By Cory
The Oil Game – Price and output depend on political deals
I found this article over at the Epoch Times very interesting.
Click here for the original posting page.
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At the end of last year, many experts thought oil prices would rise during 2017, maybe up to $60 per barrel. As time went by, however, those predictions were revised repeatedly—and each time the revisions pointed south. By the end of July of this year, crude was selling for about $46 a barrel, almost 20 percent lower than at the beginning of the year and about half the level of three years ago. Will oil prices keep dropping with high supply and sluggish demand, or will they recover as producers find a way to limit production?
The current scenario is clear. The world economy is growing, but the recovery after the crisis has been disappointing and the outlook is not particularly bright. Thanks to technological progress, we need less energy for each unit of new output, and technology has also lowered the price of extraction. And there are many more options for increasing energy efficiency, especially in economies like China and Russia, where waste is prevalent.
Oil bears take extra comfort that oil suppliers have so far failed to agree on a common strategy to restrain production. A few years ago, any geopolitical crisis would lead to fear of damaged oil wells and cuts in supply, but today the opposite applies. Whenever there is trouble in Russia or the Middle East, analysts expect other oil producers elsewhere to seize the opportunity to increase their own production and make up for the shortfall.
Since the dynamic of oil demand is unlikely to change, the future oil price will probably be defined by supply.
Oil bulls, on the other hand, say lower prices have affected investment in traditional drilling and exploration, which should lead to a reduction in supply down the line. But they have hardly stopped in the shale oil business.
The reason is again technology: According to consultancy firm Rystad Energy, the break-even point of shale oil extraction in 2013 was $70 to $100 a barrel, depending on the geology and location of the shale deposits. By the end of 2016, the price interval had narrowed and fallen to $30 to $40. And this decline has not stopped.
In other words, oil bulls focus on declining investment and new discoveries in traditional wells on land and offshore, downplaying the role of shale oil. And indeed, shale oil from the United States accounts for about 6 percent of global oil production and about 60 percent of total shale oil output. If they are right, the current market oversupply will soon disappear. Shale oil production, they claim, is unlikely to increase significantly, and the existing supply will not be enough to meet future demand.
Supply Matters
And in one respect, the bulls are correct: Since the dynamic of oil demand is unlikely to change, the future oil price will probably be defined by supply. Here it helps that the outlook for shale oil is not crystal clear. For example, producers might adopt a wait-and-see approach before deciding to expand production. …read more
Source:: The Korelin Economics Report
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