“Black Gold” Price Recovery Will Be Slow

Concerns (rightly or wrongly) about anthropogenic climate change center on the release of carbon dioxide from fossil fuels into the atmosphere which, believers claim, causes less heat to radiate into space, trapping it in the atmosphere and warming the planet up. While there have been calls to curb our dependence on oil and gas for heating, power generation and transportation (among many other uses – not least as a feedstock in the plastics industry), crude oil and gas will remain economically critical for decades to come. Given that these ancient fuel sources are finite, their price will (ought to!) rise as supplies dwindle.

The collapse of the oil price from over $113 (March 2013) to its current level of $37.4 was due to a number of factors. The weak global recovery hit demand; OPEC could not get an agreement to restrict supply, contributing to a glut on the market; US shale oil output picked up; the slowing Chinese economy further dampened global demand. The oil price is currently flirting with an 11 year low.

OPEC have been relatively happy to see the oil price collapse because shale oil and deep water oil fields are expensive to exploit. If the price falls low enough for long enough, such reserves become uneconomic to exploit (and they could fall foul of climate change regulations, potentially). Equally, exploration of new oil field in demanding environments are also likely to be mothballed whilst the crude price remains weak.

The cartel expects that the recovery of the oil price will be a slow affair and are predicting that the crude oil price will only have recovered to $70 by the year 2020. In turn, this will continue to exert a moderating effect on inflation in western economies and may slow the process of normalization of interest rates which the Federal Reserve embarked upon earlier this month.