With oil prices falling below $50 a barrel for the first time since 2009 in the US, many are wondering if cheap oil is here to stay. Here are some of the most important factors to look out for.
Since the price of oil is tied to a wide range of variables, from economic events, to wars, forecasting their trajectory with confidence is a feat even expert analysts struggle with.
There are many things, however, that one can look out for. Below are three of the most important global factors which could affect oil prices in the foreseeable future.
The intensification of global conflicts can contribute greatly to a spike in oil demand, causing prices to rise. This is something we’ve seen more recently in Yemen and previously in Libya.
In 2011, Libya, one of the world’s major crude oil producing countries, was unable to keep up with demand due to its disruptive civil war. This caused supply to plummet and demand to rise – a duo of circumstances that lead to oil prices of about $105 per barrel in 2011.
Yemen threatens to do the same, though not through the same means. The country may not be a major crude producer, but it is located strategically next to one: Saudi Arabia.
If violence spreads in Yemen, it could affect a major waterway located in South Yemen called the Gulf of Aden. According to Reuters, about 30 percent of Europe’s oil passes through this waterway and about 11 percent of the world’s total seaborne petroleum.
Since Saudi Arabia is the third highest oil producer in the world, this makes the Gulf of Aden a crucial flashpoint in the Yemeni conflict – one that could have a drastic impact on the price of oil in the future.
Already, since Saudi Arabia began bombing Yemen, we’ve seen a 6 percent increase in the price of oil.
2.) Shale remaining constant
In 2014, the US was the largest oil producing country in the world, pumping out nearly 12 million barrels per day – about 1 million more than the next largest producer, Russia. This was no coincidence; in fact, it had everything to do with shale oil.
Shale oil is the crude oil extracted from the “hydro-fracking” of natural gas, which has propelled the US to the top of the crude producing food chain in the last year. Its spot at the top, however, is far from guaranteed.
So far, shale oil has proven to be significantly more expensive than conventional drilling, since the extraction process is much harder, and requires constant innovation to keep up with demand.
New technologies like “pad drilling,” which allows drillers to create multiple wells using only a few rigs, have kept oil production steady, but technology might only get drillers so far.
The biggest concern about shale oil revolves around production. According to the National Governor’s Association, a typical well in the Bakken shale formation in North Dakota declines in output by about 65 percent (pdf) after the first year.
This makes shale oil deposits quite a gamble for those looking to rely on its production for the sustainable future, and international petroleum organization OPEC has already forecasted their demise this year.
3.) China’s economy
As one of the top oil consuming countries in the world, second only to the US, China’s role in global consumption will also play a large role in swaying demand, and therefore, oil prices.
This forecast, however, is shadowed conversely by tepid economic growth from China’s economy. China’s GDP grew by 7.4 percent in 2014, which signals its lowest rate of growth since 1990.
If the Chinese economy continues to slow, it could have a significant impact on demand for oil globally, keeping oil prices lower for the foreseeable future.