Jim comments that “over the past 33 years, I have had plenty of opportunity to study both oil prices and foreign exchange rates…to determine whether there is such a thing as an equilibrium oil price.” He concluded that a good indication of this moving equilibrium does exist: the five-year forward oil price, or the amount paid for guaranteed delivery of oil five years from now.
Jim identified two big factors fundamentally driving the price of oil: 1) the early days of the exploitation of shale oil and gas in the United States, and 2) the shift in China’s economic focus from quantity to quality, which implied that the Chinese economy would no longer be consuming energy at the frenetic rate it had been.
Referencing a recent article he’d read, Jim suggests that if oil prices remain at recent levels, US production of shale oil and gas next year could be 10% below recent projections. He comments that this seems plausible; and, “given how important shale oil and gas has become to America’s economic recovery, it also seems like something that US policymakers would be eager to avoid.”
They may very well get their wish. Jim concludes that “oil prices may not start rising in the coming months, but, as 2014 comes to a close, forces that will eventually halt their decline are beginning to appear.”
Click here to read the full article.