Toyota Motor Corporation (ADR) (TM), General Motors Company (GM): Why Oil Prices Are Bound to Stagnate

In short, stagnant demand and increasing supply in the OECD countries, particularly the U.S. and Canada, should be sufficient to offset demand growth in the developing world for at least five more years. Beyond that, the “shale revolution” will probably be exported to other countries that still rely on conventional drilling techniques today. While brief supply interruptions may cause price spikes now and again, oil prices will tend to be stagnant (or even trend lower) for the foreseeable future.

Foolish bottom line

When oil soared past $100 a barrel in 2008, global oil supplies were very tight. At the peak, in July 2008, the IEA assessed OPEC’s effective spare capacity at just 1.5 million bpd. That figure has now risen to more than 3.7 million bpd, indicating a much more benign supply-demand balance.

The main reason for this shift is that we needed sustained high oil prices to change consumer behavior — e.g., driving less often and preferring more fuel-efficient cars — and to justify new (and more expensive) drilling techniques such as hydraulic fracturing. Now that oil prices have hovered near $100 for some time, supply growth has picked up again while demand is stagnant. Even demand growth in China has paled in comparison with U.S. supply increases.

I’ll close with one more piece of corroborating evidence. While December 2013 Brent crude futures recently traded for approximately $103 a barrel, December 2019 Brent futures traded for less than $89. Conventional wisdom may say that oil prices will skyrocket sooner or later, but the market is telling us otherwise. Don’t underestimate the power of efficiency gains and new drilling techniques to keep oil prices in check for many years to come.

The article Why Oil Prices Are Bound to Stagnate originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends General Motors.

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