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Future Oil Price – Unchartered Territory

With oil prices in a slump, there is a lot of uncertainty around the future of fossil fuels and as Forbes says, ‘’Uncertainty is expensive.’’ In addition, the vacuum left by slashed oil prices and decreasing CAPEX has engendered the emergence of renewable energy as an increasingly viable option, attracting futher public and private investment.

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If we continue down the path of reliance on oil, international markets will forever be vulnerable to the inherent unpredictability of the industry. Forbes recently outlined a number of reasons to rethink our dependecy on oil. The first was the cast iron guarantee that not one single person in the world can tell you how much oil is going to sell for in three months’ time. Forecasts over the next five years vary between $20 and $100. The inability to predict prices makes long term business and policy decisions tricky to stand over with confidence. We have OPEC facing internal strife over its November pact, Iran’s monumental deal over its nuclear future and continuing resilience from US shale producers: it’s no wonder the market is on a rollercoaster ride.

The next is the impact that oil price volatility has on the economy. In one article on CNBC last week it quoted HSBC strategists predicting a rise to 460 a barrel in 2016, and yet seven paragraphs down it comments on Citi’s commodities team “who forecast Tuesday that Brent and WTI will reach new lows for the year.” With unchartered land all around the market acts cautiously when asked to hand over money. That slows production, puts off projects and hampers job growth.

And – if that wasn’t enough of a kicker – renewable energy prices are going down and that trend is predicted to continue. Solar photovoltaic panels have decreased by 80% since 2008; in 2014 US wind power prices were lower than wholesale electricity prices in five out of seven regions. That led to President Obama putting up a $1bn increase in loan guarantees for renewable energy projects – $24m of which directly for homeowners to install solar panels. (See last week’s article – the same isn’t happening in the UK.) Obama said, “A lot of Americans are going solar and becoming more energy-efficient not because of tree huggers – although trees are important, just want you to know – but because they’re cost cutters.”

One final point – Ali al-Naimi said earlier this year, “We recognise that eventually one of these days we are not going to need fossil fuels. So we have embarked on a programme to develop solar energy.” You know if the Saudis are doing it we’re all going to be doing it. The question really is only when.