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Will Oil Prices Stay Low?

Oil prices over the last two years have plummeted, and they don’t appear to be recovering. But, what market forces drove this change and what can we expect for the future? NBR took a deeper look into some of the major factors that have changed the global oil landscape.

In June 2014, the cost of crude oil cost was around $112 per barrel, falling to $62 per barrel in December of that same year. So what happened? The short answer is: supply increased, by a lot, and the demand for oil never managed to catch up. According to U.S. Energy Information Administration (EIA) numbers, the global oil production levels have remained higher than consumption levels since early 2014. Supply has typically not been greater than demand for such an extended period of time. That supply glut has been the most significant factor for the decline in oil prices.

A lot of the increase in oil production is actually coming from the United States. Between 2010 and 2015, U.S. crude oil production has grown nearly 72 percent, according to the EIA. That growth is primarily the result of increased offshore drilling in the Gulf of Mexico and the extraction of tight oil, also known as shale oil. As the U.S. has moved to reduce the amount of oil it is importing, countries like Saudi Arabia have needed to sell their barrels elsewhere.

While there remains an oversupply of oil, it seems that the continued increases in world oil production are not likely to stop anytime soon. According to the Wall Street Journal, Russia, Libya, and Nigeria alone have increased global production by a million barrels of oil per day combined. The Organization of Petroleum Exporting Countries (OPEC), which includes some of the world’s largest oil-producing countries such as Saudi Arabia, Iran, and Iraq, will meet on November 30 to finalize a potential deal to limit output. Their target is to cut production by somewhere between 200,000 and 700,000 barrels per day. However, it is still uncertain if OPEC will reach its first deal since 2008 to limit output. According to the  Wall Street Journal report, countries such as Libya, Nigeria, Iraq, and especially Iran remain inflexible to the proposed output cuts.

As more countries move towards renewable energy sources, the demand for oil might continue to decline and result in a greater fall in future oil prices. This is certainly a trend to keep a closer eye on. In 2015, renewable energy sources accounted for about 10 percent of total U.S. energy consumption and about 13 percent of electricity generation. Hydroelectric power and wind energy are the largest contributors, per EIA numbers. According to geophysicist Dr. Steve Jacobsen, Associate Professor of Earth and Planetary Sciences at Northwestern University, the growth rate of renewable energy is “faster now than ever before.”

Jacobsen sees solar energy as having great potential. Although it currently accounts for only a small portion of U.S. electricity generation, the sector grew at a rate of  30 percent in terms of consumption, more than any other sector in the U.S. Jacobsen identified Germany, a country without particularly high levels of sun exposure, as an example of how solar energy could become an important future alternative to oil for some countries. Solar energy accounted for nearly 7 percent of German electricity consumption in 2014.

As we look towards the future of global oil production, the recent election of Donald Trump as President of the United States has created a new level of uncertainty that could have significant ramifications. According to his campaign website, Donald Trump is advocating for “unleashing America’s $50 trillion in untapped shale, oil, and natural gas reserves.” Doing so could decrease the price of oil even more. Mr. Trump’s policies could present a reversal from the recent trend of high growth in renewable energy sources; instead pushing growth into cheaper sources of energy such as coal and oil. At the same time, he said that he is open to “all sorts of energy…including solar,” so it remains to be seen what changes we can expect from the U.S. moving forward.

Note: Prices are for West Texas Intermediate (WTI), a variety of crude oil and an important benchmark for oil prices.

Javier Madrazo

About Javier Madrazo

Javier is a freshman from Mexico City majoring in economics. He likes photography, the Steelers, and watching Seinfeld.

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