Run for the Hills! Oil Paradigm Shift Ahead!

Posted by: Steve LeVine on December 08

Sell the SUV, or fill it up? Buy a Prius, or wait and see?

What if you’re a Russian or Saudi official — should you pare the state budget to the bone, or keep the project queue ready for when the cash flow returns?

With gasoline back down to as little as $1.26 a gallon in the U.S. (at the Loaf ‘N Jug over on Salt Creek Highway in Caspar, Wyo.), one can be forgiven for complaining of whiplash.

Just five months ago, U.S. prices averaged $4.11 a gallon, and the consensus was that they were headed to European-style levels of $5 a gallon and more.

It was explained as a fundamental change in global energy, a paradigm shift in which supply was in trouble because the cheaper, easy-to-get oil and natural gas were already mostly tapped; and demand was soaring because of growing Chinese and Indian needs.

Citing these realities just a month ago, the Paris-based International Energy Agency warned of a worsening supply crunch, and counseled urgent action to avert a global crisis. Some mainstream analysts warned that the crunch could get nasty.

Now, though, with prices down by more than $100 a barrel from the July 11 peak of $147 a barrel, we are hearing the opposite — oil demand is falling so rapidly, even while new supply is coming on stream, that the new reality is low oil and gasoline prices.

Here’s how Phil Flynn, the very good analyst at Alaron Energies, puts it: “The wild bull era is over. It was a thing of the past. We are now entering a new era of lower and more stable oil prices for years to come.”

After last summer’s global panic that the world was running out of oil, now we’re in a panic that there’s too much of it. In a piece last Friday, my former Wall Street Journal colleagues Ann Davis, Ben Casselman and Carolyn Chi detailed the case for lower-priced oil.

So which is it? What type of paradigm shift are we in?

Those who seem steadiest at the helm see the current price collapse as an aberration. We probably are in the midst of a couple or more years of low-priced oil, these observers say, but then crude will rise back above $100 a barrel.

The reason is that, after the current deep recession, demand will go back up, especially in China; but meanwhile, oil companies have been cutting back the development of new supply, so there isn’t going to be new oil to meet that demand. At some point, those two lines in a graph — a fresh rise in demand, and the cut in supply — are going to cross, and the visible result will be a new price spike.

Last night on 60 Minutes, there was a long interview with Saudi oil minister Ali Naimi. (Here is Part 1. And Part 2.) Among other things, Naimi said the Saudis are adding another 2 million barrels a day of production capacity next year. Thus, he said, if need be the Kingdom can produce 12 million barrels of oil.

Naimi meant to communicate that the Saudis are reliable, and that the world isn’t in fact running out of oil. But he also supported the case that low prices result in low company investment. The result of that? “Price will skyrocket,” Naimi said.

In short, keep your name on the Prius list.