items to show for April 2016
  5. May There are no items to show for May 2016
  6. Jun There are no items to show for June 2016
  7. Jul
  8. Aug There are no items to show for August 2016
  9. Sep
  10. Oct
  11. Nov There are no items to show for November 2016
  12. Dec There are no items to show for December 2016

2015

  1. Jan
  2. Feb
  3. Mar
  4. Apr There are no items to show for April 2015
  5. May
  6. Jun
  7. Jul There are no items to show for July 2015
  8. Aug
  9. Sep
  10. Oct
  11. Nov
  12. Dec There are no items to show for December 2015

2014

  1. Jan There are no items to show for January 2014
  2. Feb There are no items to show for February 2014
  3. Mar
  4. Apr
  5. May
  6. Jun
  7. Jul There are no items to show for July 2014
  8. Aug There are no items to show for August 2014
  9. Sep
  10. Oct
  11. Nov
  12. Dec

2013

  1. Jan
  2. Feb There are no items to show for February 2013
  3. Mar There are no items to show for March 2013
  4. Apr There are no items to show for April 2013
  5. May There are no items to show for May 2013
  6. Jun
  7. Jul There are no items to show for July 2013
  8. Aug There are no items to show for August 2013
  9. Sep There are no items to show for September 2013
  10. Oct There are no items to show for October 2013
  11. Nov
  12. Dec

2012

  1. Jan There are no items to show for January 2012
  2. Feb There are no items to show for February 2012
  3. Mar There are no items to show for March 2012
  4. Apr There are no items to show for April 2012
  5. May There are no items to show for May 2012
  6. Jun
  7. Jul There are no items to show for July 2012
  8. Aug There are no items to show for August 2012
  9. Sep There are no items to show for September 2012
  10. Oct
  11. Nov There are no items to show for November 2012
  12. Dec