After reaching historic high prices last month, oil prices have started to drift lower, falling more than $5/barrel one day last week.
What’s causing the drop?
The Times has an article discussing the causes. The short answer is that the high prices earlier this year have caused significant changes in consumer consumption around the world – dropping use by more than 10%. Additionally Saudi Arabia has pledged and is acting to increase their production rate. So we have less demand, more supply and falling prices.
But, this is a sign that we’re starting to manage the crisis better, not a sign that the crisis is over.
The article continues with a discussion about the long-term prospects for oil prices:
“Nevertheless, while the recent falls have been welcome, there is good reason to believe that oil prices are unlikely to fall to the levels consumers were comfortable with a few years ago.
The days of $30 or $40 for a barrel of oil are probably over. This is because the fundamental factors that have driven oil to such high levels remain in place, even against the background of a slowing global economy.
Booming demand for energy from developing countries is not going to abate soon. Meanwhile, constraints on global supply because of declining output outside the OPEC exporters’ cartel, and a lack of investment in production and refining capacity are not problems that can be solved overnight.
Saudi Arabia is the only country in the world with the ability to significantly raise production quickly and most experts believe it is operating close to its current limit.
Some of the world’s biggest oil companies, including Total and Chevron, have cast doubt over whether global production, which stands at around 85 million barrels per day, can ever exceed 100 million barrels, despite demand projections of as much as 130 million barrels per day within a few decades by the US Government.
It is worth remembering that oil at the current level of $118 per barrel, or even $100 or $80, is by historic standards extremely high.
Predicting where oil prices will head next is virtually impossible, but there is a compelling argument they will remain high for a sustained period.”
Read the full article here.
All of which means that the pain we are going to feel is going to be 10% less painful. (Or something on that order at any rate.) This is good news in that it may offer us all a little more flexibility as we think through the steps needed to make a transition away from high consumption of expensive limited resources.