Why Oil Prices Will Keep Falling

The Wall Street Journal • May 2012 • by Nansen G. Saleri

New energy extraction technologies will overcome bad policies and geopolitical risks.

Nansen - Wall Street Journal

The recent retreat in crude prices has surprised many experts, who were predicting steeply higher levels. The sanctions choking off Iranian exports and the ever-present elephant in the room—a possible shutdown of the Strait of Hormuz, where 20% of global crude traffic occurs—were pushing prices up.

Recently, however, an ensemble of unrelated factors—the Greek economic bailout, shale-oil fracking in the U.S., and the resurgence of exports from Iraq and Libya—have combined to push prices down. Is this a temporary relief that will falter with the first stress test? The answer is no.

The trend derives as much from the fundamentals of supply and demand as it does from the psycho-speculative forces that generate risk premiums ranging from $20 to $30 extra per barrel. A case in point is the Greek bailout, which offsets the anxiety premium raised by Iranian war games in the Persian Gulf by suppressing demand projections.

The invisible hand steadying global energy markets is the growing influence of modern technologies. So a case can be made for a relatively stable crude-price window—$80 to $120 a barrel for the next several years.

Yes, there could be unforeseeable global events and a price-spike response to them at the pumps. For instance, the stoppage of crude exports through the Strait of Hormuz would be highly disruptive, and anxiety over it would add more than $30 to the price of oil. On the other hand, there are workarounds that would preclude a sustained blockage.

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Technology Trumps Oil Politics