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Prediction: Oil price plunge & California comeback

May 31, 2013

Michael HendrixNational-chamber-foundation
Director, Research & Emerging Issues
U.S. Chamber Foundation Forum for Innovation

for your Friday reading.

Is the price of oil about to plunge? A new forecast from the International Energy Agency finds growing spare capacity in the global oil market, with many oil fields operating at less than full capacity. Recent years have seen oil markets sited on a precipice, with the merest hint of instability sending prices rocketing. Spare capacity will double next year and remain elevated through 2018. Here’s how this trend will impact the price of a barrel of oil:

“Brent crude is currently trading at about $102 a barrel. The IEA is forecasting $93 a barrel by 2018, and Brent futures on the ICE exchange are trading at $89 a barrel for that year. But prices could plunge more—last year, Citigroup forecast average $80-a-barrel prices through 2017, and they could drop even below that.”

Source: International Energy Administration (via Quartz)

Speaking of energy-related matters, it appears that a California comeback is possible thanks to the Monterey Shale Formation. This Rhode Island-sized patch of oil—stretching from Modesto to Bakersfield—holds upwards of 64% of all shale oil reserves in the United States. This could really benefit both California manufacturers as well as the struggling towns and cities in this stretch of California’s Central Valley.

 

  
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Bob Clark May 31, 2013

I am seeing more of a long term plateau to oil prices, with year to year economic and geopolitical cycles helping to cause year to year oil price variation. OPEC can and often does cut its own production to stabilize price for extended periods, counted in years. OPEC has this ability to cut currently. Then, too, Canada’s tar-sands oil supply is not cheap to produce, and so, Canadian oil production will slump if oil prices fall towards the $60 per barrel mark (West Texas Intermediate oil benchmark). Another big factor currently is oil demand is globally soft because of Europe’s steep economic recession. But on the flip side, China’s days of very heady economic growth are probably over.

The horizontal drilling and hydraulic fracturing technology causing the current surge in U.S oil production should spread globally (and to California), helping to ramp higher global oil supply and offset recovery in oil demand spurred by recovery in economic growth in the developed world.

The new normal in oil price might be in and around $80 per barrel. This is real good news because it removes the economic bottleneck represented by constrained oil supply in the past ten years or so (2002 to 2012). The inflation of the past decade is in large part driven by oil, as there generally exists a large global surplus of labor. The reason central banks can create massive amounts of new money without spurring inflation is because of the global glut in labor, and now energy is fading as a bottleneck; possibly giving greater effectiveness to money creation in helping spur economic recovery.

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