Oil Prices Will Stay Low For a While Yet

30 december 2015

The Analytical Center has published another issue of its Bulletin ‘Global Oil Market: Difficult Reality and Cautious Forecasts’ dealing with the current trends in global economy. Authors attempt to present a reliable basis for predictions to make the work easier for experts in the field.

Oil is a normal raw material, but it has a difficult ‘political background’. Oil royalties helped a number of countries, particularly those in the Middle East, on their way to economic recovery and growth only after a political decision was made in the 1970s, which lifted the 4 dollars/barrel price limit on oil coming from the Persian Gulf. Previously, through the whole of the XX century, this was the only important commodity whose price varied but little compared to metal and grain.

The authors note that longterm pricing tendencies have to do with global economic growth dynamics and cyclical fluctuations, with climate change and global warming, with investments and energy policies (taxes, tariffs, subsidies) in different countries, and finally — more and more so recently — with the fast technological progress (both in drilling and in transportation and consumption of oil and energy at large).

What is happening in the world in these areas is quite rational. The role of ‘political plots’ has a degree of truth in it, but the fall of oil prices in 2014 was a logical reaction to a number of factors, such as excessive offer, reduced demand due to economic recession in a number of countries, economic growth and improved energy efficiency in OECD countries.

The US retains its leadership positions as the main consumer of oil and oil products. The European Union has been lowering its oil consumption, mostly thanks to opting for green energy sources.

How big is the oil surplus and how long could the prices stay low? The International Energy Agency expects oil prices to stay at the level of 80 dollars/barrel in 2020. The irony is that reducing production and export by only about 2-3 % could bring the high earnings back to all oil exporters, but the current market conditions — with a diversity of interests, a lack of coordination between exporters, as well as the current political situation in the world — exclude the possibility of an effective cartel. Thus, oil prices are likely to stay low long term.

See more in our Bulletin ‘Global Oil Market: Difficult Reality and Cautious Forecasts’.

For other issues of our Bulletins on current trends in global economy see Publications.