By Cees Bruggemans
Last week I did a short note on global oil company concerns that the Opec market share defence, resulting oil price collapse and culling of non-Opec supply marginals will lead to new future demand/supply imbalances as not enough new investment will be undertaken, giving us new oil prices surges, potentially well beyond seen to date ($200 being mentioned).
That note in turn invited tempering comments.
The present fall in oil prices is not just due to swing producer behaviour. It is also, importantly, a function of the slowdown in global energy demand. This is a function of years of very high energy prices, and also of the slow recuperation by the world economy generally from the major global financial and existential crises of the past decade, including China’s economic repositioning.
In addition, there are the global gains in energy efficiency, a function of technical progress, which are improving all the time in rich countries, and whose impact are boosted by their transference to the developing world where energy efficiency is still relatively (very) low.
This transference is a cumulative process, like an incoming high tide, and as irresistible, on the back of new technology generations becoming embedded in new fixed investment revitalizing the capital stock.
These very strong global currents are likely to keep the oil (energy) price lower for longer than what concerns about new investment trends may suggest.
The era of cheaper energy abruptly opening up since mid-2014, as it last did in the early 1980s, may therefore last longer than perhaps imagined when linking it as of old to short-term Opec maximizing tactics of bygone generations, or when inherently assumed in projecting new supply investment.
Going by news reports, the passing of the Saudi King last week is unlikely to change the Saudi policy stance, seeing that the new King reportedly was at the centre of the new oil strategy formulation.
Then too, not all major new oil and gas finds having been made are going to be neutralised in coming years by a halved marker price ($50-$70). The rundown of existing fields will still occur, but new supply additions may still surprise.
The futures markets seemingly smells “low-for-longer” oil prices, with the Brent five-year futures already down to $73. Time will tell its true dimensions. It may perhaps not be for a full generation, but its era will probably still register in energy’s history as much more than a recession-blip.
