We’ve all heard the basics of supply and demand. When one goes up, the other tends to fall. That much is simple. But in the case of petroleum prices, and the complex global events, which constantly influence them, there’s nothing simple about it.
WHAT’S A BOOM AND WHAT’S A BUST?
A boom is when oil and/or natural gas prices drastically rise to the point where drilling rigs, refineries and the crews that run them kick into full production. That’s generally when supplies have dropped and demand has risen to the point where production is more profitable. A bust is just the opposite.
World oil supply is close to 94 million barrels per day, and consumption is about equal. Any sudden change in consumption or supply has an immediate effect on the global price of petroleum.
WHAT MAKES SUPPLY GO UP AND DEMAND GO DOWN?
Horizontal drilling and hydraulic fracturing (fracking).
The development of these two technologies led to the shale revolution, which began around 2005. They dramatically improved efficiency and drove domestic production from roughly 5 million barrels per day to 9 million barrels per day – a big plus for raising U.S. supplies.
Steadily improving energy efficiency.
Vehicles with higher MPGs, buildings and homes with better insulation and more energy efficient appliances help balance rising global consumption. Hence, domestic demand drops to a lower level than it would have been without these energy saving measures.
WHAT MAKES DEMAND GO UP AND SUPPLY GO DOWN?
Rising middle-classes of China, India and developing nations.
As a region’s economy grows and/or improves, more people start driving gas-powered vehicles, turning on lights and heating and cooling new homes and businesses. This global demand and oil prices rise.
Political instability in oil and natural gas-producing nations.
Wars and regime changes often cause disruptions in supply, which lead to sudden price spikes. We’ve seen these unpredictable shocks happen in Venezuela, Nigeria and elsewhere with dramatic results.
During the gas crisis of the mid 1970s, OPEC cut off exports causing sudden shortages in the U.S. Later, oil and natural gas production experienced a slow down due to a flooded market in 1982, when oversupply caused a regional recession in Oklahoma and surrounding states.
HOW DOES SUPPLY AND DEMAND AFFECT OKLAHOMA?
The effects of low oil prices are great when you’re topping off the gas tank, but the economies of oil producing states like Oklahoma do much better when the prices are higher. That’s when petroleum companies work their hardest; investing in drilling rigs, hiring work crews and buying land leases.
“THE ECONOMIC KEY IS KNOWING EXACTLY WHERE THE MARGIN LIES; THE POINT AT WHICH COMPANIES CAN SAFELY MAKE A PROFIT BY PRODUCING OIL AND NATURAL GAS.”
—Steven C. Agee, Dean of the Meinders School of Business, Oklahoma City University and Professor of Economics
Thankfully, when the nation was hit by the global recession in 2008, we in Oklahoma largely missed the worst part. $100/barrel oil kept production robust until supply caught up with demand.
BETTER DATA: IMPROVED ENERGY FORECASTING
New data analytics technology is making booms and busts more predictable. We can better see signs of ramp ups and slowdowns coming, and that will improve as the role of big data continues to grow. However, even with the best analytical tools, sudden unforeseen market disruptions will most likely remain inevitable.
When economist, and professor, Steven Agee talks about oil and natural gas pricing and what causes their miraculous highs and startling lows, he speaks with the authority of a Ph.D., and from real-world experience. In 1982, he started an oil and natural gas company at the onset of a regional recession, and later sold it in 2006, 2 years before the Great Recession hit the U.S. with full force.