What Will Prevent Oil Prices From Dropping Or Increasing Forever?

The recent fall in oil prices has been the subject of a number of debates and analyses. A great deal of this discussion has focused on whether this price movement is conjectural or permanent. In a previous contribution to Seeking Alpha, I have taken a position on this issue. In my view, the phenomenon might be long-lasting due to three reasons.

First, that the current deflation in China would have contributed to the slowdown of its economy. That, together with the decision of the Chinese government to introduce electric vehicles in their fleet to alleviate their high levels of air pollution, translated into a lower demand and a lower international price for the fossil fuel.

Second, that the boom of shale gas in the U.S. has led to a drop in oil prices as a result of an increase in the production of it. That’s either because an upsurge of this type of gas production is simultaneously an increase of shale oil, or because a significant portion of excess shale gas becomes diesel, reducing U.S. demand for oil and oil imports.

Third, the worsening of climate change would have prompted the switch from oil to renewable and non-renewable energy alternatives and the electrification of the automobile industry in the world. That would have started to be reflected in a decreased demand for diesel and gasoline.

A month and a half later, my contribution was complemented by a Washington Post article. To begin, there is the possible decrease in Chinese demand, evidenced by a recent fall in oil consumption in Europe and Japan was supplemented. In addition, with information from the Energy Information Administration (EIA), it was reported that at present, thanks to the oil shale revolution, the U.S. was producing two times more oil than a decade ago and that other countries (Canada, Russia and Syria) had begun to produce more oil, all of which would have influenced prices. Note in this connection that the decision in late November last year of the Organization of Petroleum Exporting Countries (OPEC) not to reduce its oil production to maintain their share of the market which led to a further fall in the price of oil would have been aimed at displacing U.S. shale drillers from the oil market. Lastly, my argument about electrification of the global automotive industry was reinforced with data (also from the EIA) on use of less fuel in vehicles in the U.S. in 2014 as compared to 2008.

In this article, I intend to reconcile the notion of a permanent fall of oil prices with the contention that “oil prices won’t drop forever” I endorsed in a 2009 piece published both on Industrial Minerals and EV World. And there’s the fact that global warming is already forcing many countries to reduce their carbon dioxide emissions so as to avoid climate change. There’s also the argument that in about a decade peak oil is likely to induce most countries to further decrease their demand for oil in response to an ever-diminishing supply, so as to circumvent a new permanent hike in oil prices, that I advanced by and large in a 2012 Seeking Alpha contribution.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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