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Page added on January 9, 2016
The Last Time Oil Was This Cheap, It Was Expensive
Oil prices have slumped to 12-year lows, shocking even the most bearish forecasters.
But back in February 2004, the last time the U.S. benchmark settled below $33.50 a barrel, oil at these prices was considered pricey.
In 2004, U.S. oil production was falling, and political conflict and instability in Venezuela and Nigeria had disrupted output in those nations. Meanwhile, demand was rising.
Inflation played a role, of course. Oil at $33 a barrel in 2004 is roughly equivalent to $41 in 2015 dollars, which is higher than today’s price but still dramatically lower than the triple-digit prices the industry enjoyed a few years ago.
U.S. consumers were angry about high gas prices: Prices at the pump averaged $1.56 a gallon in 2003, a record at the time. (Adjusted for inflation, that’s $2.01 a gallon today compared with the current U.S. average price of $1.988.)
According to a February 2004 article in The Wall Street Journal:
Senior OPEC officials recently said they will try to keep crude-oil prices above $28 a barrel for the foreseeable future. At that level, high gasoline prices are expected to stick around world-wide.
So how did $30 oil go from expensive to cheap in just 12 years?
Rapid demand growth in China drove commodity prices higher in the mid-2000s, helping push oil prices to a record high of nearly $150 a barrel in 2008. Even after the dust started to clear from the financial crisis, oil prices stayed relatively high, hovering above $90 a barrel between 2011 to mid-2014. The cheap sources of oil were being depleted, analysts said, and only more-expensive sources of supply were left.
“The $100 barrel is the new $20,” Chevron CEO John Watson told industry leaders in March 2014.
Now that oil has plummeted about 70% from its mid-2014 highs, is it time for another paradigm shift?
Some analysts say yes. BP’s chief economist Dale Spencer argued in an October paper titled “New Economics of Oil” that due to shale-oil drilling techniques and growing concerns about curbing carbon emissions, “there is no longer a strong reason to expect the relative price of oil to increase over time.”
But others argue that low oil prices are only setting the market up for a price spike in 2017 or beyond, as spending cuts made today reduce the amount of supply available to consumers in the future.
5 Comments on "The Last Time Oil Was This Cheap, It Was Expensive"
Nony on Sat, 9th Jan 2016 1:15 pm
Fair article. Shale has beat down the 100+. But shale has not gotten us back into the 20s.
twocats on Sat, 9th Jan 2016 2:39 pm
“The human mind, poor thing, what can it do really” (kundera). For those that praise the free market also consider that the market doesnt necessarily care if there is sufficient oil supply in 2017. Sure there might be a producer that gambles in the anarchy of production that planning for that will pay off economically, but maybe not.
makati1 on Sat, 9th Jan 2016 7:13 pm
Supply is NOT as important to sales as ability to purchase. (Ask retailers in the US how that goes.) The ‘supply’ has not radically changed from $100 oil to $30 oil, just the ability to purchase. That is only going to get worse as time passes. Maybe in 2017 ability to purchaser will only be $20? We shall see.
MSN Fanboy on Sat, 9th Jan 2016 7:37 pm
“Shale has beat down the 100+”
Exactly Nony, of course one must disregard demand destruction via the prior high oil prices.
Have you seen how much grad students get paid on average now upon entering the job market.
They are being paid in general 20% less for the same jobs students had before 08(this is not taking inflation into account)
We are setting up a younger impoverished workforce (alongside less in work) and raising house prices at the same time with the spread being covered by debt.
More debt and less ability to service it, what could go wrong.
Tunnel Vision Nony, you,re better than that.
Anyhow this is redundant, Shale is what, 4% of global output lol
HARM on Mon, 11th Jan 2016 3:19 pm
“We are setting up a younger impoverished workforce (alongside less in work) and raising house prices at the same time with the spread being covered by debt.”
Exactly. And thanks to the Fed’s cheap money Echo Bubble, real estate is now just as overpriced as it was back in 2007 –at least along the coasts. College kids today are also graduating with staggering debt levels to add to the fun. How does a 25 year-old with $100k in (nondischargeable) student loans and lousy earning prospects manage to buy an average house and start a family in Los Angeles? San Francisco? New York? Boston? Miami? Seattle? Good luck with that.