Economics, Tips

What will happen to oil in the long run?

The oil market has experienced extreme volatility over the course of this pandemic.  The lack of demand for oil pushed oil futures prices into the negative, as there was an overstock of oil in storage.  Currently, oil prices have returned to normal, but there underlying factors that could influence oil prices in the years to come. 

The current issue facing the oil market is the lack of investment.   Many countries have experienced a decrease in production, feeding into further declining investments.  This decline in shell production may span over the course of the next couple years as drilling begins to resume.  Many drilling sites have begun to re-open, but the vast majority remain shut off due to the capital cost associated with re-starting.  The limited production of oil has caused a decrease in investment, further playing into the cycle of decreased production.  It is safe to say global oil production will continue to be below previous production levels due to this cycle.  

The long term outlook in the oil market also raises concern over the expanding electric energy market.  As more consumers switch to electric vehicles, the oil market will be forced to adapt.  One major strategic change the oil market may make is to convert the oil into materials.  Oil may no longer be the energy that vehicles and machines run off, but will transition to be the material used in the vehicles and machines.  Oil companies will be forced to re-adjust into the supplier of materials. However, there may be repercussions in an electric vehicle dominated market.  Many country and state infrastructures are not suited for the electricity demand expected for a dramatic increase of electrical consumption.  Once infrastructures cannot support the electricity required, demand for oil may resume.  Due to the previous lack of investment, leading to declining production, there will not be sufficient oil to meet the demand.  Without sufficient oil there will be a shortage, causing a dramatic price increase.  

It is important to understand the impact of electric vehicles on the oil market  If electric vehicles continue to increase in demand, it may alter the strategy of oil companies.  If we reach this point, it is a logical conclusion oil prices may spike in the future once the inability to sustain the electric demand on infrastructures is realized.  

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