Oil Prices Stuck Forever

Oil prices were rising. Now they are falling because U.S. supply is creating bigger oil stockpiles. This is the pattern that will keep oil prices in this range, pretty much forever, or until nobody really uses oil anymore.

Fracking Means Oil Price Stability

Once upon a time, OPEC controlled the price of oil. They still do, to a certain extent. The new monkey wrench in the gears is U.S. oil drilling has figured out how to tap huge amounts of previously unreachable oil. Fracking allows for oil under North Dakota, for example, to be pumped out of the ground at reasonable expense.

Now, getting oil this way costs more than pumping it regularly like they do from under Saudi Arabia, for sure, but it is still nicely profitable in the $50 per barrel range. Add it all up, and this puts a soft-cap on oil prices of around $50 per barrel.

falling oil prices picture

Here is how it works. OPEC determines their production levels hoping to create a certain price in the oil markets. If that price goes below $50 per barrel, U.S. producers have to start shutting down their non-prime pumping operations because it just isn’t profitable. However, they don’t go out and yank all of their gear out of the ground. That costs even more money. So, they leave it out there, ready to go.

As oil prices rise, producers fire these wells back up, increasing supply and tempering price increases. For stable producers, they might wait to fire up their non-prime wells until prices get closer to $55 a barrel. But, for producers running leaner, and maybe a little bit desperate for incoming cash, start turning their pumps on at $50.

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The result is a bit of a shock absorber on rising prices with more and more supply coming online as prices increase. If the market forces are there to push prices all the way up into the $60s, then even more supply comes online. If prices stay there, drillers start looking to bring new wells online creating an even bigger downward pressure on prices, and making the shock absorber stronger for next time prices start rising.

Oil Under $70 Per Barrel Forever

This dynamic looks to be the kind of thing that will be in place over the next decade or two. The catch to that is that electric cars are actually finally, starting to come online, and not just to the environmental crowd. Some car companies have already announced that all of their cars will be at least somewhat electric in just a few years.

Driving cars is the number one driver of demand for oil. While it will take at least two decades for a majority of gasoline using cars to come off the roads, every new non-gasoline car put out into the world reduces the supply.

Essentially, high oil prices is a race between how fast demand comes off the roads versus how fast a growing oil-using population adds supply. Thanks to fracking, it is a good bet that decreasing demand wins this race.

Now, this doesn’t mean that oil will never spike above $70 per barrel, or even hang around there for a month or two, but it does make it very unlikely that we’ll ever see sustained prices above that level.

How To Invest For Reduced Oil Demand

Now, isn’t really the time to be looking for ways to play this investment. The transition technologies are still new, and both automakers and electric car suppliers are going to make mistakes getting these technologies to market. There is no way of knowing whose way will work, and whose way will end up being a mistake, making investments in this trend both very long term (remember this will take a decade+ to shake out) and highly speculative. Two aspects that make for lousy investing.

For the time being, keep your eye on which suppliers end up working with early movers, they may have the advantage. More importantly, keep your eyes very carefully on the laggards who are not playing this trend. They may end up having to play catch-up in a very expensive race.

And, stay away from any investment that requires $70+ oil to make good. It just isn’t going to happen.

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