The Price of Oil

March 14th, 2017

 

In some odd way I am an oil price geek.

In 2006, when I was starting this blog and starting to speak full time about the future, I made a forecast that oil would get to $125 a barrel price in 2008. At the time it was trading around $70 a barrel, which was the highest price ever except for a brief spike in 1980. At the time that forecast was greeted with dismissal or even ridicule. As you may recall the price reached $147 in 2008.

That forecast, along with a few other accurate ones in 2006 and 2007- to be addressed in future columns- gave me credibility as a futurist forecaster.

At the time of this forecast I was focusing on several things that indicated to me that the price would reach $125/barrel. First a variation of the peak oil theory in that much of the cheap, easy to reach oil had already been extracted so only a rise in price could continue ever more expensive exploration and extraction. Second, China’s economy was growing at a 15% clip, being in the middle of the greatest national wealth creation event in human history. Other oil importing countries were also growing at high single to low double digit rates. Third, was the turmoil and disruption in Middle East countries due to the war in Iraq and political issues with Iran.

Since then, with the exception of 2009- when the price of a barrel of oil collapsed by 66%- when I took a step back as the dynamics of the Great Recession were too broad and deep to fully understand at the time, I have been consistently accurate about the price of a barrel of oil.

There are several areas where I have developed a strong sense of where things are going and the price of oil is one of them. So when something is of interest and one’s forecasts of it are consistently accurate, one can develop a kind of geeky obsession about it. In addition the price of oil is now tied to an increasing number of trends relative to the future of humanity.

Starting in 2010, at the beginning of every year through 2013 I correctly forecast that the price range of a barrel of oil would be $90-120, with occasional pressure on the downside and little or no pressure on the upside. An accurate but relatively easy forecast to make. Then came 2014.

Early in 2014 I started to say that there could be strong pressure on the downside of $90 so much so that the price could drop down into the $70 range or slightly be low that. So I was completely right in the direction –again a bit of a unique forecast at the time- but wrong on the depth of the price collapse. I wrote about why in a column here. Basically I had not anticipated that with the price collapsing that Saudi Arabia would produce with a market share mentality.

In that same year, when the price was dropping, I stated that we would not see $100/barrel oil again, at least not in this decade [unless there was some catastrophic event in Saudi Arabia]. I then went further with a major forecast in December 2014 I have not seen in many other places: that humanity and the global economy was entering an era of lower cost energy across the board.

During the last 18 months, I have been saying that oil would trade largely between $45-60 with occasional blips both above and below those prices. This has been the case. As the price of a barrel of oil moved to the upper range number I had absolutely confidence that it would decline.

So I write all of the above for three reasons: first, to document my accuracy and confess my geeky obsession, second because last week the price of oil “tumbled” as the Wall Street Journal stated to under $50 and of course third, to forecast into the future.

Forecast for the next few years: the price of a barrel of oil will predominately be between $40-60, with more pressure on the downside than the upside.

Here are the dynamics that point to this forecast:

-The world is awash with oil in strategic reserves and large tanker ships. If all drilling stopped there is months of oil parked in these places.

-Oil exporting countries desperately need the cash flow of selling oil, even at a loss.

-Though the oil and gas industry in the U.S. has seen a massive collapse and multiple bankruptcies, the wells brought on line that are producing have very low costs. It is in the exploration and drilling where the costs are

-Wind and Solar energy is undergoing explosive growth around the world. A particularly good article about that is here.

-Wind and Solar can now compete on price with oil as a source of electricity. Tesla Power and others are producing batteries that can store variable energy.

-An ever -increasing number of electric vehicles are hitting the streets around the world every day.

-Significant majorities of citizens in developed countries – over %70 in the U.S.- believe that Climate Change is not only real but to some degree is caused by the use of fossil fuel. Ever more people are now acting as crew members of This Spaceship Earth, making conscious decisions every day to lower greenhouse gas emissions.

-A group of Wise Republican Elders have rolled out a well developed plan for taxing carbon in the U.S. starting as soon as possible.

 

In a column here, I stated that 2015-2017 will be looked back upon as the early beginning of the end of the fossil fuel era. By 2025, if not earlier, this will become totally clear.

Humanity has entered a two decade long period of transformation, disruption and creative destruction that may well be as significant as the beginning of the Industrial Revolution. This means that all the history and market economics of the oil business, supply and demand, does OPEC mean anything any longer; all such things are now only a part of the oil market and the price of oil..

Oil producers, oil traders, corporations and countries will be well served to see the future of the commodity through these future-facing dynamics. The global economy is in its first major energy transit since the discovery of coal and then oil. Transitions from old to new are painful and disrupting for those that think the status quo/past is reality.

 

 

 

2 thoughts on “The Price of Oil

  1. Very interesting. But I am much more interested in “climate change.” Will humans have the interest in, or the desire to, or the capability of, reducing global warming? These seem to me to be the critical questions for our survival. Of course, if fossil fuel use is greatly limited in order to reign in global warming, then the price should collapse. What are your thoughts?

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