As access to energy resources has become more decentralized, price volatility is likely to grow, attendees of KPMG's 2016 Global Energy Conference in Houston learned Thursday.
Mustafa Mohatarem, General Motors chief economist, pointed out that the Texas Railroad Commission, which regulates the state's oil and gas industry, effectively regulated the world price of oil from the 1930s until the first oil crisis in the early 1970s, and Saudi Arabia, through OPEC, has done so for most of the period from 1974 through the present.
During this period, much of the energy complex, including natural gas, has moved in tandem with the price of oil.
Constance Hunter, KPMG chief economist, noted that in constant 2013 dollar terms, the West Texas Intermediate price of oil was relatively stable through 1973, straying beyond two standard deviations of the mean just twice -- on the high side in the late 1940s and on the low side in the early 1970s.
During OPEC's reign, the WTI price swung sharply above the upper standard deviation boundary, in constant 2013 dollars, in the late 1970s.
But Philip Verleger, a top energy policy adviser to presidents Gerald Ford and Jimmy Carter and currently head of PKVerleger, an energy economics consultancy, said that with the introduction of heating oil futures in 1977 and crude oil contracts in 1983, "you knew eventually they were going to break the cartel," as trading drove prices to long-term marginal costs.
Oil prices stayed low, in real terms, for almost 20 years, from November 1985 to June 2005, Mohatarem said, when big increases in Chinese demand caught up with supplies, and Saudi Arabia decided not to expand production to meet the increased demand.
Alternative energy sources did arise, however, in the form of hydraulic fracturing for oil and gas and renewables for electricity, which have created a glut of energy resources.
"The question is, where will the new demand come from that absorbs the excess supply?" Mohatarem said.
In the past few weeks, fires in the oil fields of Alberta, violence in Nigeria and virtual chaos in Venezuela have effectively cut supply by 5 million to 6 million b/d, "and it has barely moved the market," Mohatarem said, and he expects that when Nigeria resumes production, prices will stay in the range of $40/b to $50/b.
"US shale producers have become the marginal producers," Mohatarem said.
But despite low prices and massive cutbacks in oil-and-gas exploration, KPMG's Hunter noted that oil companies continued to issue increasing amounts of debt -- about $440 billion in 2015, up from about $400 billion in 2013.
"When you have an oversupply of something and leverage on the back end, your trough tends to be longer," Hunter said. "It's possible that the downtrend could be a little lower and a little longer than a lot have anticipated."
The fact that the US "has huge resources for oil" has meant the transformation of that market from an extractive business cycle with prices tied, in effect, to the cost of capital to extract it from the ground, to an agricultural business cycle, in which certain extraordinary events -- war, for example -- cause price spikes, later followed by "a big crop" with low prices, Verleger said.
Verleger presented an oil price graph that showed big swings over the next 10 years -- topping $100/b before 2020, sinking to near $10/b in the early 2020s, soaring to near $180/b a couple of years later, then dropping to around $40/b by 2026.
One factor in the supply/demand balance for energy is automotive vehicle sales, and GM's Mohatarem said demand is flat in Europe and the more developed parts of Asia (Japan, South Korea and Australia), while demand is growing fastest in China and India.
But China and India have extremely bad levels of air pollution in their major cities, which may shift demand away from gasoline and diesel-fueled vehicles, Hunter said.
"Politics shift, based on whether or not you can breathe," she said.
The percentage of all electricity supplied by coal-fired generation has been trending downward in China over the past 10 years, just as it has in the US and Europe, Hunter said, but the opposite is true for India.
And the amount of all energy provided by coal is expected to remain relatively constant through 2040, although other sources, such as natural gas and renewables, are expected to grow through the period, according to a KPMG graph.
The percentage of all Chinese vehicle sales that are powered by electricity or something other than gasoline rose from about 0.3% in 2014 to more than 1.3% in 2015, according to a KPMG graph.
Politics can have a big effect on what kind of energy is used, Verleger said, pointing out that Norway's incentives related to highway use have resulted in a high percentage of electric vehicle sales, and the Netherlands requires all taxis to be electric vehicles, with the result that virtually all of them are Teslas.
California's requirement that vehicles have decreasing levels of carbon emissions over time is likely to cause a spread of electric vehicles elsewhere in the US, Verleger said.
