Many investors are still expecting oil prices to rebound back toward their highs but, according to some experts, this may not happen for another 20 years.
This time on FS Insider, Roberto Aguilera, adjunct research fellow at Curtin University in Australia and co-author of the book The Price of Oil, discussed why this price rebound is unlikely, and what long-term factors will keep oil prices low for the better part of a generation.
Technological Revolutions Pressure Price
In his book, Aguilera argues that the twin technological revolutions of hydraulic fracking and horizontal drilling will exert a long-term downward pressure on the price of oil, especially as these technological revolutions spread to the rest of the globe.
“We said that … as the revolution developed and expanded, it was bound to have a strong price-depressing impact,” he said.
Aguilera concluded prices will average between $40 and $60 a barrel until around the year 2035, implying two decades of low average prices.
“Supply from the shale sector has exceeded expectations and I believe it will continue to surprise the experts,” he said.
The advantages afforded by the shale revolution in the US are so strong that their international spread is inevitable, Aguilera added.
US geological conditions are likely not unique and the technology to exploit these resources is not proprietary, and so is widely available.
There’s always the chance that unforeseen geopolitical developments could send prices back to triple digits, such as a political revolution in a major oil producing country, Aguilera noted.
However, even if this happens, the twin technological revolutions have such a price-depressing impact that if oil prices do rise back to their highs, they will be quickly pushed down once again because of the expanded and diversified supply.
However, another potential influence that might send oil prices back up above his predicted range would be an ambitious global climate policy.
“If a serious climate policy was enacted … (it) would raise the cost of oil production and prices, and choke off demand, and result in a faster penetration of alternative sources like renewables,” he said.
Geopolitical Pressures and Peak Oil
Lower oil prices have already had important negative repercussions for income in oil-producing nations, with many being forced to make painful adjustments to shrinking public budgets, Aguilera stated.
The upside is, this may encourage them to consider a push for economic diversification. As a result, we may see a dampening effect over conflicts related to oil profits.
It’s been proven over the past few years that shale oil is broadly economic at $40 to $50 a barrel, he stated. If prices increase, we’ll see rigs come back more quickly and eventually production will increase.
“We demonstrate (in the book) that there are huge amounts of shale and conventional oil around the world, available at a cost of around $60 or, more optimistically, at $40,” Aguilera said. “That’s the price level required to bring production online at almost any conceivable level of demand. … The equilibrium price eventually will settle at that level of $40 to $60 dollars.”