Oil Stuck Below $80? No Way, or Global Collapse Is Coming

The International Energy Agency's prediction of long-term $80-a-barrel oil is laughable. TheStreet's energy contributor, Dan Dicker, explains why.
By Daniel Dicker ,

The International Energy Agency has released its yearly energy report, including their projections on oil prices.

As usual, their predictions are laughable. For the rest of the decade, they do not see oil prices rising above $80 a barrel. In their low-price oil scenario, they don't see oil prices rising above $80 until 2020.

They ought to predict a global economic meltdown to go along with it. The consequences of that kind of extended low oil price that the IEA predicts would not only bankrupt every oil company in the world, but also several sovereign nations. You could almost guarantee a global depression as a result.

Before explaining why the IEA must be wrong in these projections, let's remind people of their last few forecasts. In 2013, they expected we'd be at $110 a barrel today -- a far cry from the current $45 oil price.

What the IEA does is assess global supply and demand figures, and then interpolate those figures into the future to predict prices. What they don't do is forecast the economic results of low prices and how those prices will affect both supply and demand.

And here is where the IEA must certainly be wrong -- another five years of low oil prices would fully decimate the necessary capital expenditures required to develop new oil sources, collapsing supply.

We can already see some of the effects of lowered spending here in the U.S. But with prices that low for that long, not only would U.S. suppliers entirely run dry, but countries like Venezuela, Nigeria, Iraq and even Russia would be unable to continue to support their economies. Sovereign debt in these countries would collapse, credit would run dry and unemployment would be rampant. Even in countries with cheaper break-even prices, oil production would rapidly slow as well.

And demand, under long-term low oil prices, would obviously swell. For now, the IEA is predicting a 900,000 barrel a day demand increase for every year of the remaining part of the decade. I believe that this number is already low, but continued low oil prices would naturally increase this predicted demand.

Lowered supply and increased demand? These are not the market conditions that keep prices on any commodity low -- and they won't for oil.

Or at least let's not hope so -- otherwise, we're all headed for a very nasty economic shock.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...