Challenges of Global Oil-Price Roller Coaster

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"A number of trends firmly in place point to higher oil prices and will transform the global energy market."

The global financial crisis has caused a massive slide in energy prices, down to $40 to $50 a barrel of NYMEX light sweet crude from the July 2008 highs of $147. While oil prices, along with other commodities, are expected to continue their fall in the short term, over the medium to long term, economic recovery is likely to generate growth in demand, and oil prices are expected to recover as energy markets tighten.

Moreover, lower oil prices are likely to impede the massive investment needed to meet rising demand by 2030, delay introduction of energy-saving technologies, and make alternative fuels less competitive. The tight credit environment will also make it more difficult for energy firms to obtain the necessary funding to finance the capital-intensive growth in produc¬tion capacity—especially necessary for expensive and difficult offshore production, exploration and develop¬ment, and heavy oil, oil sands, or oil shale production.

A number of trends are firmly in place that point to higher oil prices beyond the current recession, and are, indeed, transforming the global energy market: a massive rise in oil demand from emerging markets; a lack of OPEC and non-OPEC spare capacity to meet peak demand; a shift of influence over oil reserves and production from international oil companies (IOCs) to national oil companies (NOCs); an insuffi¬cient level of investment in production capacity; a decrease in discovery of oil fields; and a rising rate of oil-field depletion rates. Making matters worse, there continues to be an increase in energy nationalism and the proclivity to use energy as a geopolitical tool.

The Obama Administration must have a keen appreciation of these trends when formulating national security and international energy security policy. In the 21st century, the two are intertwined as never before. It should pursue domestic and international policies that lower the barriers to investment, innovation, and entre-preneurial activity through tax, deregulation, and free trade policies. Such changes will increase pro-duction of traditional energy supplies and discovery and development of new technologies to meet the country's energy and transportation needs.

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