Are higher global oil prices likely?

The world economy consumes approximately 97 million barrels per day (mbpd) of various types of crude oil. The Organization of the Petroleum Exporting Countries (OPEC), with 14 member countries, collectively produces on average 31 mbpd, with Saudi Arabia the de facto leader producing the largest amount of about 10 to 11 mbpd.

Since the formation of OPEC in the 1970s Saudi Arabia has been the “swing supplier” managing that supply of oil in the global marketplace — and by extension the price of which the commodity is traded. Then came the disruptive, uncontrolled supply of the US “Tight Shale Sweet Light” crude oil to the market, which eroded the effectiveness of OPEC classic methods of stabilising the oil market.

Oil price reached a historic high of US$140 per barrel in mid-2008 and dropped to a low of US$41 per barrel in 2009. The price rocketed up to US$113 per barrel in 2011, then fell to US$47 in late 2014, then further below US$30 per barrel in 2016. Never have oil prices seen such volatility in recent years, if at all.

The volatility is primarily caused by the US shale oil producers and OPEC’s several failed attempts to shut down the US oil production, which has proven to be resilient against OPEC’s best efforts on its own.

The challenge for OPEC countries is that they favour a high oil price to support their economies. Countries, such as Venezuela, Nigeria, Iraq and Libya to name a few, without large sovereign funds reserved require oil prices of between US$80 to US$100 to balance their national budgets. However, higher global oil prices incentivise more US shale oil producers to produce more of their expensive “tight oil” to the market, thus increasing supply and causing prices to collapse. Sustained low oil prices cause financial distress and bankruptcy for shale producers forcing them out of the market or shutting down their production, thus reducing supply and causing oil prices to rise. It is this new disruptive cycle which leads to price volatility that OPEC is struggling to manage.

In the past, before the US shale oil producers, Saudi Arabia, basically on its own, would use its spare capacity to stabilise global oil prices. If the supply of oil in market was tight, they would intervene and produce more to balance the market. The converse is true, if the global inventory level of oil was too high, causing oil prices to fall, they would reduce their production of oil causing prices to rise.

http://www.jamaicaobserver.com/opinion/are-higher-global-oil-prices-likely-_130564