This is why the oil price will go shooting up again, eventually

Posted: July 11, 2016 in Energy, Oil
Tags: , ,

file6071284660910We are not good at learning the lessons of the past. Alas, we are not so good at learning the lessons of the recent past. Take the oil price and the way the markets are failing to grasp that there is a thing called a cycle.

This is the theory. When the oil price is high, at first we just carrying on demanding it as before. Economists say that oil demand is price inelastic. But over time, things change. For one thing, when the oil price is high we see masses of investment into finding new sources of oil. For another thing, we change our habits.

So in the 1970s, for example, the US government imposed a speed limit on the roads, so that less petrol was consumed.  In recent years, people have been saving money by opting for more fuel efficient cars, putting solar panels on roofs, insulating lofts, while the likes of Elon Musk promote the electric car and battery bandwagon.

At the same time, we see innovation on the supply side, and we get oil from the Alberta tar sands, and shale gas and oil.

But always, the markets, and even the wise people at the top of business, fail to spot it. Oil is going to be expensive forever, we are running out of it, we are told. “We are at peak oil.”

But things change. Even the rise of China failed to have the impact on the oil price that had been expected, for the simple reason that China made very inefficient use of energy. As it grew, it became more efficient in its use of energy, and its demand did not rise at the pace that had been expected.

So the oil cycle turned, and the oil price collapsed. That is how the market cycle works. Always we seem to forget, and say this time it is for good.

Now the International Energy Agency has warned that Middle East oil producers, such as Saudi Arabia and Iraq have their highest share of world oil markets since the 1970s.

At the same time, the imperative of energy efficiency slowly seems to be in the process of being forgotten. According to the FT, https://next.ft.com/content/a36bfe6e-4367-11e6-9b66-0712b3873ae1 sales of sports utility cars have risen such that sales of these cars now exceed ordinary cars by two and half times. Our habits are changing; we are slowly adjusting to cheaper oil.

Investment into new energy resources has been cut, less money is being spent on oil exploration. Shell maintains its dividend, and invests less in the future, less for the day when oil price starts to rise.

That is why the oil cycle will turn again. And why I suspect that the oil price will surge over $100 before this decade is out.

Now gaze even further into the future. I wonder whether the next turn in the cycle may be the last upwards one. The slump in the oil price has delayed alternatives but that is all it has done.  The internet of things will create unprecedented efficiency. Solar power is becoming ever more efficient. Battery technology is advancing, nano technology may even make it possible for us to create synthetic oil.

The oil cycle will turn upwards within a few years, and then a few years later it will turn down, but then it may not turn anymore.

This article originally appeared at Fresh Business Thinking: http://www.freshbusinessthinking.com/this-is-why-oil-prices-will-shoot-up-again-eventually/

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s