Wednesday, January 27, 2016

Lack of investment will lead to an oil price spike


The biggest result from the collapse in oil prices could be a future price spike.

Oil prices at $30 per barrel have put most producers under water. That has led to austere budgets and severe cuts to spending. Wood Mackenzie recently estimated that $380 billion in major oil projects have been delayed or cancelled since. That means that about 27 billion barrels that had been slated for production from those projects will now not be produced.

But more cuts are expected moving forward. “There has been a $1.8 trillion reduction in spending planned for 2015 to 2020 compared to what was expected in 2014,” historian and oil expert Daniel Yergin said at the World Economic Forum in Davos, according to the Telegraph.

As has been stated many times in the past; the cure for low prices is low prices. As the article goes onto to point, natural depletion of around 5% a year guarantees that at some point in the future, barring a recession, oil supply will be insufficient for demand and the price will rise. This is the way it always works in commodity markets. The idea that we are in a new era of low prices is ridiculous. The lack of investment is rational as virtually no one can make money at these prices so no investment in future production replacement will take place. patience and prudence will allow one to take advantage of the eventual price rise. Just as in nature the weak will be culled from the herd and the remaining companies left standing will provide for excellent returns when the cycle turns up as it must.

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