There are always caveats to any predictions. I may be missing something; unexpected events (wars, disasters, severe government intervention,…) can happen; etc. Still, here’s what I think should or could happen next:
- Shale and high-cost oil companies will default on loans, significantly devalue and face bankruptcy. This already started and is unavoidable. Loans taken based on $80/barrel cannot be paid back in a $50/barrel world. It is very puzzling that citibank, who is most exposed to losses from shale is also Ed Morse’s home and had to know all of this.
- As drilled shale wells dry up (most shale wells have oil for less than three years), prices will start climbing. If investors get cold feet, prices may exceed the $70 mark for a while, but that shouldn’t last for long. Enough shale should be profitable above $65-$70 and it is easy enough to see who’s drilling where to avoid another oil glut.
- Governments across the globe will face difficult environmental decisions regarding shale. The world has enough shale in the ground1 and extraction costs are decreasing. Shale is creating jobs in the US and elsewhere. However, there are serious claims about extremely harmful local environmental effects (water damage, earthquakes, etc.). To the extent the concerns can be validated, shale’s future may be limited. Such limits will also require however that governments intervene against local profits for the sake of environmental concerns.
- Electric/hydrogen/hybrid vehicles may remove a third of the demand for oil in 10-15 years. For this, the new technologies need to be a profitable alternative to oil $65 a barrel. If they are, everything changes.
- China is now the world’s largest oil importer, and demand is growing fast. This can save OPEC in the short run. Longer term (10 years?), China has an extremely aggressive electric vehicle program and huge shale reserves.
- OPEC’s future is difficult. First, it is not clear all members agree that they should not (or cannot) do more to increase prices. Second, lower oil prices reduce the cartel’s value proposition to its members, as does the threat from alternative energy sources. These and other concerns increases the risk some members will leave the cartel, causing a steeper decrease in prices (or other geopolitical issues).
Summing up, standard supply and demand economics provide a pretty compelling explanation of the oil price rollercoaster and a very clear prediction for the future. Unless shale is blocked or somehow depleted, prices will rarely surpass $70 (probably $65) a barrel in the relevant future, and there’s nothing OPEC can really do about it.