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Are Low Oil Prices here to Stay

5/4/2018

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​Spoiler alert, foregoing any shock to the economy, such as a large bomb exploding or a war that disrupts oil flow, yes they are here to stay compliments of US fracking technology.  If you look at the two charts below, they show the price of oil in nominal dollars and then adjusted for inflation in 2017 dollars.  To put it in perspective, $1 in 1973, the 1st oil crisis, has the same purchasing power as $5.51 now.  So if a barrel of oil was selling for $7.85 then, it would be akin to $43.25 now.  The question that comes to mind should then be, what do I consider to be low oil prices.  In today’s dollars and cents, anything under $75-$80 I feel is reasonable and low by historical standards.  The highest that oil has ever been was $147 in 2008 or $167 in 2017 prices and gas at the pump was above $4 for a gallon of regular.  A general rule of thumb is every time that the price of oil/barrel changes by $1, it equates to 2.5 cents at the pump.  Before we go any further some statistics and information on oil.

​   Worldwide oil demand is a little over 100 million barrels/day and supply is slightly more.  US oil demand is about 1/5 of that at 20 million barrels/day, and as a result, the US is a net exporter of oil.  The largest oil producer (see chart) is Russia at 11 million barrels per day followed by the US at 10.62 and Saudi Arabia at about 10.  Saudi Arabia is capable of producing more, but they have reduced production as part of a voluntary OPEC cutback to prop up prices.  

  More background on oil and production.  In the 1956, Marion Hubbert, an American Geologist came forth with a theory concerning a countries oil production hence known as Hubbert’s Peak.  Hubbert stated that fossil fuel production for a country would follow that of a normal bell shaped curve.  It will increase at an increasing, then increase at a decreasing rate, reach a peak and then decrease.  The ultimate conclusion is that we (the world) will ultimately deplete fossil fuel and al alternate source is needed.  If you look at the charts below for Norway, China and the US, it follow the theory perfectly.  However, along comes fracking technology and within 10 years, we have doubled the production of US oil.  Production is expected to increase, particularly as oil remains above $60, and  we are expected to surpass Russia as the number 1 producer of oil in the world.  The EIA (Energy Information Agency) has stated that we have proven oil reserves of over 35 billion barrels and from the US Geological association, over a trillion barrels of remaining reserves and the EIA is lower at 200 billion. 

    Given the above, I see continuing cheap oil in the foreseeable future.
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    John Tommasi is a retired Senior Lecturer of Economics & Finance from Bentley University and  the University of New Hampshire.

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