Why ‘bottom of the barrel’ oil prices won’t last
Ottawa – Despite the uncertainty surrounding the future direction of world oil prices, prices should rise over the course of this year, according to a new commentary prepared by the Conference Board of Canada’s Kip Beckman, principal research associate, Economic Services.
He suggests there won’t be much movement in the first half of 2015, and $100 per barrel oil isn’t coming back any time soon. But the Board expect world oil prices to rise above $60 by the end of 2015. A mix of demand, supply and Saudi intentions will be behind the turnaround.
A factor that should push oil prices higher is one of the economics profession’s most basic principles — the best solution to the problem of low oil prices is … low prices, says Beckman. “The Globe and Mail recently noted that in the late 1990s oil prices plummeted to $10 and The Economist infamously predicted that $5 oil was just around the horizon. But lower gasoline prices ramped up demand for SUVs and gas-guzzling pickup trucks. And at the same time, oil production slumped as companies slashed exploration and development budgets. By the beginning of 2005, oil prices had already surged above $50 per barrel, and they eventually rose to $120 in the spring of 2008, before collapsing once the recession hit the global economy with a vengeance in 2009.”
History is already repeating itself, notes Beckman. Sales of SUVs and pickup trucks in the United States rose sharply in the final months of 2014, and high-cost oil producers have already made steep cuts in their capital expenditures. Deep-well offshore developers, oil sands producers and some of the US shale oil companies are among those that require prices well above current levels to remain in business. ConocoPhillips recently announced cuts of 20% in investment spending this year, while Chevron and Shell have halted plans to drill for shale oil in Ukraine. These cutbacks will eventually reduce the supply of oil on world markets and put upward pressure on prices.
Low oil prices will also stimulate global economic growth that will fuel rising demand for oil and higher prices. While oil-producing countries such as Canada are hurt by tumbling oil prices, most of the world’s largest economies — including the United States, India, and China — are net importers of oil, and their GDP growth will receive a boost from lower energy costs.
In the present economic environment, where global oil supplies exceed demand by around one million barrels per day and oil prices continue to slide on a daily basis, it may be difficult to imagine a turnaround any time soon. Yet, history shows that, more often than not, tumbling oil prices are quickly followed by a sharp upturn.
Beckman’s bottom line is this: Enjoy gas at 95 cents a litre or less, but don’t get too comfortable with it. Read the full commentary.