Bloomberg: “Rising oil prices are prompting forecasts of a return to $100 a barrel for the first time since 2014, creating both winners and losers in the world economy.”
The media is full of stories predicting that the oil price will go over $100 a barrel within a year or two while others predict “lower, longer” prices. Odd as it might seem, both are possible depending primarily on what happens in certain oil producers, especially Iran and Venezuela, as well as Libya and Nigeria. All these countries are suffering from political problems of different sorts, and each could see either a recovery in production or further disruptions.
But this also reflects a tendency towards superficial views of the market. This was made obvious when the price of oil was over $100 a barrel and many executives argued that the marginal cost of production was $100, so that the price could not be below that for any length of time. Such is simply untrue: lower prices would mean expensive projects would be abandoned, reducing the apparent marginal cost, and lower investment would reduce upstream costs, which had been seriously inflated for cyclical reasons.
Still, several market watchers have argued that 3 mb/d of planned projects have been cancelled or delayed by the 2014 price collapse, and the IEA has noted that upstream investment has dropped by about one half from 2014 to 2016. There has been some recovery, but investment is still about 1/3 below the peak, and international drilling is lower by roughly the same amount (figure below).Click here to see the figure referenced there and read the rest of the article.
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