The Oil Price Cycle

The Oil Price Cycle

Fracking has been on the minds of many people in the media, policy and NGO world for some time now. There are clear concerns about water quality and seismic safety which have yet to be answered. It seems apparent that with, or without, answers to these concerns, fracking is likely to push forward in the U.S. and abroad. Recent research by Amy Meyers Jaffe (a fellow member of UC Davis’ Institute of Transportation Studies) and Mahmoud El-Gamal of Rice University evaluates the likely impact of fracking on global fossil fuel markets.

The brief version is to expect lower prices. The not-so-brief version is a likely return to the historical boom-and-bust cycle of oil markets, in which price increases trigger massive investments in exploration and extraction technology, which take many years to produce results. When the newly discovered oil fields come on line, often years after they were initiated, a glut of energy hits the markets, driving prices down. There have been several notable oil price collapses in the OPEC era. This one may be worse for several reasons. 

First, OPEC nations have less budgetary flexibility to reduce their incoming revenues. Many OPEN nations have been spending their oil money as fast as it comes in, to control political unrest, either by appeasing the public with social programs, or investing in their police state. Comparatively few have been accumulating significant surpluses during this recent period of high prices. When price goes down, OPEC may find it difficult to squeeze supply as it has in the past. 

Second, fracking has made many non-OPEC nations major potential suppliers of fossil fuels. The U.S. may well achieve its goal of net energy independence, not because of renewables and conservation, but because of the Eagleford, Bakken, Utica and Monterey shale formations.

All of this means that at the very least, we should expect an extended period of low oil prices. At worse, we are looking at a collapsing bubble which could wreak havoc on countries whose economy depends on high oil prices.

Low prices are a mixed bag for environmentalists and climate advocates. On one hand, strong growth implies healthy economies and more leeway to accept price increases caused by sustainability mandates. On the other hand, high prices incentivize private conservation efforts. The gas price spike of the late 2000’s is likely what killed Hummer and brought an end to the dominance of oversized urban assault vehicles in car-makers’ portfolios.

Policy makers should act to put in sustainability and pricing policies that look forward and anticipate lower prices. There might be room for compromise on sustainability policies if they’re triggered only by low prices. Granted, Congress has trouble holding itself to commitments it makes (see: Medicare reimbursement rates, fiscal cliff) but a theoretical target might be better than the complete lack of action we see now.


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