Are low oil prices here to stay?

You might not think it, but overall the price of oil has been in decline for around 20 years. There are several reasons; shale oil from the US and the return of Libyan oil to the market are increasing supply, and there’s been a slowdown in the Chinese and EU economies which has reduced demand. A strong US dollar has made things worse, making oil more expensive in real terms.

But what’s likely to happen to the price of oil in the near future? Surely the industry can’t withstand too much more of a price drop? Unfortunately for them, it looks as if that may be the case, as the US shale industry is booming and there are no imminent signs of a recovery in the global economy.

Normally OPEC would intervene and cut production, but they’ve declined this time; well, given that they are only responsible for 30 per cent of global oil production these days we can’t really blame them.

Without intervention from Opec artificially supporting the oil price, and demand dropping, it’s quite likely that oil prices will stay below $100 for some time. The futures market expects the price to increase to about $70 by 2019, although most experts forecast from just $40-$80 for the next few years at least.

The low prices could put North Sea oil production at serious risk; the newer wells need to be able to get $70-$80 just to make it worthwhile drilling. It’s not unforeseeable that North Sea oil production could fall by 20 per cent, which would impact massively on the Scottish economy.

The major oil companies have announced tens of billions of dollars of cuts in exploration spending and the share prices of BP, Total and Chevron are all down about 15 per cent since summer 2014. Smaller oil groups face an even more uncertain future.

If you think this is good news for the renewables sector, you’d be wrong. Dropping oil and gas prices undermine the economic argument submitted by many governments around the world in support of renewable energy, and that is that the price of fossil fuels will carry on increasing. Shares in wind turbine and solar panel manufacturing firms are already beginning to see a drop in price.

If this all sounds apocalyptic for the oil industry, don’t worry just yet. The industry has an inbuilt self-stabilising price mechanism which stops things getting too out of hand price-wise; so when prices fall, production drops, and then of course the oil supply falls and prices start to rise again. Exploration and production will be reduced while prices stay low, and this also means supply will drop off. It might take a bit of time to filter through, but when it does you can be sure that the prices will start to increase.

Environmentalists say that fossil fuels should really stay where they are so that governments can meet their climate change targets and minimise global warming. In time, a meaningful carbon price - hitting polluters for emitting CO2 – will be introduced, and this is likely to have a massive impact on the global oil market.

Don’t underestimate the influence of electric vehicles on the oil sector either. As battery technology improves, electric cars will become more appealing and move into the mainstream, reducing the demand for oil. Transport currently accounts for over half of oil consumption. So, are low prices here to stay? For a while, possibly. The oil market is certainly going through some major changes, and there’s more to come.