The recent meeting of OPEC provides an opportunity to understand the mysteries of the global oil market. As expected, OPEC decided not to cut its oil production. Barring unanticipated developments, prices will drop, says oil analyst Larry Goldstein. Potential oil supply, including drawdowns from bloated inventories, exceeds demand.
Goldstein rightly cautions, however, that no one knows where prices will settle.
Oil’s dramatic price changes seem baffling. In mid-2014, crude prices averaged around $100 a barrel; now, they’re gyrating between $50 and $60. Over the same period, U.S. gasoline prices have dipped from more than $3.50 a gallon to around $2.50. With the world economy slowly recovering, why have prices collapsed?
The standard explanation comes in two parts.
First, oil demand is what economists call price “inelastic.” Slight changes in supply and demand can produce large price swings. People and businesses need fuel. If oil is scarce, they still need fuel and will pay dearly to get it. If oil is plentiful, they don’t need much more fuel and, therefore, require huge price discounts before buying more.
This is what’s happened. Supply and demand have unexpectedly expanded the global surplus, reducing prices. The increase in American shale-oil (U.S. oil production is up about 80 percent since 2006) unexpectedly boosted supply. Weaker-than-predicted global economic growth depressed demand. The world now uses about 93 million barrels daily (mbd) but can produce 95 mbd or a bit more.
Second, Saudi Arabia hasn’t absorbed the surplus. OPEC isn’t a cartel, says Goldstein, because most of its 12 members won’t cut production to prop up prices. In the past, the Saudis have done that. But now they are refusing to play. They’ve flooded the market with oil. Reportedly, they don’t want to lose sales to other producers. They are also said to worry that excessively high prices will blunt the future demand for oil.
All of this is fine as far as it goes. It explains the mechanics of lower prices. But it misses a larger story: the retreat from “peak oil.”
omaha
And this letter to WP:
In his analysis of “peak oil,” Robert J. Samuelson rightly observed that new supplies of oil have arisen in response to higher prices and, consequently, the available supply has expanded [“The retreat of ‘peak oil,’ ” op-ed, June 15]. However, he left out a key part of the process: the much higher cost and risks associated with developing resources from the deep ocean, the Arctic and tar sands — three of the major potential sources of future supply. Each of these is very expensive and predicated on costs of at least $80 to $100 a barrel for oil companies to profit. At such prices, investment in alternatives such as electric cars would be more economically attractive.
Peak oil is linked to the economics of extraction and alternatives, also only resource availability.
