Today Bordoff directs the Center on Global Energy Policy at Columbia University. As oil prices tanked on Friday afternoon, he answered Storyline’s questions on what consumers should expect from the global oil market in the months and years to come.
Should consumers think of Friday’s oil price drop – and the gasoline drops that should accompany it – as a temporary blip, or a shift toward lower prices for a while?
Predicting oil prices is always fraught with peril—just look at how high all the projections were a few months ago—but it seems likely now that oil prices will be considerably lower for several months. Of course, the lower they drop, the more investment may be curtailed in higher cost sources of production and the more demand for oil may be pick up, so the market has a way of balancing itself.
I would be surprised if oil prices stayed in the $60s for long. How far and how fast they rebound will depend on many factors: First, OPEC may yet find a way to cut production, as further economic pain and panic from a bigger oil price drop could lead the major oil exporters to come together to restrict output. Second, there is a great deal of uncertainty about how resilient U.S. tight oil production can be in the face of sharply lower oil prices and how much investment in maintaining and growing production will now be curtailed; a sharp cutback in spending plans for 2015, which should be announced in the next few months, would push prices back up.
Third, faster economic growth and oil demand projections, partly spurred by lower oil prices, would support oil prices. And, finally, there remains a great deal of geopolitical risk in the oil market—from Libya to Iran to Iraq to Russia—and further instability would push prices back up.
What are the chances gas prices stay this low, or close to it, for a year? Five years?
Gas prices may not stay this low for more than a few months, but it is certainly possible they stay low relative to recent prices for the next year or even a few years, with oil trading in the $70s or $80s. Over time, prices will respond to increased demand and will need to rebound to stimulate investment in the higher cost areas of production that will be needed to meet rising demand, like Brazil, North America, or the Arctic.
A lot of people responded to higher gas prices in recent years by buying more fuel-efficient vehicles. Now some might be tempted to go for more of a gas-guzzler with their next purchase. Would you advise that? How should consumers, in other words, change their fuel-economy calculus for their next vehicle purchase?
Investing in more fuel efficient cars, along with many other fuel efficient appliances, generally saves the consumer money over time, not to mention helps reduce carbon emissions and other environmental impacts. On top of that, there is a great deal of uncertainty over what the outlook for oil prices will be, so it would not be wise for consumers, or businesses for that matter, to bet that low oil prices are here to stay indefinitely.
Oil prices are notoriously volatile, and perhaps the best way for the U.S. to reduce our economic exposure to those price swings is to reduce the amount of oil we consume in the first place.