Opinion: Oil Price Outlook

Diesel, gasoline and oil prices are at very low levels, and there appears to be little concern within trucking that this will change drastically in the near term. At the recent Oil & Money Conference conducted by the Energy Intelligence Group, executives and analysts within the oil industry seemed to concur with this assessment. Most speakers at the conference believe the price of oil will probably bounce around its current levels, at least for the next few months, and perhaps even longer.

First, numerous events induced the dramatic decreases witnessed over the last year, including weakening Asian economies, last winter’s warm temperatures in North America, increasing non-Iraqi OPEC production, and Iraq export expansion. All of these led to excess inventories, leading to a fall in prices.

Even though OPEC — the Organization of Petroleum Exporting Countries — doesn’t have the pricing power it once held, its members produce about 40% of worldwide oil output and still have the largest export capacity in the world — as well as reserves. The developed world imports roughly 54% of its oil consumption, with OPEC covering 75% of such imports and satisfying almost 41% of those countries’ total demand.

Furthermore, over the last several years, technology, efficiency and competition advancements have helped the oil industry produce more for relatively less. Just a few years ago, the cost of producing a barrel of oil was around $13, but today it is closer to $10. So even at $12 per barrel, the industry as a whole is earning revenue above production costs. Some analysts believe that production costs could drop even more as new upstream technologies develop, perhaps as low as $6 per barrel.

Should we expect the trading price of oil to drop this low? Probably not — oil is a limited resource, after all.

According to the experts, the world replaces only a portion of proven reserves with new discoveries each year. This derives from the fact that no significant new discoveries have emerged in many years, excluding a few exceptions in West Africa and offshore Brazil. In fact, new discoveries reached a high in the 1960s. As a result, the reserve-to-production ratio had been falling for the last several years until recently. Some believe production could peak as soon as the next two to three years for public oil companies. If this does develop, prices would most likely increase substantially and once again promote the status of Persian Gulf producers.

While this scenario seems unlikely today, remember that demand for oil will increase worldwide in tandem with growth in the developing countries. Currently, the U.S. uses exceedingly more energy than developing countries do — Americans consume 25% of the world’s energy. To put it in perspective, the average U.S. citizen consumes twice as much energy as the average European and 20 times more than the average Chinese citizen. Yet while the developing countries could see tremendous economic growth in the future, their expanded demand for petroleum should be partially offset by lower production costs on the supply side, thanks to technological advances, especially if we witness more privatizations of government-owned oil monopolies globally.

For the full story, see the Dec. 21 print edition of Transport Topics. Subscribe today.