An Oil prices rebound in 2009?

Escrito el 2 mayo 2009 por Miguel Aguirre en Economía Global

One of the main issues in the commercial trade is the oil export import trade.  On July 2008 the crude hit a record high of USD 147 and after many bounces back and forth we are now with a price around USD 50 for the first time since November .  Many analyst believe that we are in a road to higher prices all along 2009.  But the current economic downturn is global and severe so the worldwide demand is expected to decrease a 1,6% this year according to the Energy Information Administration.  Also due to the actual economic collapse many research expensive projects -unconventional oil or deepwater exploration- are being pulled back,  while the  OPEC, trying to keep oil above USD 50 per barrel with a goal of cutting 4.2 million barrels a day from its member’s daily production (from a global amount of  almost 25 million). 

So in the following years there could be two ways of heading this issue: One will  put the emphasis in environmental costs and the need to develop clean energy alternative sources (is not Warren Buffet promoting a Chinese electric car?) .  The other one would try to maintain the favour in the oil sector, with some reasons as the economic return: The Amex oil index trades at six times its earnings  or the consequences of   the US government spending  that could drive down the value of dollar, hence a weaker USD will put pressure on the price of oil. 

If its not clear if in the following years there would be more prudence on the consumption -it looks clear that the last years run up is over-, we would have more environmental pressure or the increase of demand in countries as Mexico, Brazil or Russia -with their own moguls as PEMEX , PETROBRAS or YUKOS  would head us back to a USD 147 oil barrel 



It is interesting that the dramatic fall in oil and gas prices is likely to represent a tougher challenge for the renewable energy sector than for the oil and gas sectors themselves.

Most renewable sources are uneconomical at current oil prices and on top of that credit is constrained.

It will be very interesting to see what happens with natural gas – Henry Hub prices (the marker price for the US market) has fallen by 75% compared to “just” a 65% fall for oil. And on top of that there are huge new supplies of LNG coming on stream this year and next, making nat gas by far the cheapest source of electricity in the short to medium term, cheaper than new coal and nuclear stations.

As far as the environment is concerned it seems that the crisis, with the huge fall in demand for energy, is achieving more in terms of reducing CO2 emmissions than years of public subsidies for renewables have achieved (of course this is a bit of a miopic short-term view of things). Note that whatever the EIA is saying, the 4 million barrel a day cut in OPEC production is equivalent to 5% of global output, so it looks like the fall in demand might be more severe than the 1.6% prediction.

[...] Miguel Aguirre created an interesting post today on Economy Weblog » An Oil prices rebound in 2009? – IE Business SchoolHere’s a short outlineBut the current economic downturn is global and severe so the worldwide demand is expected to decrease a 1,6% this year according to the Energy Information Administration. Also due to the actual economic collapse many research expensive … [...]

Fernando Peral 4 mayo 2009 - 18:00

Dear randomspaniard,

Your analysis is quite sharp; in fact, I think you should go a bit further on the reasons that explain your objective statement that “the huge fall in demand for energy, is achieving more in terms of reducing CO2 emissions than years of public subsidies for renewables have achieved”. As I see it, this is far from being a miopic short-term view of things. I refer you to my intervention on Prof. Pampillón’s entry on similarities of the present crisis with that of 1929. I would say it is good reason to seek a sharper explanation for the preeent situation in this key area of economy.

andres camacho 5 mayo 2009 - 19:43

Hello Miguel, I read the other day in the Economist that because of the crisis and the adaptation of the consumer to it, the demand and supply of products has reduced, specially oil. It is forecasted that oil will be around 30-40 usd all year long, and even though its still our main source of energy, every day, consumers are worrying more about the environment, and global warming, which will cause another effect on the market. So not only is the price of oil going to reduce itself because of the crisis and the low demand for it, but sooner or later global crisis ecologists will find a way to decrease the consumption and might provoke the lowest prices of oil in a long time.
In Mexico, Pemex is already feeling the crisis, as it has received lower profits than in previous years.

As far as Natural Gas I am not very familiar with the effects being suffered worldwide because of the crisis, but I do know that in Mexico, companies are no longer investing because there is no competition,as prices where not established as imposed by the mexican law, and they might suffer a big impact in the market.

I do know that several alternate source of energies are trying to be formulated, but because of this problems, one of them might be able to benefit, specially if the Chinese find a business model that convinces people, that it is the right source to use.
Maybe the Warren Buffett idea will work in the end!

Patricia de Obeso 12 mayo 2009 - 21:25

Hello Miguel,

I am from Mexico and I can comment on the issues that the country has been facing due to the dramatic changes in oil prices. Because of the considerable amount of this natural resource that the country posses, the need of a large infrastructure has been the debate. Recently the government tried to pass reforms to privatize a part of PEMEX and make it more efficent. There is no doubt that the volatility in prices will keep affecting this strong component of Mexico´s economy. If they are not capable of extracting the oil and doing it in a safe way, none of the points you raised will be possible. Clearly not an environmental approach or the prudence in consumption.

Leticia Salama 15 junio 2009 - 15:43

Hello everyone,
First of all, I agree with Andres Camacho, because of the crisis, the consumption of oil and gas has declined significantly leading to price a barrel for 50USD. However, there is a slower recovery in the global economic growth and in the oil consumption. However, organizations such as OPEC have still spare barrels which continue keep prices down.
Nevertheless, I personally think it is difficult to forecast the oil price because of the crisis and furthermore because of the environmental issues of nowadays such as clean energy alternatives which makes it all more difficult to judge crude’s “fair” price.

Claudia Monroy 15 junio 2009 - 15:55

The negative effect our oil consumption is having on the environment and greenhouse effects is only one of your worries. The rising of oil prices gave leftist nations such as Venezuela and Iran an advantageous situation. They reaped the benefits of huge margins and then allocated their profits into their no-good ventures. I, being from Venezuela, am glad that the oil prices have fallen. Venezuelan president, Hugo Chavez, has been faced with a reality of the unsustainable inflated price of crude oil. He can no longer finance the nation´s spending level and thus is losing popularity.

As for the alternatives of dealing with this issue, I for one vote in favor of finding and investing in alternative energy resources. We can solve two problems with at once. Stop damaging the environment we live in and also impeding oil rich nations with unstable governments from profiting from rising oil margins.

Louise 15 junio 2009 - 22:49

Andres, I think I know what article you are refering to, isn´t it this one: http://www.economist.com/displayStory.cfm?story_id=13764718 (the Economist, 1st June 2009)
however, after reading this article it can be concluded that such a crisis eventhough damaging in some countries and eventhough it will be felt by almost everyone, will not be as damaging in the long run since the wages, prices, etc.. will probably adjust accordingly.
The article mentiones than unlike during the 1970s crisis, nowadays the wages for example are more easily adjustable…
In that sense “They doubted that higher oil prices would mean the return of stagflation, concluding that inflation, unemployment and output were markedly less responsive to oil prices during the two big oil price hikes since the 1980s, which began in 1999 and 2002.”

and the article concluded with this: “So the world may have less to fear from an oil price rise in terms of overall macroeconomic stability than it used to. But the world economy has to be guided out of the biggest rut it has been in since the second world war, with eventual recovery likely to be slow and shallow. So it was probably wise of OPEC to decide recently to hold off more production cuts: too rapid a rise in oil prices could at least batter consumer confidence further, hampering recovery.”

Farah Hudhud 16 junio 2009 - 01:19

Being an arab from Jordan i guess i could say we have not been blessed as the gulf region by having reserves of oil! Not only we are not as “rich” but also dependent on other countries such as Iraq. As a trade off for opening our boarders and accepting thousands or iraqies and offered them land and house, Jordan received oil from Iraq which increased the supply and decreased the oil prices drastically. This did improve and released the jordanian citizens, however, having had the opportunity to access more renewable energy would not have made us as reliant and so as affected by this price volatility and thus the economy.
therefore in my opinion, country’s should invest in alternative energy in order to make it a win win situation for the enviroment and nations that are dependent upon others.

co2 gas 20 septiembre 2009 - 07:10

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