Why oil prices will keep falling

May 25, 2012 at 4:27 pm Leave a comment

This Wall street journal article sums up the reasons why oil price will fall in the long run.

Why Oil Prices Will Keep Falling-Nansen Saleri
New energy extraction technologies will overcome bad policies and geopolitical risks.

“And even a price spike can have unintended consequences that ultimately lower prices. In the U.S., for instance, a price spike would give consumers an incentive to move toward non-crude alternatives, namely hybrid and electric vehicles. American transportation’s slow transition to a more natural-gas-centric fuel will get a boost from supply disruptions.

Neither the Arab Spring nor the collapse of the Soviet Union was forecast by experts. Each simply happened. Who is to say when Iran or Venezuela will shed their handicapped status in petroleum production and produce more? The potential for more global supply to hold down prices is not insignificant.

Iran’s current production capabilities are decades behind the rest of the oil industry. With their huge reserves of some 137 billion barrels, the Iranians have substantial room to increase production. Whether they do will depend on several factors, including U.S. sanctions and political change. Daily Iranian production capacity of five to seven million barrels (double the current level) appears achievable. Iraq increased its daily production by 50% after the 2003 war began—to three million barrels today compared with two million barrels prewar. Libya’s quick recovery and resurgence in crude exports since the chaos that brought down the Gadhafi regime is not the result of political stability or democratic reforms.

Some may argue that burgeoning middle classes in China and India will cause a sea change in the demand for oil, with the competition for fuel driving prices up. Not so. Consumption efficiencies will likely offset demand pressures. One game-changer is electric cars, which in essence allow nuclear plants or unconventional gas to fuel future cars via power grids.

The growing influence of modern technologies is evident everywhere. Net daily U.S. imports of petroleum have dropped by 50% to eight million barrels over the last five years. Imports are likely to shrink further in the coming decade due to an upsurge in domestic oil and gas supplies.

The U.S. is on its way to becoming energy independent—a state that can be defined as, say, 90%-plus self-sufficiency—riding its advantage in unconventional oil and gas resources. The question is how fast will this happen.

Equating shale oil and gas resources with fracking—today’s technical solution to releasing the oil—is disingenuous at best. The U.S. has abundant oil and even more massive gas resources. Fracking does not have a monopoly over future exploitation techniques any more than rotary phones did over the making of long-distance calls. What fracking and next-generation technologies do provide is an orderly transition to the post-petroleum era.”

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