Event Recap

The Organization of the Petroleum Exporting Countries (OPEC) made big news this month when it decided to extend production cuts in an attempt to raise oil prices. But, the move will have very little impact on long-term prices because they are no longer driven by traditional oil-producing nations, said Jeffrey Currie, Global Head of Commodities Research at Goldman Sachs, at an EPIC seminar on May 24th.

“Not only will cutting output do nothing to price, increasing output will do nothing to price,” Currie said. He pointed out, however, that there is a consensus developing around long-term oil prices. And, many believe that consensus will be wrong. But, Currie believes it will be right.

He explained: “The key point is not that there’s a consensus developing around the price, there’s a consensus developing around the technology, the dominant technology.”

The dominant technology driving prices is the combination of horizontal drilling and hydraulic fracturing that have led to a booming U.S. shale industry. The U.S. shale industry has no doubt changed the dynamics of the global oil industry in profound ways. In fact, economists contend it has created a “new oil order” by shortening the time from investment to production.

“It gets rid of the investment problem in the sense that you make an investment now, and you don’t see production for 3 to 5 years,” explained Currie. “That was the old oil world we lived in.”

But how new is the “new oil order”? Not very new at all, Currie believes. He explained that what is happening now happened in the past with offshore drilling and with deepwater drilling. Back then, investment went into new technologies, boosting production and causing prices to first drop then stabilize to around the cost of oil coming from the dominant technology of the time—then, about $20 a barrel.

Based on this history, Currie believes long-term prices will stabilize again, with the supply curve remaining flat at around $50 a barrel. He explained that what people believe is a “new oil order” is really just the world going back to a time when the price converges around a dominant technology.

Currie adds, however, that while this new technology solves a supply problem, which drives long-term prices, there is still fluctuating demand. And, demand drives near-term prices. That means, the roller coaster oil prices we’ve been seeing will persist.

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Global oil markets are experiencing a period of significant uncertainty thanks to changing dynamics in oil supply and uncertainty in key consumer markets, including China. The volatility caused OPEC to close out 2016 with its first production cut in eight years. What does this new oil order mean for companies, consumers, and policymakers? How long will low prices continue? And has the structure of the global oil market changed in fundamental ways thanks to the advent of U.S. shale, a flexible source of low-cost oil outside of OPEC, and emerging competition to oil like electric vehicles? Cost: Free Contacts Bethel Haile: bhaile@uchicago.edu
Areas of Focus: Energy Markets
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Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Fossil Fuels
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Fossil Fuels
Under current policies, fossil fuels will play an important role in the energy system for the foreseeable future. EPIC research is exploring the costs and benefits of these fuels as...