Global Energy Outlook:

How Low Can It Go?

Craig Pirrong

Bauer College of Business

University of Houston

What A Long, Strange Trip

• The past year has been a tumultuous one for energy prices, even by

their historically wild standard

• After a period of relative quiescence, oil prices cratered starting in

July, 2014

• Where do we go from here?

• If I knew that, I’d be lounging on a yacht that would make a Russian

oligarch jealous

How You Know Economists Can’t

Predict The Future

Where We’ve Been: Oil

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The Boom-Bust-MiniBoom-Bust

• Story pretty well-known: unprecedented demand shock, primarily

EM/Chinese in origin, ran up against stagnant supply, particularly in

energy: booming prices resulted

• Forces originating primarily in the developing world, namely the

GFC, caused demand to plunge, resulting in a stunning price bust

• Prices recovered along with the world economy, and stimulus in

China was particularly favorable to a price rebound

• Prices remained relatively flat 2010-2015. Unprecedented low

volatility in FH 2015.

The Bottom Falls Out

• The price collapse since mid-2014 is historic

• Widely blamed on surging US supply, but US and world supply

growth did not exhibit a pronounced increase

• Likely culprits: demand decline (particularly in China), and perhaps

anticipated future demand decline & supply increase

• Note other China-driven commodities, namely iron ore & coal, also

have experienced substantial price declines

• Swelling inventories, especially in US

Disregard Conspiracy Theories

• One commonly heard theme is that Saudi Arabia engineered the price

collapse in order to drive out US shale producers

• Saudis did not increase output dramatically as they did in ‘86: KSA

output basically flat

• Given KSA market share and elasticity of oil demand, maintaining

output profit maximizing

• Predatory pricing strategies almost never work, and the Saudis know

this

• The oil & the expertise aren’t going anywhere: prices go back up, and

shale E&P will rebound

Whither Demand?

(Or is it Wither Demand?)• This means that the future course of oil prices will depend on

demand, and that will depend primarily on China

• That, in turn, depends crucially on Chinese policy

• Will China successfully transition to a new, less resource-intensive

growth model?

• In two out of three alternatives (successful transition, failed transition

leading to a hard landing) commodity demand growth will drop,

perhaps precipitously (and even decline)

• In the third alternative (unsuccessful transition, continued reliance on

credit stimulus) the growth will continue . . . For a while

Will We See $100/bbl again?

• Many say the era of $100 oil is over: but the same people used to say

the era of $100 oil would never end, so . . .

• Given extreme short-run elasticity of supply, the variability of

demand, and the susceptibility of production to geopolitical risks, oil

will always be vulnerable to both spikes and collapses

• That said, the shale revolution has changed the fundamentals

significantly: supply more elastic and flexible. The long run happens

sooner

• Will productivity continue to surge? Will there be an analog to

Moore’s Law in Oil? (Color me hopeful.) Will shale production

migrate outside North America? (Color me skeptical.)