Advanced Search
MyIDEAS: Login to save this paper or follow this series

A New Era for Oil Prices

Contents:

Author Info

  • John V. Mitchell
Registered author(s):

    Abstract

    Since 2003 the international oil market has been moving away from the previous 20-year equilibrium in which prices fluctuated around $25/bbl (in today’s dollars). The single most important reason is that growing demand has eliminated the structural surplus of crude production capacity which had existed since the oil price shock of 1979-83. So far, the higher oil prices since 2003, and even higher since 2005, have not induced economic recession in oil-importing countries so that oil demand has not fallen as it did in the 1980s after the second oil shock. Unless this occurs, a structural surplus will not be recreated, and prices are likely to remain ‘high’ – above $50/bbl – until longer-term reactions take effect. If the political situation in the Middle East deteriorates further prices could reach new levels, but the reaction would be quicker and stronger. Meanwhile, supply and demand are set to expand roughly in balance over the next five years, though there are many uncertainties which will lead to short-term fluctuations. With so little controllable flexibility in supply or demand, prices will remain volatile in the short term. Five or more years of oil and related energy prices averaging double (or more) their previous long-term average cannot fail to create a new long-term situation both in terms of economic behaviour and government policy. This will bring new competition which will simultaneously reduce the demand for energy, increase the supply of oil, and increase the substitution of other fuels for oil outside the transport sector. As these forces develop, oil prices will be unstable through the long term. For the transport sector, there is a very large range of possibilities which do not depend on the development of new technology. Examples are a shift in US vehicle demand to vehicles with typical Japanese or European fuel efficiency (which would reduce world transport fuel demand by nearly 10%) and the opening of US and European markets to competition from Brazilian and other developing country ethanol supplies. A period of high oil prices will also lead to investment to increase the production of liquid fuels from oil sands or natural gas. Once these investments are made, they are likely to continue producing as long as their operating costs remain lower than the price of oil.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://tisiphone.mit.edu/RePEc/mee/wpaper/2006-014.pdf
    Our checks indicate that this address may not be valid because: 500 Can't connect to tisiphone.mit.edu:80 (10060). If this is indeed the case, please notify (Sharmila Ganguly)
    Download Restriction: no

    Bibliographic Info

    Paper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 0614.

    as in new window
    Length:
    Date of creation: Jun 2006
    Date of revision:
    Handle: RePEc:mee:wpaper:0614

    Contact details of provider:
    Postal: 77 Massachusetts Ave. (Building E40-279), Cambridge, MA 02139-4307
    Phone: (617) 253-3551
    Fax: (617) 253-9845
    Email:
    Web page: http://tisiphone.mit.edu/RePEc
    More information through EDIRC

    Related research

    Keywords:

    This paper has been announced in the following NEP Reports:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:mee:wpaper:0614. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sharmila Ganguly) The email address of this maintainer does not seem to be valid anymore. Please ask Sharmila Ganguly to update the entry or send us the correct address.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.