2009 The Last of Cheap Gas - 1/23/09

When oil was $147 a barrel in July many were predicting $200 a barrel in the near future.  Today at $42 a barrel, it is now predicted by some that we could see $25 a barrel in 2009.  Just like $200 a barrel, I don’t think we will see $25 a barrel.

Prices as low as they are now it is welcomed by many consumers and hopefully will help the economy turn around before year’s end.  The fact is oil will continue to supply the largest share of the world’s energy for the next several years.  Alternatives to petroleum just cannot be put in place that quickly.  The US Department of Energy predicts that petroleum will still make up 38 percent of the U.S.’s energy supply in 2015.  That percentage is expected to decline slightly as biofuel and alternatives come on board.

Low oil prices may be good for the consumer, but it is bad for producers who stop investments in oil ventures like offshore drilling and the development of biofuel.

Oil prices have fell off a cliff because of the plunge in demand due to the onset of a huge global recession.  We most likely will not see $147 a barrel this year, but if demand picks up we could see $80 a barrel by the summer of this year.  If things get worse and demand falls more it will be the first time in three decades world consumption would have declined two years in a row.  The Department of Energy is predicting a fall in global demand in 2009 by an amazing 450,000 barrels per day.

The oil industry is strapped with excess output and insufficient demand.  Even with the OPEC cut in output in December by 2.2 million per day, there has been no increase in the price.  This supply and demand imbalance may last until the middle of 2009 or some believe until the beginning of 2010.  China’s demand does have a big factor in when prices will rise.  Between 2002 and 2007 China accounted for 35 percent of the total increase in world oil consumption.  If Chinese demand continues to falter like their economy, oil and gas prices will continue to be depressed.

With oil producers not investing in new production, when demand for oil begins there is most likely going to be a sharp rise in price due to output not meeting demand. 

Saudi Arabia has announced delays in four major energy projects due to the slowdown in oil demand.  Most of the easy to get oil reserves have now been exhausted and tough to get oil projects are not profitable with oil below $50, so they have been delayed.  Oil will need to be back at $80 before these projects get started again.

The run up in oil between 2003 and 2008 was the result of the increase in global demand and the perception of dwindling supply.  The imminent arrival of “peak oil” fueled major consuming nations to secure foreign sources of oil as quick as they could.  This has recently abated. 

The low price of oil will put oil producing countries under extreme pressure.  They rely on this income to finance health, education, food and energy subsidies and youth employment.  With this income now almost gone it could spark widespread protest in many oil producing countries like Iran, where unemployment and cost of living is on the rise. 

With many young men losing their jobs in these countries and the upsurge in the popularity of Islam this could set the stage for a major upsurge in anti-government unrest and violence in these countries and toward the U.S. 

Prices will rise again this summer anywhere from $60 to $80 a barrel most likely.  When the world recession is over and demand really kicks in inadequate supply will drive prices much higher again.  The world is addicted to oil, but through strong leadership we can be on our way toward energy independence.

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