Why Oil Prices Might Never Recover

Oil & Natural Gas / Conventional Oil & Gas Resources / Economics

Date posted: 07/21/16

Arthur Berman opines that 2 years into the global oil-price collapse, it seems unlikely that prices will return to sustained levels above $70 per barrel any time soon or perhaps, never. That is because the global economy is exhausted. The current oil-price rally is over as Berman predicted several months ago and prices are heading down toward $40 per barrel. Oil has been re-valued to affordable levels based on the real value of money. The market now accepts the erroneous producer claims of profitability below the cost of production and has adjusted expectations accordingly. Meanwhile, a global uprising is unfolding. The U.K. vote to exit the European Union is part of it. So is the Trump presidential candidacy in the U.S. and the re-run of the presidential election in Austria. Radical Islam and the Arab Spring were precursors. People want to throw out the elites who led the world into such a mess while assuring them that everything was fine. The uprising seems to be about immigration and borders but it is really about hard times in a failing global economy. Debt and the cost of energy are the pillars that underlie that failure and the resulting discontent. Immigrants and infidels are scapegoats invented by demagogues. Energy is the economy. Energy resources are the reserve account behind currency. The economy can grow as long as there is surplus affordable energy in that account. The economy stops growing when the cost of energy production becomes unaffordable. It is irrelevant that oil companies can make a profit at unaffordable prices. The oil-price collapse that began in mid-2014 followed the longest period of unaffordable oil prices in history. Monthly oil prices (in 2016 dollars) were above $90 per barrel for 48 months from November 2010 through September 2014. Renewable energy will be increasingly part of the landscape but its enthusiasts are also magical thinkers. In 2015, renewables accounted for only 3% of U.S. primary energy consumption.