Declining Global Demand Triggers Dramatic Oil Price Drop

Posted Jan. 14, 2015

MP3 Interview with Richard Heinberg, senior fellow at the Post Carbon Institute, conducted by Melinda Tuhus

oil

Plummeting oil prices are grabbing headlines all over the world. The price has dropped in the past few months from over $100 a barrel to less than $50. That price drop had repercussions throughout the energy sector, and also led, among other things, to more Americans buying gas-guzzling vehicles. Gasoline prices in the U.S. are heading to as low as $2 a gallon in some places, down from $4 a gallon.

The drop in oil prices is mostly due to more supply and less demand. But at least one analyst, independent petroleum geologist Art Berman says the drop was exacerbated by the fact that quantitative easing ended in July 2014, exactly when prices began to fall. Because world oil prices are tied to the U.S. dollar and the U.S. government was no longer printing massive amounts of money, the dollar grew stronger and the price of oil went down.

Between The Lines’ Melinda Tuhus spoke with Richard Heinberg, senior fellow at the Post Carbon Institute who notes that before the recent drop, oil prices were exceptionally high. Here, he explains how the drop in oil prices is impacting other energy sectors with a focus on natural gas and liquefied natural gas produced for export.

RICHARD HEINBERG: It's mostly supply and demand, and a lot of it has to do with the fact that oil prices have been very high for the past several years, and that has destroyed a lot of demand, both in the U.S. and elsewhere around the world. People have learned to use a lot less oil than they otherwise would have and now economies are softening, particularly in Europe, Japan and China. Economic growth is really slowing down, and when that happens, of course, oil demand declines. Meanwhile, we have increased supply coming from the U.S., from the shale patch, from light, tight oil from the Bakken field in North Dakota and the Eagle Ford fields in South Texas. Also, some supply is coming back online from Libya and Iraq that has been offline for several years. And then, Saudi Arabia, which is the swing producer and in past years has often moderated production – either increasing it or decreasing it to balance the market – Saudi Arabia has declined to reduce its oil production, and there's a lot of speculation about why that is, but the Saudis have even unilaterally reduced their prices, especially to some of their Asian customers. So, a combination of all of those factors has led to a precipitous decline in oil prices, over 50 percent at this point since the peak last summer.

BETWEEN THE LINES: So, Richard Heinberg, how does the low price of oil affect natural gas, if it does?

RICHARD HEINBERG: Well, it is affected. Of course, oil and gas are two different commodities and their prices can be very different. Here in the U.S. we had very high oil prices for the past few years and very low natural gas prices. Globally, however, natural gas prices are often tied to oil prices. For example, Gazprom, the big state-owned oil company in Russia, ties the price of its natural gas exports to the price of oil. So during the last few years, the price of oil has been high, therefore the price of natural gas in Europe and Asia has been high. And that has created the incentive for the idea of U.S. exporting natural gas. In fact, the U.S. is still a net importer of natural gas; we import almost 10 percent of our natural gas from Canada. Nevertheless, the U.S. has much lower natural gas prices than much of the rest of the world, so there was the idea that some companies in the U.S. could get rich by exporting natural gas through LNG to Europe and Asia. And that idea is not making much sense right now. With lower oil prices, that means lower natural gas prices in Europe and Asia, and there's really no marginal room for U.S. companies to make money on LNG exports at this point, because it's a very expensive business – building the terminals, liquifying the natural gas, transporting it – that all requires a fairly high natural gas price, and currently the price is not high enough to justify it.

BETWEEN THE LINES: Does the low price of oil affect renewable energy projects?

RICHARD HEINBERG: Not direct impact. Of course with low oil prices, people tend to buy bigger cars again, and I'm sure there's somewhat less interest, then, in hybrid and electric vehicles. So that has some effect on the renewable energy markets. But, you know, oil is used in the transport sector; it's not used in the electricity sector, and most of the renewables – solar and wind, geothermal and so on – all of those produce electricity, so we're really talking about two different markets. Natural gas prices have a much more direct impact on the renewables markets than oil does.

BETWEEN THE LINES: A lot of the work in the oil and shale fields is subcontracted out to pretty small companies. How will the price of oil affect them?

RICHARD HEINBERG: They're operating on very small margins and they have a lot of debt. So as oil prices are going down, they are having a big problem servicing that debt and we're going to see a huge shakeout in that industry. A lot of those companies are going to consolidate or go under in the next few months.

For more information on the Post Carbon Institute, visit postcarbon.org.

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