What I can see is the present, where markets react to any sign of good economic news with a big jump in oil prices. And the news in question is of the “things aren’t getting bad quite as quickly as we feared” genre of good news. What if six months ago, the economy is actually growing?
That’s an excellent question. Probably the only good side effect of the current recession has been the easing of gas prices in the short-term. There’s definitely been some disagreement about the cause – were the high prices due to speculation or because of demand? Was there an oil mini-bubble? Were we entering into a peak oil era?
The IEA is pointing to supply. The problem comes from a lack of investment in new oil fields combined with low productivity of existing oilfield combined with increasing demand. Yes, demand is still increasing, though at a slower rate because of the economic slowdown. From The Telegraph:
Ever since the bottom dropped out of the economy — and the oil market — last fall, there has been a single-minded focus on the weekly demand numbers released by the various energy agencies around the world. The conclusion drawn was that oil prices were going to remain weak for the foreseeable future because of the huge drop in consumption.
This, despite other compelling information that has long determined the decline rates of existing fields, even with steady demand, is going to push the world toward an oil shortage.
Now, all of a sudden, the tide has turned and the focus is on the supply side.
This analysis also point out the currency issue with oil prices. Since oil is priced in USD, the weakening of the USD has a large effect on the price as well.
The Calgary Herald also predicts higher prices in the near term.
But the real cause for concern is the supply side. Amid a lack of finance, large crude exporters such as Saudi Arabia, UAE and Russia have indeed put major drilling projects “under review”.
The number of oil and natural gas rigs operating around the world dropped 11pc in April alone. Having fallen for seven months in a row, this “rig count” is now down 42pc since September as energy companies’ credit lines have been cut.
The International Energy Agency, the Western oil watchdog, has just acknowledged that spending on oil exploration and future production will drop 20pc this year, double its earlier decline forecast.
On top of that, global oil markets are growing ever more concerned at mounting evidence the world’s largest fields are now seriously depleting.
These developments are setting up a “vertical supply curve” – where, as the global economy recovers, just a small demand increase could cause a shocking price jump.
A return of high gas prices could send the economy back into recession. It’s now more important than ever to invest in alternative forms of energy. It’s a twofer: it will help our economy and it will position us as technology leaders for the future.
If you’re interested in issues of oil and energy, I highly recommend the blog The Oil Drum.