Has a new economic cycle started?
Oil prices have dropped by more than USD 45 during the last six months, prompting onlookers to ask: What’s the problem now? Funny, the same question wasn’t asked when the barrel price was above USD 120 only a few months ago.
Looking at historical oil prices going back to 1991, it seems that the price move, which started in 2003, might be considered an exceptional event and we are now witnessing a reversal to a longer term equilibrium between supply and demand. The 200 month average price is around USD 60 per barrel.
I remember a time when the barrel price was less than USD 10 per barrel. But between then and now, a few important issues have taken place (Gulf wars, a booming economy in China and other emerging countries, and the Arab Spring), but these events in no way justify barrel prices above USD 120. New technologies now permit the exploration of basins which were not accessible in the past and this is particularly true for the US which has increased its production in recent years to the extent that it has now become a potential oil exporter.
It appears the price decline has been programmed, (it seems OPEC have failed this time to orchestrate a production reduction as they have in the past when they became cash hungry!). So given this, can we assume that economic forces have been redistributed for the next few decades, or so?
Running with this scenario, one could assume that barrel prices above USD 120 can be considered to be outliers and the longer term price range could stabilize in the region of USD 40 – 60 per barrel. This would obviously push a number of smaller operators in the US out of business and at the same time make many, if not all, alternative energy projects economically speaking, unsustainable.
Energy makes capitalism work, in every sense. And here are just a few numbers to illustrate this point: barrel prices around USD 50 generate about USD 1,000 additional spending power per household per year in the developed world. In other words, this is a combined discretionary spending increase of USD 1,000 billion (i.e. one trillion) for the developed economies. Most of this money will be allocated to services and related activities, which in turn will help to restart a new growth cycle somewhere between the 3rd and 4th quarters of 2015.