What if Oil Prices Stay Low Forever?
If there’s one bit of conventional wisdom when to comes to oil prices it’s this: What goes down, must go up. The boom-bust cycle of the oil markets means that the cheap gas you’re enjoying now will cost you more sometime in the future. But what if low oil prices are actually the new normal? Some people are saying just that.
First we have to decide what we mean when we say cheap oil. Prices at the pump are low right now, but historically they’re nothing that special. They probably feel lower than they are, because of how high prices had been for years before the drop.
“The period in the very early part of this century is a real outlier, along with the period in the ‘80s. Those are the real high oil prices adjusted for inflation,” says Severin Bornstein, a Professor at UC Berkeley’s Hass School of Business. “We’re now back into what has historically been the more common price level.”
Even if oil prices creep back up a bit, more people are arguing that we may stay in that more “common price level” for a long time to come. One report that makes the case is by Stanford economist Frank Wolak.
“It’s a policy brief I wrote,” he says. “It’s called The End of Expensive Oil. It’s on my website.”
Wolak points out that the same shale formations that unleashed so much oil and gas in the U.S. exist all over the world: in Argentina and Mexico, he says, and in China:
“China is estimated to have even more shale reserves by the U.S. EIA [Energy Information Administration] than the United States.”
Once those countries get into the shale oil game, it will put even more downward pressure on oil prices, especially as natural gas becomes a more attractive fuel for vehicles.
“Simply because your cost per mile [using liquified natural gas] is half what it would be if you were burning gasoline,” Wolak says.
Better fuel efficiency and the growth of ride-hailing apps and electric cars could also decrease demand for gas and keep prices low. Of course, that has a flip side.
Last week the car company Fiat Chrysler said they’d focus on building bigger vehicles like SUVs because, in the words of their CEO: "Low gas prices are seen as permanent condition."
Cheap oil sounds great to drivers, but it’s causing anxiety for industry.
“A lot of oil costs more than this to produce,” says Jon Olson, Chair of Petroleum and Geosystems Engineering at UT Austin. Olson thinks prices will rebound eventually, but he says almost as damaging as low prices right now is the uncertainty of when that will happen.
“[Oil companies] just retract from any investment whatsoever because they’re like, is it going to go up or down – we don’t know!”
State and local governments in oil producing states are also feeling the sting. Credit rating agency Moody’s just released a report saying Texas’ projected budget surplus could evaporate if oil prices stay low. But the Texas state comptroller, who is responsible for keeping tabs on the budget, rejected those findings.