There will be oil, but at what price? – Chris Nelder and Gregor Macdonald
1. Introduction
It would be fair to say that the timing of the sudden drop in the price of oil since June 2014 took energy and financial analysts by surprise. After averaging around US$110 per barrel since 2011 (IEA, 2013: 6), suggesting a ‘new normal’, the last six months have seen the price of oil fall to around US$50 per barrel (as of February 2015). But although the timing of this price drop was not forecast by analysts with any precision, there are economic, geological, and geopolitical dynamics at play in light of which the price volatility we are seeing is not actually that surprising.
In my article ‘The New Economics of Oil’ (Alexander, 2014) – published a few months prior to the fall in price – I explained why expensive oil has a stagnating effect on oil-dependent economies, which I argued could lead to a drop in oil demand and thus a sharp fall in price.[1] I also explained why expensive oil can incentivise greater investment in production while dis-incentivising consumption, a dynamic that can increase oil production faster than demand and thereby generate short-term oil gluts that can also lead to price volatility, only via a different route.[2] Both of these dynamics go a long way to explaining the current state of oil markets. While the exact timing of the current fall in prices may have come as a surprise to everyone, including me, the phenomenon itself is quite comprehensible when one recognises the intimate connection between energy (especially oil) and economics. As we will see, the ever-present influence of geopolitics is shaping oil markets too.
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