Friday 29 Mar 2024
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KUALA LUMPUR (June 30): The oil price collapse of 2014–2015 began one year ago this month, and the world crossed a boundary in which prices are not only lower now but will probably remain lower for some time, according to energy portal Oilprice.com.

In an opinion piece June 29, petroleum geologist Arthur Berman said this represented a phase change like when water turns into ice, meaning the composition was the same as before but the physical state and governing laws were different.

Berman said that for oil prices, the phase change was caused mostly by the growth of a new source of supply from unconventional, expensive oil.

“Expensive oil made sense only because of the longest period ever of high oil prices in real dollars from late 2010 until mid-2014,” he said.

He explained that the phase change occurred also because of a profoundly weakened global economy and lower demand growth for oil.

“This followed the 2008 Financial Collapse and the preceding decades of reliance on debt to create economic expansion in a world approaching the limits of growth.

“If the cause of the Financial Collapse was too much debt, the solution taken by central banks was more debt,” he said.

Berman said this may have saved the world from an even worse crisis in 2008–2009 but it did not result in growing demand for oil and other commodities necessary for an expanding economy.

He also said that prolonged high oil prices caused demand destruction.

“This also allowed the expansion of renewable energy that could compete only at high energy costs.

“Concerns about global climate change and its relationship to burning oil and other fossil energy threatened the future interests of conventional oil-exporting countries,” he said.

Berman said the Organisation of Petroleum Exporting Countries (OPEC) hoped to regain market share from expensive unconventional oil and renewable energy, and to renew demand for oil through several years of low oil prices.

He said OPEC increased production in mid-2014, and decided not to cut production at its November 2014 meeting. By January 2015 oil prices fell below US$50 per barrel.

“Most observers expected a sharp reduction in US tight oil production after rig counts fell with lower prices.

“Production fell in early 2015 but recovered as new capital poured into North American E&P (exploration and production) companies.

“This and the partial recovery of oil prices into the mid-US$60 per barrel range gave expensive oil another day to survive and fight,” he said.

Berman said if capital continues to flow to unconventional oil companies and OPEC’s resolve stays firm, oil prices could average near the present range for many years.

He said oil prices would probably fall in the second half of 2015 as the ongoing production surplus and weak demand overcome the sentiment-based belief that a price recovery is already underway.

“Oil prices must inevitably rise as unconventional production peaks over the next decade and oil-exporting countries increasingly consume more of their own oil.

“Politically driven supply interruptions will inevitably punctuate the emerging new reality with periods of higher prices.

“For now, however, we have crossed a boundary and notions of normal or business-as-usual should be put aside,” he said.

 

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