How Likely is Another Price Shock in the Oil Business?

The oil price is crucial for understanding the energy markets.

In fact, oil prices determine what we invest in and when we invest in specific energy sources. They are our guide to understanding the energy world.

1. Oil prices are a good guide to understand the energy world

The price of oil is the most important variable to identify trends in the energy industry. One can even go so far as to say that oil prices (alone) have determined the course of energy investments over the last 100 years. As the share of renewable energies in the economy has grown, we have seen a gradual decline in the close relationship between oil prices and the economy in general. In general, an increase in oil prices has also meant a decrease in GDP. A larger part of the economy must be spent on energy costs, which does not necessarily contribute to productivity growth, but must be considered an expense.

What we have seen in recent months is the dramatic fall in the price of oil on the energy markets. Oil prices were steadily approaching a rate of $30 per barrel of oil. Now there are estimates on how far the oil price can go down. Although many analysts estimate that the oil price dynamics in the first quarter of next year will lead to a turnaround, there are a number of factors that for various reasons actually point in the opposite direction.

2. Historical trends in oil markets

The first argument that could be an indication that oil prices will skyrocket is that they have fallen sharply since April 2020 and do not necessarily reflect their long-term value. Even if it is true that we are in a recession, this does not mean that current market prices reflect the long-term trends in oil prices. Long-term trends in the oil markets are difficult to predict. But by historical standards, it is very likely that oil prices in the near future will be in line with the prices we saw after the 2009 financial crisis. 

3. China’s growth and the rise of East Asia

The second reason is China. The growth of the Chinese economy has clearly had an impact on recent price movements. Due to the coronavirus epidemic, the Chinese economy and East Asia in general has fallen behind. However, industrial production in China and the East Asian countries has continued. This was not necessarily the case in Europe and North America, where the shutdown affected the markets much more. We can clearly see that the current pandemic will have a much more lasting impact on the European and North American economies than on the East Asian economies.

So, generally speaking, we will probably see a recovery in East Asia. It is very likely that we will see an economic upturn in the East Asian region. This development should support the rising oil consumption in the Eastern Hemisphere. Since most of the oil that East Asian countries receive comes from the Middle East, this will help to reduce oil storage in the oil-producing countries. Oil that is stored in containers costs a lot of money. Since it has to be turned frequently and kept in motion to keep the oil stable, it also costs a lot of money.

4. Peak oil and oil price movements

Now we come to long-term dynamics. We are talking about the fact that the decreasing oil production of conventional crude oil is driving the oil price ever higher. Here we are talking primarily about peak oil. Although this topic is hotly debated in academic circles and in the oil companies themselves, peak oil has its justification as a geological concept.

The debate revolves around whether we will find alternative energy sources and whether peak demand is more important than peak supply. If we can find enough resources to replace oil in the near future, then we don’t need to worry too much. If we do not find alternative energy sources that are capable of maintaining our modern way of life and standard of living, then we are obviously facing a disparate situation. We face a disparate situation especially when we try to distribute these limited resources. So we must also take peak oil into account in our business models.

5. Conclusion

It is very likely that we will see rising oil prices in the medium term. It is not yet clear in which direction oil prices will develop. Due to the geopolitical volatility, it is even more difficult to make accurate estimates of the direction in which oil prices will develop. It can be assumed that the oil production maximum will have a major influence on the oil price, but in what way and when this will happen is another question that is difficult to determine at the moment. The most likely outcome is that we will see a worsening of the economic situation, as the macroeconomic climate could deteriorate further in the medium term.

This is only an estimate and it cannot be said with certainty that this will actually happen. If we see a delay in economic growth, this will have an impact on the energy markets. This in turn will lead to a drop in the price of oil. If there is a further deterioration in the oil markets, we will see a stronger increase in the oil price again in the medium term. For the foreseeable future, it is unlikely that prices will match the price increase seen shortly before the financial crisis in 2009. However, it is likely that we will slowly approach the price level after the financial crisis of 2009. 

Many thanks for the shared interest in the energy world!

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