So, this oil price hey?
Down 75% in a year, why? Is it a good thing? Surely, it means cheaper petrol AND therefore more money to spend on other goodies, right? Global warming means we don’t need our heaters on quite so much? (Perhaps NY and Washington readers might have a bit to say about that…)
A few years ago, when oil was fetching upwards of $130 a barrel, the media was full of articles on how we were about to run out of oil, that it would fetch $200 a barrel imminently, and asking how the hell would the world survive without it.
“An Oracle of Oil Predicts $200-a-Barrel Crude”
Gee, the experts got that right, didn’t they….?
The first thing you learn in high school economics is the concept of supply and demand, and how higher prices encourage more supply, and lower demand; and lower prices encourage lower supply and more demand.
It makes perfect sense – if you can fetch $130/barrel for every one you sell and it costs $100/bbl to produce, then you still clear $30. So far this has been what’s happened.
Have you heard talk about shale gas in the U.S? Or the Canadian oil sands? Or the Queensland Liquid Natural Gas [LNG] plants that have been/are being built? They’re all to do with more companies trying to sell more oil and gas for as much as they can (LNG is a substitute for oil, and so prices move more or less the same as oil).
Demand for oil is fairly consistent, and so with a whole heap more oil and oil substitutes available for this steady consumption, prices have to fall. There isn’t much more to what has happened in the oil market than that.
“Goldman Oil Prices Forecast: From $200 To $20 In Just A Few Years”
Good one fellas!
So what now?
Great question – I thought you’d never ask!
That’s really 2 questions though – will the oil price go back up, and do we actually prefer a lower oil price ? (Yep, I know you know that…)
It depends on what you call going back up? It’s at $30-35/bbl now depending on which day of the week it is. Of course it can go back up and probably will, at some stage, to $45-50 again. It rallied from $30 to $35 last week when it was reported that the Russians and Saudis may, and only may cooperate to cut back on their production. It is interesting to see there has actually been no comment from the Saudis though.
But back to $100+? I kinda doubt it. You see, the Saudis have a lot of oil. And not much else. Think about this: What if, in say 20-30 years from now, rather than running out of oil, you don’t actually need oil anymore? Electric cars, thanks Elon, nuclear powered energy, scary, yes, but also pretty realistic – the Japanese are fast learners, the French already use it, wind energy, solar energy. The list goes on
This is exactly where I believe the Saudis’ thinking is…:
“We’ve got a shedload of oil, nothing else, so let’s sell whatever we can, WHILE we can. And while we flood the market with oil at whatever price we can get, all these newly-established, johnny-come-lately companies thinking they too could get $130/bbl (so their cost of $100 didn’t matter) will fall by the wayside, meaning we Saudis can sell everything we have before the world no longer needs it.”
So no, I don’t think the oil price is going way back up to where it was a few years ago. Ever.
The theory is that for every $1 fall in the oil price, more is spent by the consumer than is lost by the producer, and so low oil prices should be good for all of us. But tell me, when you fill your car up with petrol and it costs $45 instead of $100, do you really see that as more money to ‘spend’ in the economy, or is it a happy saving that helps with ever rising school fees and essential costs of living, (which seem to rise at way more than the rate of inflation anyway, but that’s another story).
Gee, I even saw an article on the weekend saying that chocolate companies should be the one of the biggest beneficiaries of lower oil prices, since you will all now buy some chocolate at the petrol station with those savings at the bowser. Come on! We all buy that chocolate anyway! [editor’s note – I am living proof – SL].
The whole world is still in belt tightening mode – there isn’t massive economic growth coming along anytime soon – and the Global Financial Crisis [GFC] of 2008 has paved the way for a new thinking – save a bit more, spend a bit less, just in case.
So there you have it – my simple thoughts on oil. It ain’t going back to $100 – ever – and we aren’t spending the extra dollars we save at the bowser on extra chocolates, or anything much else for that matter. Get used to it. And, unless you are a shareholder in an oil company, don’t fret too much about the headlines you see on oil – it’s really not that bad for consumers. So enjoy that chocolate!