Oil prices

How Low Can Oil Prices Go?

The tricky geopolitics of tumbling demand and rising supply

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The price of oil in global markets has plunged by nearly 45 percent over the past six months. As a result, the price of a gallon of regular gasoline in the U.S. dropped from $3.68 in June to $2.37 in late December. In June, the U.S. Energy Information Administration had projected that a gallon of gas would average $3.48 per gallon in the second half of 2014. What happened? And where might oil prices go in the next two to five years?

We are awash in crude oil even as the world economy is slowing down, leading to lowered demand for crude. The glut in global production stems largely from the fracking boom in the United States, which has seen domestic oil production rise from 5 million barrels per day in 2008 to over 9 million barrels per day in November 2014. The predictable result of increased supply of petroleum is that the price is down: A barrel of benchmark West Texas Intermediate crude hovered around $55 at the end of December.

Over the Thanksgiving holiday, the Organization of Petroleum Exporting Countries (OPEC) declined, reportedly at the behest of Saudi Arabia, to reduce its members' production. Some analysts have suggested that the goal is to keep global oil prices low, thereby killing off fracking in the United States and preventing the drilling technique's spread to other parts of the world. It costs less than $10 per barrel to get oil out of the ground in most Middle Eastern countries, whereas production costs hover around $65 per barrel for U.S. fracked wells.

Michael Lynch, an analyst at Strategic Energy and Economic Research, thinks this strategy is unlikely to work. Lynch estimates that most fracked wells in the U.S. break even below $60. Although he says sustained lower prices are likely to cut future drilling investments by 10 to 15 percent, even that has an upside, because slackening demand for drilling rigs and crews will lower the costs for new fracked wells. In addition, technological improvements along with offsetting increases in production are reducing fracking costs by something like 10 to 20 percent annually. In any case, owners will pump oil from wells already drilled as long as production covers their variable costs.

Lynch argues that during the first decade of this century, oil prices were affected by the perceived threat to production capacity caused by strife in places like Iraq, Nigeria, Iran, and Venezuela. In effect, purchasers paid a security premium. He now believes, despite the continuing turmoil in the Middle East, that the geopolitical risk premium has abated somewhat. If that's true, leading-edge private oil companies might be enticed back to rescue the heroically mismanaged petroleum fields of certain oil-rich hellholes.

The sad fact is that nearly 80 percent of the world's oil reserves are in the hands of government-owned companies. It's not too far-fetched to believe that with the benefit of more knowledge and modern technology, the combined additional production from Libya, Iraq, Iran, Russia, Nigeria, Venezuela, South Sudan, and Mexico might amount to an extra 10 to 15 million barrels per day.

In the meantime, budget shortfalls stemming from lower oil prices might encourage unsavory petro-state regimes-Russia, Venezuela, Iran-to be more tractable. Furthermore, the International Monetary Fund estimates that lower oil prices will goose U.S. economic growth from 3.1 percent to 3.5 percent next year. So much for "peak oil."

During the last decade the alarums about the advent of peak oil grew ever more frenzied. For example, back in 2007 the Germany-based Energy Watch Group declared that the world's oil production had peaked in 2006 and predicted that it would drop by around 3 percent a year. By 2030, fearmongers predicted, the global availability of oil would be half of what it was at its apex.

Instead, world oil production increased from 77.6 million barrels per day in 2003 to 86.8 million barrels per day in 2013. Lynch's book The "Peak Oil" Scare and the Coming Oil Flood, scheduled for publication in spring 2015, predicts even larger leaps in the global production of crude. Lynch thinks world oil production will increase to around 110 million barrels per day during the next decade. In the meantime, global oil prices will oscillate around $60 per barrel and could conceivably drop to $40 per barrel within five years. I asked Lynch if this meant oil markets might be in for a replay of the price collapse that occurred in the 1980s. He replied that he thought so. In inflation-adjusted dollars, the price of oil reached its peak annual average of $106 per barrel in 1980 and then collapsed to an annual average of $30.80 per barrel in 1986.

At $40 per barrel today, the price of oil would, in inflation-adjusted dollars, just about equal the annual average price of $17 per barrel in 1998. Interestingly, in an interview with the Middle East Economic Survey, Saudi Arabia's oil minister, Ali al-Naimi, said OPEC's output would still not be cut. "Whether it goes down to $20, $40, $50, $60, it is irrelevant," he declared.

In a December Reuters op-ed, oil analyst Anatole Kaletsky divided the history of global oil prices over the past four decades into three eras. In Kaletsky's analysis, OPEC maintained pricing power from 1974 to 1985 and the price of oil bounced between $48 and $120 in inflation-adjusted dollars. This provoked more exploration and production that eventually broke OPEC's dominance, ushering in a period of competitive pricing between 1986 and 2004 where the price of crude ranged from $21 to $48 per barrel. As demand grew and supplies tightened, OPEC regained pricing power after 2004 and prices again fluctuated between $50 and $120 per barrel.

So has the global oil market reverted to competitive pricing of oil? Kaletsky is agnostic on that question, but he suggests that if the price remains at or below $50 per barrel for a year, it would indicate that we have returned to a competitive market and therefore that we'll see lower prices for many years to come.

Another factor to consider when attempting to project future prices is that demand for oil appears to have peaked in the United States and Europe. The recent period of sustained high prices encouraged drivers to buy more energy-efficient vehicles and to limit the amount of fuel they burned. U.S. gasoline consumption rose to 142 billion gallons in 2007 but has since fallen by 6 percent to 135 billion gallons in 2013. In the European Union, transport fuel consumption has fallen by 8.4 percent since peaking in 2007. In addition, the total estimated vehicle-miles traveled by Americans has dropped by more than 2 percent since then. (Lynch muses that low oil prices means we might "see the death of the electric car" once again.) Finally, if the big industrial countries do get serious in the next decade or so about cutting carbon emissions, that too will tank demand for oil.

In other words, oil consumption may well eventually reach its zenith. But not because we ran out of the stuff.

Science Correspondent Ronald Bailey (rbailey@reason.com) is the author of the forthcoming The End of Doom: Environmental Renewal in the 21st Century (St. Martin's).

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  1. Wow… squirrels ate everything…

    1. And my dad told me that it never pays to sleep in. Suckers!

  2. And now all the comments have been eaten in exchange for the article. What the hell do they spend all of the damn donation money on? COCKTAIL PARTIEZ?!!

    1. Being that there are no female libertarians, those parties are all cock and no tail.

      1. Did a tree fall in the woods?

        1. I didn’t hear anything.

  3. demand for oil appears to have peaked[, and] if the big industrial countries do get serious in the next decade or so about cutting carbon emissions, that too will tank demand for oil.

    And don’t forget about banning plastic!

    1. Peak Oil is here!

      1. Peak Derp, on the other hand, is unobtainable.

    2. When did “tank” beome a transitive verb, anyway?

      1. The nice thing about English is you can transitive verb any noun.

        1. You noun’d the shit out of that!

          1. Verbing weirds language.

  4. Gold has been declining to $1200. Given rob c’s maxim that gold:oil should be between 7-20, that tells me that $60/bbl is very reasonable to the market. Another good indicator that it will still be below $85/bbl on 12/31/15 is that Gallery Furniture in Houston has bet on it being higher. They’ve run a promotion that if oil is below a spot price on a certain date, anyone who buys more than a certain amount gets it for free. They’ve given away furniture the other two times they did this.

    1. The first time I heard the Gallery Furniture commercial I said to myself, “yeah, I’m sure this jackass knows more than the people at the U.S. Energy Information Administration.”

      OH.

      1. No, but I’m sure that the float between they time you pay Matress Mac and the time he pays you back covers the insurance premiums. Plus, think of how many people will only be approved for $6000 in financing. Its GOLD. I wonder if he picks a crazy high price to lose on purpose.

  5. “U.S. Energy Information Administration had projected that a gallon of gas would average $3.48 per gallon in the second half of 2014.”

    Well, don’t keep me in suspense! Who,at the U.S. Energy Information Administration, got fired for this screwup? Punished? Reprimanded? Scolded? Received a look of ire? Received a head-shaking expression of pity?

  6. And at Sierra Club headquarters (I wish they WOULD quarter their heads, or better still dice them) the morons who have been fantasizing about gasoline hitting $5 a gallon are running around shrieking “The sky is falling! The sky is falling!”

    Pillocks.

    1. …”running around shrieking”…

      Is THAT what we get here?

  7. The lowest I saw it go in the Phoenix area was $2.09. Damn, I was hoping to see gas below $2 for the first time since I got my license and started driving.

    1. $1.89 briefly in Houston. With grocery rewards (gives you $0.10/gal off per $100 of groceries), I got a tank for $1.39/gal. It was like 2002 all over again

    2. It was $1.89 here in the Ahwatukee area for a while.

    3. I saw $1.81 in Iowa…but our state maggots have quickly seized the opportunity legislate an 10 cent increase to the gas tax…for teh ROADZ and BRIJJEZZ…that went into effect Sunday. I love it how quickly they can muster up a bipartisan bill when it means increased revenue.

  8. …thereby killing off fracking in the United States and preventing the drilling technique’s spread to other parts of the world.

    Fracing is not a drilling technique. It is a stimulation technique. The drilling is long since complete by the time a frac crew shows up.

    1. Is that, like, F-1 racing with pitcrews and such, like?

  9. “Another factor to consider when attempting to project future prices is that demand for oil appears to have peaked in the United States and Europe. The recent period of sustained high prices encouraged drivers to buy more energy-efficient vehicles and to limit the amount of fuel they burned.”

    Sounds like a real good reason to keep investing in renewables, as well as things like better battery performance. Oh, and maybe a testimony to the effectiveness of increased fuel standards, such as those implemented under Obama.

    1. Yeah, it sounds like all those things, dude. Great comment.

      Because it took OBAMA to get us motivated to create more efficient batteries.

      Dipshit.

      1. Yikes. Try to keep up just at a minimum, eh?

        “In 2009, the Obama administration raised fuel economy standards to 35.5 miles per gallon by 2016, unleashing a wave of innovation. There are now 57 fuel-efficient models available in showrooms today?up from 27 models in 2009. In addition to offering hybrids, car makers have retooled some of their most popular models to boost efficiency. The improvements keep coming: the first half of 2012 already set the record for highest-ever fuel efficiency for new vehicles, according to analysis by market analyst Alan Baum of Baum and Associates.”

        http://switchboard.nrdc.org/bl…..s_his.html

        And then in 2012 once again:

        “The Obama Administration issued clean car standards today that will raise automobile fuel efficiency to the equivalent of 54.5 miles per gallon?on average?by 2025. That’s roughly twice the mileage our cars get today.”

        So it was a great comment, since it was fuel efficiency standards that I gave Obama credit for, not batteries. Its your response that was lacking.

        1. “So it was a great comment, since it was fuel efficiency standards that I gave Obama credit for, not batteries. Its your response that was lacking.”

          Yes, some community organizer waving his wand had a lot to do with that.
          What a jackass.

          1. Next up: an executive executive order stopping enforcement of the First and Second Laws of Thermodynamics.

            1. You said “executive” twice….

          2. I love how lefty idiots come here, spewing their obviously retarded bullshit, and then talk down to us like we’re the retards.

        2. Dude, that is TOTES what I was thinking! Switchboard is a TOTALLY non-partisan site – why to cite!!
          And clearly Obama’s fiats can produce a perfect society! Why didn’t anyone think of this sooner?!?!

          Hey, how was 2025? Do we have jetpacks yet?

          1. Oh, sorry, Monty. I forgot this is Reason where all commenters think there is conspiracy underway, encompassing all media outlets that don’t abide by the “everything Obama does is evil” doctrine. Here, BusinessWeek:

            http://www.businessweek.com/bw…..855156.htm

            By the way, your last sentence is why I posted the standards he already put in place that have had an impact, as well as newer ones. The newer ones have meaning if you subscribe to Ronald’s point that fuel efficient cars have had a good impact on oil prices.

            Get it? Nah, I didn’t think so.

            1. EVEN BETTER CITE!!
              From your own (nakedly partisan, economically ignorant) article:

              But what’s being missed in most of the headlines is that the proposed rules could have serious negative consequences unless Washington also moves ahead on policies to increase the price of using fossil fuel. Economics professor Lester Lave at Carnegie Mellon University is one of many experts who point out that Americans won’t buy higher-mileage cars as long as gasoline remains at $2 per gallon, or lower.
              Avoiding this conundrum requires an additional policy step: raising the cost of using fossil fuels. AutoNation’s Jackson and many others are arguing for a gasoline tax that keeps the price at $4 per gallon or higher.

              HEY!! Let’s tax the fuck out of people to make life harder! Who need cheap gas! Peak oil will never happen, but PEAK DERP is simlarly unreachable!

              Do you HONESTLY want to cite this twisted article as your paean to the Lightbringer and all his good works?

              1. Thanks! Oh, indeed I do want to cite it. Did you keep reading? Didn’t think so.

                “In many ways, that’s a good thing. As President Obama said during the May 19 ceremony at the White House, it saves consumers money at the gas pump, reduces greenhouse gas emissions, slows the flow of dollars going overseas to buy oil, and reduces America’s dependence on foreign oil. The potential downside, though, is that the price of gas could plunge and high-mileage cars might pile up on dealers’ lots. ”

                That was the downside? More inventory of gas guzzlers? Sounds like the marketplace issuing a demand.

                1. Yeah, you love the marketplace when it responds to naked coercion. Something to aspire to…

              2. And the last paragraph sums it up:

                “What’s more, the move is a reminder that the Obama Administration still has a powerful weapon in reserve if Congress doesn’t act on climate. The authority that the EPA is using in the proposed rules to limit tailpipe emissions of carbon dioxide comes from the Clean Air Act. If Congress doesn’t pass a climate bill, the agency can use the same law to impose its own limits on carbon dioxide in other parts of the economy as well…President Obama’s message to Congress: “The Clean Air Act is a powerful tool and they know how to use it,” says Book.”

                Guess what, Monty? The President did exactly that. Try again.

                1. Congratulations, your naked hatred of poor people and minorities is completely out in the open for all of the world to see. Just like Tony’s.

                2. “What’s more, the move is a reminder that the Obama Administration still has a powerful weapon in reserve if Congress doesn’t act on climate.”

                  Translation: The president can still act by fiat in contravention of a duly-elected Congress to be as economically ignorant and tyrannical as he wants in pursuit of artificially increasing gas prices. And you idiots elected him twice.

                  “Guess what, Monty? The President did exactly that.”

                  I know he did. The difference between you and I is that doesn’t recommend him to me – but it does to you.

                  If you want to advocate for an autocratic and utopianist despot ruling from on high, just be up front about it. Don’t do this orwellian newspeak shit of calling it a “demand” from the “marketplace”. The marketplace will push oil in a lower direction pricewise when it is not throttled by government regulation, just the same as if innovation would have been GREATER stimulated and we would probably have more efficient cars if manufacturers hadn’t been forced to create higher-mileage cars by government decree, but rather at the behest of their customers’ desires.

                  But I wouldn’t expect you to understand basic free-market economics.

    2. Another factor to consider when attempting to project future prices is that demand for oil appears to have peaked in the United States and Europe.

      Except that when you factor in the absurd jump in truck and SUV purchases over the past month, this appears to be a ridiculous assumption. OTOH, used Priuses are cheap as fuck right now.

      1. That jump you reference, which sadly is correct, has not had time yet to have any impact on oil prices and demand.

        If what Ronald claims is true, it sadly will have an impact that is not welcome.

  10. The value of the dollar plays a big role in the price of oil too. The dollar has been surging in value lately and it’s about to break out again.

    http://www.marketwatch.com/inv…..dxy/charts

    See that pennant pattern? It’s already breaking out of that and is about to head up again.

    Although the price of oil may fluctuate a bit and stagnate in the $50 range, it’s not going up to $100 any time soon. If you think it looks like a good time to buy oil futures or etfs or whatever, it’s not a good time. Unless you’re willing to wait a few years.

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  13. I think the price of oil depends more on the value of money than on any supply issue.

    1. If true,it will soon be back to $100.

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  15. It does seem like the price drop will not rebound any time soon. A wonderful boon for the American consumer.

  16. Crude prices still going down yet gasoline prices got jacked about 10 cents a gallon this past weekend in some places in the US.

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  18. Day late and dollar short. Just bought fuel and the price at the pump is up.

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