Doha – Wednesday, April 13th 2016. The real question is: Should oil be cheap? If so, how cheap? International Article by Dr. Theodore Theodoropoulos.
With the cost of a barrel of crude well worth of US$80 – US$100, anything that can provide additional supplies, alternatives, or gains in energy efficiency is booming. Obviously, the soaring cost of energy is causing plenty of pain worldwide.
“Expensive oil hurts, but there’s a business case to be made a floor under the price of crude!” Expensive energy, in other ways, can be good. Why? When the price of oil goes up, people and governments will use less, find substitutes, and develop new supplies. Those effects are just basic economics.
Today’s economic oil dependence results from the past two decades of cheap oil. Expensive energy can be a powerful, medicine for all the economies. It may hurt when taken, but it brings long-term cures for a host of ills. High energy prices can also water the flowers of innovation, support energy saving initiatives, lead to investments in alternatives which pay off and encourage the search for more oil and gas.
Today, with demand growth proving resilient and high-cost US producers cutting their output, oil prices may recover further and a price of $60/barrel is “probably within range” in the medium term. Oil prices have enjoyed a recovery in recent weeks. Four questions are likely to determine how this excess supply will be cleared and therefore shape oil markets in the short term. First, will the strong demand growth (which reached 1.8mn bpd in 2015—a five-year high) persist? Second, how will the high-cost US shale producers respond to low prices, which are making some of their projects unviable? Third, what production will Iran add after the lifting of sanctions? and Fourth, how will the rest of Opec respond to low prices?
In 2016, expected excess supply to fall to 1.2mn bpd from 1.8mn bpd in 2015. Part of this contraction will be due to higher demand, which we expect to grow by 1.2mn bpd. Emerging markets are likely to remain the main source of demand growth, given the booming consumer sector, especially in China and the rest of emerging Asia.
The meeting with Oil Producers in Doha is coming close and we will see what the Sunday April 17th will bring…
Sources: Dr. Theodore Theodoropoulos ”Oil, Gas & Petrochemicals” Ed. 2009, and ”The Secret World of Energy”, Ed. 2011.