The dramatic markdown in oil prices in the years of 2014 and 2015 has gotten everyone talking. On one side, there are those who say that oil is simply too big a component of our lives for prices to remain this low, and on the other there are those who believe that a combination of supply-side and demand-side factors will make sure that oil prices will stay at the current level, and perhaps even go lower. I tend to agree more with the latter, as a plethora of conditions are required for oil prices to go up, and, as of now, none of them are being met, and perhaps will not be for the foreseeable future. The first reason why oil prices will go lower from here is a reduction in global demand.
Although oil still plays a major role in our lives in 2015, the popularity of renewable energy has surged, with many seeing it as a viable alternative to the fossil fuels of years gone by. Global oil demand is forecast to slow to 1.2 mb/d in 2016, from an average of 1.4 mb/d this year. This evidence proves that oil is slowly but surely going out of fashion as a viable source of energy, with many citing the damage it causes to the environment as a reason to stop using it. With environmental issues gaining more prominence now than ever before, oil is being looked down upon in many developed countries, in favour of more progressive forms of energy such as solar power. This trend does not seem to be upending any time soon either, as environmentalists are raising awareness with a renewed verve and vigour. The coming rise of the electric car will only drop demand further, which only has one outcome: a reduction in prices.
In addition to this, the efficiency of oil production globally has also increased massively, with more and more producers worldwide finding more cost-effective ways to produce oil. This means that producers will require a lower and lower oil price to stay in business, as their operating costs will not be so significant anymore. The increased mechanisation of labour also is cause for concern for oil prices, as oil can be produced continually throughout the day now. Combine this knowledge with Saudi Arabia led OPEC’s stubbornness not to cut production, and you get substantially lower oil prices. We are definitely in an “oil war” of sorts at this point, with barely any producers willing to back down and stop producing so much, dropping prices.
The final point, which I have to make regarding oil prices, is that there is no incentive to cut production for the major producers. As aforementioned, corporations can remain in the green without $100 oil, and so there is frankly no reason to make an effort to cut production when they are in profit already. When you combine the supply-side and demand-side factors mentioned above, the logical conclusion to derive from them is that oil will remain very low for quite a long period of time from now. There are no logical reasons to go against $15 oil, and I, quite frankly, believe oil will flirt with those levels for an extended duration. After that? Who knows.
I have to stress that these are simply my opinions, and that they are not meant to be taken as fact. Oil prices can just as easily go up as go down from here, and I do not proclaim to be speaking facts, simply my opinions. Criticisms are welcomed in the comment section, and are actually what I most look forward to when reading comments!