Crude oil prices hit a three-year low recently and dipped below $50 per barrel for the first time since May 2005. Who could have imagined such a turnaround earlier this year? Obviously, everybody was surprised by the magnitude of the financial crisis that is on the verge of sparking a global recession.
Though many developed nations, most notably the United States, the European Union and Japan consume significantly less oil as their economies slipped into recession, the projected global demand for oil has not come down enough to justify this 66% decline in oil prices since the all-time high on July 11. In fact, the World Energy Outlook by the IEA released last week warns that global oil production is “at plateau” and highlights the possibility of a disaster unless enormous investments are made. For more on the World Energy Outlook check out last week’s post.
Decisively lower gasoline prices may benefit drivers and stimulate the economy in the short term, but low oil prices threaten to delay investments in new oil production facilities and in the alternative energy sector. Consequently, the current production capacities cannot be maintained and as soon as the economy rebounds, oil prices are likely to skyrocket to new record levels.
In the meantime, OPEC countries are about to intervene again to push oil prices up. Global crude oil stockpiles have risen to very high levels which is also annoying for all of OPEC’s members. Most oil producers need oil prices way above today’s level to be able to pay their bills. While Venezuela and Iran need $95 a barrel, Russia depends on oil prices above 70 dollars a barrel and Saudi Arabia needs $55 per barrel. As these countries adjusted their spending to record incomes earlier this year and handed out generous gifts to their people, they’re now forced to cut back their spending which is rather difficult for populist leaders like in Iran or Venezuela. For this reason, we can expect another production cut in the near future. Whether this will help to stabilize oil prices around $50 is to be seen. But regardless of how the economy or oil prices develop over the next few months, the bottom line is that oil’s days are numbered and that we will be forced to switch to alternatives sooner rather than later. This means lower CO2 emissions, less dependence on oil exporting countries and millions of jobs created at home.
Next time, I’ll outline my plan for the struggling U.S. car makers. Keep reading.