In June 2014, both West Texas Intermediate (WTI) and Brent crude were trading at prices above $100 a barrel before plunging to below $45 a barrel this past August. With West Texas Intermediate currently sitting at around $45 a barrel and Brent crude at around $48, these relatively low oil prices are a result of both weaker demand and plentiful supply. Considering the fundamental factors driving both supply and demand for oil, it is no wonder that experts forecast prices to remain low for some time with prices over $100 a barrel unlikely to return over the next decade.

Demand Factors

Slower global economic growth is depressing demand for oil. Both the U.S. and Europe have been slow to recover from the 2008 global financial crisis, and while China was able to pick up the slack in demand, the recent devaluation of the yuan suggests that China’s strong growth over the past 30 years is quickly tapering off.

Official data released on Monday, October 19, revealed that the Chinese economy grew at its slowest pace in six years at a rate of 6.9% in the third quarter. China’s previously strong growth was in large part driven by massive infrastructure and property investment but it is now clear that the country may have over-invested with both heavy industry and construction slowing down. As the world’s largest net importer of petroleum products, this slowdown has helped to depress the demand for oil.

China’s slowdown has huge implications for the growth of the global economy. Chinese imports fell almost 14% this past August compared to a year earlier marking the tenth month in a row that the country has experienced falling imports. This means weaker demand for raw materials and products from around the world, depressing other national economies, which serves to weaken demand for oil even further. Oxford Economics has downgraded its forecasts for global growth from 2.6% to 2.5% in 2015, and from 3% to 2.7% for 2016.

Another factor that has been helping to depress demand for oil are technological improvements that have made energy consumption much more efficient. Despite the U.S. economy having grown by about 9% since 2007, its demand for finished petroleum products has actually fallen by almost 11%. With motor vehicles comprising almost 60% of total U.S. oil consumption it is significant to note that the U.S. Energy Information Agency (EIA) estimates that, due to rising vehicle fuel efficiency, there will be a 25% drop in light-duty vehicle energy consumption between 2012 and 2014. (To read more, see: Oil Price Analysis: The Impact of Supply & Demand.)

Supply Factors

With the Joint Comprehensive Plan of Action being officially adopted this past Sunday that would see the U.S. lift economic sanctions on Iran, conditional on compliance to limit its nuclear program, the resurgence of Iranian oil exports threatens an already abundant global supply of oil. Iran is home to the fourth largest oil reserves in the world and Iranian officials have claimed that the country could increase oil production by up to 1 million barrels per day in just months after the removal of sanctions.

But such increased production from Iran would only serve to exacerbate an oil supply glut that has been in the making for nearly a decade now. The main factor that has contributed to increased supplies of oil is the U.S. shale boom, which has almost doubled U.S. domestic oil output in the past six years. U.S. shale oil production stood at 500,000 barrels a day in 2005, but reached a peak of over 4.5 million barrels per day at the end of 2014.

The rise in U.S. shale oil production has not only helped to create the supply glut but has acted as a crucial factor influencing OPEC’s decision last November not to cut production. The oil cartel, whose biggest producer and most influential member, Saudi Arabia, was unwilling to cut production in order to boost oil prices, claiming that it did not want to lose market share to the new shale producers.

The shale boom brought on by hydraulic fracturing, or “fracking,” allows oil producers to extract oil from tight rock formations. But the boom has largely been an American phenomenon as fracking technology has not yet been widely adopted by other countries. It is also a rather small-scale business that, while having higher marginal costs than onshore production in the Middle East, can react quickly to increase or decrease production as crude oil prices change. This fact coupled with the possibility of other nations adopting fracking technology will help to keep a ceiling on prices for some time. (To read more, see: The Cost of Shale Oil Versus Conventional Oil).

The Bottom Line

With China’s economic growth leading a decline in global oil demand, increases in oil consumption efficiency, the possibility of new supplies from Iran, and the boom in shale oil production, oil prices are likely to remain below $100 a barrel for many years to come. A recent survey of investment banks by The Wall Street Journal forecasts Brent crude, the international benchmark, to sit between $53 and $64 per barrel by the end of next year after averaging about $54 a barrel this year. Similar projections come from the EIA with Brent crude forecasted at $54 a barrel for 2015 and $59 a barrel in 2016. As of July of this year, the World Bank’s ten-year forecast sees the price of oil rising to only $88.3 (nominal USD) a barrel by 2025.

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