The price per barrel of oil is as low as it has been in over a decade and there is nothing that seems temporary about it. The impact on the world has been mixed, with real strain in the energy producing regions and some cautious optimism among those enjoying the low costs of that fuel. The big question is as it has been all year: is there anything that will end the glut?
There are basically four ways that an oil glut is reduced. Two are production related and two are consumption related. The most obvious would be a reduction in output from the oil producers and that has always been the tried and true technique. This is not happening at present, as all the producers are competing for market share and waiting from somebody else to make the first move. The second production issue would be some kind of interruption due to weather or a geopolitical event. This has not happened in a while, but next spring is forecast to be more intense as far as tropical storms are concerned.
The two consumption issues are related. The first is that countries will go back to their normal use—the United States for the most part already has returned to consumption of some 20 million barrels a day. Europe and Asia remain far from their usual consumption numbers. The consumer has to get involved with transportation again. The second consumption issue is connected to weather to some degree. This has been a mild winter and that has reduced demand on utilities. Some still use heating oil, and there has been less demand overall. The overall situation right now mitigates against increased oil consumption and that will keep prices far lower than the previous norm going forward.
- Chris Kuehl, Ph.D., NACM economist and Armada Corporate Intelligence co-founder