Oil, for sure, is much more than a fuel; a force even bigger than its trillion dollar market. And by conventional wisdom, the fall in oil prices will support global growth by trimming down the energy import bill of consuming nation.
But “lower-for-longer” oil prices could more often than not act as a double-edged sword to unsettle the demand-supply balance in a volatile market. An oil shock may be lurking around the corner as the price bust has hammered investment in future supply, according to the International Energy Agency.
“Historic” investment cuts taking place now increase the possibility of oil-security surprises in the “not-too-distant” future, according to Neil Atkinson, head of the IEA’s Oil Industry and Markets Division. About $300bn is needed to sustain the current level of production. But global oil majors, including ConocoPhillips, Chevron and BP, have cancelled more than $100bn in investments, laid off tens of thousands of workers and sold assets as oil sank below $30 a barrel to a 12-year low.
The International Monetary Fund (IMF) researchers recently said the perceived benefits from cheap oil to boost global growth may not materialise until demand in the global economy picks up and central banks in advanced nations move away from near-zero interest rates. “The current episode of historically low oil prices could ignite a variety of dislocations including corporate and sovereign defaults, dislocations that can feed back into already jittery financial markets,” the IMF report said.
Oil prices, which have declined for two years, may have passed their lowest point as shrinking supplies outside Opec and disruptions inside the group erode the global surplus. Sure, a lot has happened since Goldman Sachs made the forecast of oil sinking to $20 (some doomsday views went as low as $10) some two months ago. Some US shale drillers have said they’ll pump less in 2016. There is an increasing hope that members of the Organisation of Petroleum Exporting Countries, along with non-Opec producers, may be moving toward a consensus to support prices in an oversupplied market.
It still is not a rosy path of steady recovery for the oil market. The bear camp has a host of gloomy scenarios to get disheartened: Oversupplies estimated above 2mn bpd; global stockpiles of more than 3bn barrels; lower demand growth forecasts for 2016; the dollar staying strong to make imported oil costlier; extra Iranian barrels flooding the market; US shale producers pouncing back at $50 oil; hard landing in major consumer China and the like.
While few analysts expect oil prices to return to the prices seen a few years ago any time soon, oil companies say the global energy future envisages rising demand and population growth, making oil an important fuel for decades to come. Despite the emergence of renewables, global energy security depends mainly on fossil fuels for the foreseeable future. And it calls for a stable oil market with price equilibrium.