Oil price ping-pong

Don’t look now, but oil prices are starting to rise again. After bottoming out around $26/barrel in late-January, they’ve come back up into the $50/barrel neighborhood in recent days. There are several reasons, but they all come back to basic economics: supply is down and demand is up. The latter is relatively simple: cheap oil leads to cheap oil products, and low prices lead to higher demand. But the former has several causes: wildfires in Canada are cutting tar sands production significantly, for example, and those low prices also made fracking unprofitable for a lot of US producers, so US production is down.

One new wrinkle involves terrorist activity in Nigeria, but not from Boko Haram. A new group, the “Niger Delta Avengers” (really), has been attacking oil infrastructure effectively enough to cut Nigerian production by hundreds of thousands of barrels per day. Not much is known about the NDA yet, but among their stated aims is a redistribution of more of Nigeria’s oil revenue back to the people in the Niger Delta, particularly in the form of some serious environmental remediation for all the pollution that the country’s oil industry has caused there over the years.

Foreign Policy is telling us that “The Era of Cheap Oil Is Coming to an End,” citing an International Energy Agency estimate that the world’s oil production and oil consumption will probably be about even for the rest of the year. And, hey, maybe that’s not such a terrible thing. Cheap oil (along, to be sure, with a hefty dose of bad governance) destroys people’s lives in Venezuela, makes it harder for the Iraqi and Libyan governments to restore some stability to their countries, and increases the chances of a hardline political resurgence in next year’s Iranian presidential election. Yeah it sucks at the gas pump, but there are some bigger issues at stake.

But wait–in May, Scientific American told me that “The Age of Cheap Oil and Natural Gas Is Just Beginning”! What gives? I think it all depends on how you define “cheap oil.” We probably shouldn’t expect oil to get back to the low $30s/barrel and stay there, but at the same time it’s unlikely to get close to $100/barrel again for quite some time. The reason, again, is supply. Libya, for example, might finally be put back together, which would allow that country to increase its oil production. Iran is already putting more oil on the market, and can probably be expected to increase its production a bit even beyond what it already is. The NDA might be defeated, or appeased, allowing Nigeria to ramp production up again. Those wildfires in Canada will eventually be brought under control–well, either that or they’ll grow until they eventually consume the planet, in which case oil prices probably won’t be an issue anymore. And, most crucially, if prices climb back to the point where fracking becomes economically viable again, US production can be expected to rise again. All of these things would put downward pressure on prices. On the other hand, if things continue to deteriorate in Venezuela that country might have to cut back oil production, which would put upward pressure on prices.

So the upshot is that oil prices will probably find an equilibrium somewhere near where they are now and stay there, give or take, for the foreseeable future. This probably means a return to the days of the oil price spike, where the market reacts immediately to bad news, though again probably not as dramatically as it did back in the days of ultra-expensive oil.


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