Sichuan
Province, China, above, is one of many places where demand for oil
has fallen, causing turmoil in markets. Some experts predict
further drops. (Reuters)
[Enlarge this image]
But the concern about lower oil prices crimping new investment
is shared by experts at the International Energy Agency, a leading
forecaster, which has repeatedly warned that a "supply crunch"
within the next five years could push prices to
new records.
Among the community of analysts who track the oil markets
closely, the view that prices could keep falling in the near term
is not widely held. The Organization of the Petroleum Exporting
Countries, they point out, is propping up the market by cutting
production. OPEC has announced three production cuts
since September.
Indeed, prices have been rising in the last three weeks as
traders calculate that the cartel will announce another cut at a
meeting this weekend in Vienna. Oil closed in New York trading on
Monday at $47.07 a barrel, up $1.55 and well above the recent low
of $33 a barrel in December.
But as the global economic outlook worsens, the view that prices
have farther to fall seems to be gaining adherents.
The debate is not just a proxy for varying predictions about the
economy. It also reflects divergent opinions about the future of
the oil business, which has been rocked by an unprecedented
boom-and-bust cycle in recent months.
Predicting oil prices is a tricky business. As prices rose to
$147 a barrel last year, some analysts suggested that oil would
reach $200 a barrel. Instead, prices plummeted after their July
peak, dropping by more than $100 since the summer. The recent rise
has not altered the view of the camp that believes the fall in oil
prices is not over.
One of the biggest uncertainties is whether today's market will
mirror the early 1980s, when prices collapsed and stayed low for
much of the next two decades, or whether it will prove more like
1998, when prices fell to $10 a barrel after the Asian financial
crisis but rebounded within a few years as growth
picked up.
With the global economy worsening and demand slowing, some
economists, including Kenneth Rogoff of Harvard and Nouriel Roubini
of New York University, say oil prices could keep declining in the
short term.
"The twin engines of growth were the U.S. and China; the U.S.
has fallen off and China has stalled, to put it mildly," Roubini
said. "In my scenario, oil will fall lower. I would not be
surprised if oil even went to $20, if the recession is
more severe."
While many analysts expect oil demand to rebound sharply once
the economy recovers, not everyone agrees that prices are
necessarily going to soar at that point.
Edward Morse, the chief economist at the New York broker LCM
Commodities, says that each energy shock in the last 60 years
resulted in lower growth for oil demand in
succeeding years.
This time, he said, should be no different. "The case is
overpowering," Morse said.
Before the energy crisis of 1973, he said, global oil demand was
growing at 8 percent a year. But by the late 1970s, as many
countries found ways to use less oil, that rate of growth had
slowed to 4 percent a year. Similarly, after the oil shock caused
by the Iranian revolution, demand growth slowed to 2 percent a
year. And in the decade after Iraq's invasion of Kuwait,
consumption increased 1.5 percent to 1.8 percent a year.
Morse estimates that in the next recovery, global oil demand
will grow perhaps 1 percent a year, because of lower demand growth
in the United States, China and the Middle East.
In the longer term, another factor may keep prices down. As OPEC
trims its output in the face of falling demand, it automatically
raises the amount of spare production capacity.
After years with a thin cushion — a factor in pushing prices up
— the market now has at least five million barrels a day of
untapped output potential. That level could rise to as high as
eight million barrels a day by the end of the year, according to
estimates by cartel officials, a level unseen in more than a
decade. The last time that happened, prices stayed low
for years.
"By any economic measure, we still have much more downside for
oil prices," said Adam Robinson, director of commodities at Armored
Wolf, a California hedge fund.
For the moment, the market's focus is on consumption rather than
supplies. In China, for example, oil consumption, which had been
growing at more than 10 percent a year, fell by 4 percent in
December, according to the International Energy Agency. This year,
the agency expects "paltry" growth of 0.7 percent in Chinese
oil demand.
In the United States last year, demand plummeted 6 percent, the
steepest decline in nearly three decades. With Americans traveling
less because of the bad economy, the demand for jet fuel fell 11
percent in January, compared with a year earlier.
A period of lower oil prices could also slow investments in
alternative energy, a sector that is already suffering from the
credit crisis and the economic slowdown. Without government
subsidies, many technologies cannot compete with oil at
today's prices.
Some oil executives, however, have sought to remain optimistic,
saying that costs for oil companies are beginning to fall.
"I remember a time when I thought $40 was a fantastic price,"
said Tony Hayward, chief executive of BP. "Not much has changed,
but we allowed our cost base to get ahead of us. The industry
worked very well at $40 a barrel four years ago."
Newsletter
Subscribe to our email list for regular free market updates
as well as a chance to get coupons!
Crude oil article in international herald tribune
DXO opinions
Posted by steve101 on 12th of Mar 2009 at 08:25 am
Wondering if crude could fall even more
In recent weeks, as oil traded around $40 a barrel, the conventional wisdom among specialists was that the price decline that began last summer was largely over. Amid production cuts by the OPEC cartel, oil had apparently found a floor that would last until the global economy rebounded.
But a growing chorus of analysts and economists is questioning that notion. While theirs is a minority view, they see troubling conditions in the oil market that could still push prices down sharply — and a global economy that is getting worse, not better. Some are predicting that oil could fall to $20 a barrel and stay low for years.
Petroleum executives generally do not regard this prospect as likely. But in a year when dire predictions about the economy keep coming true, they fear it is a possibility. Another big drop could lead to a sustained period of low investments, and many executives say that would set the stage for prices to soar once the global economy finally starts to recover.
"The industry needs reasonable prices," Zhou Jiping, the vice president of the China National Petroleum Corp., said at a conference last month in Houston held by Cambridge Energy Research Associates. "If prices stay below $40 a barrel, a large number of wells have to be shut down."
Lower oil prices have provided a welcome break in a tough economy. Gasoline, which peaked above $4 a gallon last summer, or 84 euro cents per liter, now sells for $1.94 on average. The drop has saved consumers billions of dollars.
Related Articles
Today in Business with Reuters
But the concern about lower oil prices crimping new investment is shared by experts at the International Energy Agency, a leading forecaster, which has repeatedly warned that a "supply crunch" within the next five years could push prices to new records.
Among the community of analysts who track the oil markets closely, the view that prices could keep falling in the near term is not widely held. The Organization of the Petroleum Exporting Countries, they point out, is propping up the market by cutting production. OPEC has announced three production cuts since September.
Indeed, prices have been rising in the last three weeks as traders calculate that the cartel will announce another cut at a meeting this weekend in Vienna. Oil closed in New York trading on Monday at $47.07 a barrel, up $1.55 and well above the recent low of $33 a barrel in December.
But as the global economic outlook worsens, the view that prices have farther to fall seems to be gaining adherents.
The debate is not just a proxy for varying predictions about the economy. It also reflects divergent opinions about the future of the oil business, which has been rocked by an unprecedented boom-and-bust cycle in recent months.
Predicting oil prices is a tricky business. As prices rose to $147 a barrel last year, some analysts suggested that oil would reach $200 a barrel. Instead, prices plummeted after their July peak, dropping by more than $100 since the summer. The recent rise has not altered the view of the camp that believes the fall in oil prices is not over.
One of the biggest uncertainties is whether today's market will mirror the early 1980s, when prices collapsed and stayed low for much of the next two decades, or whether it will prove more like 1998, when prices fell to $10 a barrel after the Asian financial crisis but rebounded within a few years as growth picked up.
With the global economy worsening and demand slowing, some economists, including Kenneth Rogoff of Harvard and Nouriel Roubini of New York University, say oil prices could keep declining in the short term.
"The twin engines of growth were the U.S. and China; the U.S. has fallen off and China has stalled, to put it mildly," Roubini said. "In my scenario, oil will fall lower. I would not be surprised if oil even went to $20, if the recession is more severe."
While many analysts expect oil demand to rebound sharply once the economy recovers, not everyone agrees that prices are necessarily going to soar at that point.
Edward Morse, the chief economist at the New York broker LCM Commodities, says that each energy shock in the last 60 years resulted in lower growth for oil demand in succeeding years.
This time, he said, should be no different. "The case is overpowering," Morse said.
Before the energy crisis of 1973, he said, global oil demand was growing at 8 percent a year. But by the late 1970s, as many countries found ways to use less oil, that rate of growth had slowed to 4 percent a year. Similarly, after the oil shock caused by the Iranian revolution, demand growth slowed to 2 percent a year. And in the decade after Iraq's invasion of Kuwait, consumption increased 1.5 percent to 1.8 percent a year.
Morse estimates that in the next recovery, global oil demand will grow perhaps 1 percent a year, because of lower demand growth in the United States, China and the Middle East.
In the longer term, another factor may keep prices down. As OPEC trims its output in the face of falling demand, it automatically raises the amount of spare production capacity.
After years with a thin cushion — a factor in pushing prices up — the market now has at least five million barrels a day of untapped output potential. That level could rise to as high as eight million barrels a day by the end of the year, according to estimates by cartel officials, a level unseen in more than a decade. The last time that happened, prices stayed low for years.
"By any economic measure, we still have much more downside for oil prices," said Adam Robinson, director of commodities at Armored Wolf, a California hedge fund.
For the moment, the market's focus is on consumption rather than supplies. In China, for example, oil consumption, which had been growing at more than 10 percent a year, fell by 4 percent in December, according to the International Energy Agency. This year, the agency expects "paltry" growth of 0.7 percent in Chinese oil demand.
In the United States last year, demand plummeted 6 percent, the steepest decline in nearly three decades. With Americans traveling less because of the bad economy, the demand for jet fuel fell 11 percent in January, compared with a year earlier.
A period of lower oil prices could also slow investments in alternative energy, a sector that is already suffering from the credit crisis and the economic slowdown. Without government subsidies, many technologies cannot compete with oil at today's prices.
Some oil executives, however, have sought to remain optimistic, saying that costs for oil companies are beginning to fall.
"I remember a time when I thought $40 was a fantastic price," said Tony Hayward, chief executive of BP. "Not much has changed, but we allowed our cost base to get ahead of us. The industry worked very well at $40 a barrel four years ago."