Leaders from some of the world’s most productive oil-exporting nations will meet this week in Vienna, just as oil prices have begun to stabilize at around $60 per barrel.
As we near peak summer driving season, American consumers would have worried a generation ago that such a meeting would be an impetus for a pullback in production, with oil exporters aiming to raise prices by limiting supply. But the world has changed a great deal since the height of OPEC’s power in 1979, when member nations accounted for 50% of global oil production, compared with less than one-third today.
When Fortune published its report on the collapse of oil prices in February, investors like Jeremy Grantham told us that oil would be heading back to a price per barrel of more than $100 in the long run. Other analysts, like economist Nouriel Roubini, argued that cheap oil would last just a year or 18 months before producers like Saudi Arabia had successfully flushed out higher-cost competitors like shale producers here in the U.S.
While there’s still time for Roubini’s prediction to come true, the intervening months have shown that producers around the world—from embattled drillers in war-torn Iraq, to shale concerns here in the U.S.—aren’t being scared off by cheap prices. Here are four reasons why we can expect the era of cheap oil to continue, even as Americans consume more gasoline this summer.
1. Low interest rates mean cheap money for American producers. A report in The Wall Street Journal Sunday showed that despite falling prices, investors are still eager to fund oil exploration and extraction efforts here in the U.S. With interest rates so low and investors searching for anything that will provide decent returns, even oil companies facing high costs of production and low market prices are having no problem getting funding:
As crude prices began to plunge last year, many energy experts predicted a repeat of 1986 when U.S. oil companies lost their funding and the industry collapsed into a yearslong bust. Without money, companies had to slow or even stop drilling for the crude that helped create a global glut. Many were forced to sell out to rivals or go bankrupt.
But the gloomy scenario of that downturn hasn’t played out on a large scale this time. That is because banks, private-equity firms and institutional investors have continued to pour money into the sector even as oil companies slashed billions of dollars in spending from their budgets and laid off more than 100,000 workers.
2. Saudi Arabia has no choice but to keep pumping. Long gone are the days when Saudi Arabia acted as the so-called “swing producer” in the global oil market, when it would increase or decrease production to keep prices stable and profits high. A report in The New York Times delves into what has changed in the Middle Eastern kingdom over the last generation. For one, political instability has made maintaining employment in the oil industry more important than keeping government revenues from oil sales high. Second, the explosion in oil production elsewhere in the world means that Saudi Arabia’s production just isn’t as significant as it once was. And finally, over the previous 30 years, Saudi Arabia has increasingly relied on selling lower quality oil as its supply of “sweeter” crude has dwindled. To facilitate this, the kingdom has invested in its refinery capabilities, and that investment demands that it keep the oil flowing, even amid falling prices.
3. Iran’s oil could soon hit the global market. If Iran and the United States finalize an agreement on the latter’s nuclear enrichment program and lift an embargo against Iranian oil, we would see another increase in global supply. Analysts estimate that a sanction-free Iran could add another 1 million barrels per day of oil to global supply by 2016, providing a supply cushion if U.S. shale producers end up running out of financing.
4. Renewable energy continues to get cheaper. Earlier this month, an unnamed Saudi official told The Financial Times, “Saudi Arabia wants to extend the age of oil…. We want oil to continue to be used as a major source of energy and we want to be the major producer of that energy.” That logic is another reason why OPEC countries have less of an incentive to cut back production: renewable energy sources is starting to give fossil fuels some serious competition, and oil-exporting countries have an interest in keeping oil a cheap alternative.
It’s often said that cheap oil will not hurt the rise of renewables like solar because oil is used mainly to power things like automobiles, while renewables are mostly used for electricity generation. But expensive oil has been a boon to products like electric cars, too. Edmunds.com announced last month, for instance, that for the first time ever loyalty rates for electric car owners fell below 50%. “For better or worse, it looks like many hybrid and EV owners are driven more by financial motives rather than a responsibility to the environment,” said Edmunds.com director of industry analysis Jessica Caldwell.
