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13 November 2013, Gateway House

The new energy price economics

In recent years, U.S. oil and gas imports have declined due to the development of shale resources in the country. How will the production of shale oil, increase in oil production by non-OPEC countries, supply disruptions in West Asia and economic growth in India and China impact global crude oil prices?

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After ranging between $11 per barrel and $35 per barrel in the 1990s and early 2000s, the price of oil shot up to just over $130 per barrel in 2007-08, then came crashing down within the span of a few months to only $40 per barrel.

Studies following this unusual pattern showed that speculation in the oil futures market might have contributed to the large swings. However, some of these studies, such as one done by James Hamilton in 2009, also pointed to a shift in the oil demand-supply fundamentals, and implied that oil prices are on a different trajectory compared to previous periods. Indeed, since the dip in the second half of 2008, global crude oil prices have continued to rise steadily, and are now hovering at just over $100 per barrel. [1]

Analysing four previous global oil price shocks, in the 1970s and 80s, Hamilton pointed out that these were primarily a result of supply disruptions due to the conflicts in West Asia, although some of the impacts of lower production in such countries were offset by increased production from others. Besides, general inflationary pressures also contributed to the price increase.

On the other hand, he concluded that the price spike of 2007-08, one of the biggest oil price shocks, was mainly due to two other factors: (a) an unexpectedly low price elasticity of demand (responsiveness of global oil demand to changes in price) and (b) rather than disruptions to oil supply due to geopolitical conflicts, the inability of global crude oil supply to increase adequately to meet growing demand from emerging economies, led by China.

While speculative market activity might have contributed to the spike and subsequent collapse, according to Hamilton, its impact would have nonetheless depended on these two factors. Hamilton writes that the trend of burgeoning demand and weak supplies is likely to be long-term, and any supply or demand disruptions will increase the volatility of oil prices compared to previous periods.

Oil demand increases with income, but evidence shows that the income elasticity of oil consumption (the responsiveness of the quantity of oil demanded to a country’s income) may decline after a certain income level, slowing down oil demand in more mature economies. [2] Some of this lower income elasticity, as a country becomes more developed, could be due to energy efficiency.

Although oil demand is expected to be stagnant or lower in the U.S., Europe and other developed economies in the next 30 years, countries such as China and India are leading an unprecedented growth. From being a net exporter of petroleum in 1992, China is now the world’s largest importer, surpassing the U.S. in September 2013, with net imports at almost 6 million barrels a day. [3] According to the U.S. Energy Information Administration’s (EIA) International Energy Outlook 2013 Reference case, by 2040, demand growth for petroleum and other liquid fuels in China and India is expected to exceed the combined demand growth of the rest of the world. [4]

At the same time, as demand in China and India was increasing, oil production in the U.S. and other major basins was declining in the 2000s due to the depletion of conventional oil resources. Saudi Arabia, the world’s largest oil exporter, had previously stepped in during short-term supply disruptions in other countries and increased its production, to stabilise the price of oil. During the run-up to 2007-08, however, the country did not, or was not able to, increase production substantially to meet growing global demand; in fact, it was producing less oil in 2007 than in 2005. These dynamics helped push the oil price to record highs in 2007-08.

What was probably not considered a serious factor, even as recently as 2009 when Hamilton published his research, was the increase in global, and particularly North American, shale production that has the potential to ease supply constraints. After rising oil and gas imports from the 1980s until the mid-2000s, U.S. imports have declined in recent years due to the development of shale resources in the country.

U.S. crude oil production increased from 5 million barrels per day in 2008 to 6.5 million barrels per day in 2012, reversing a period of decline from the 1980’s onwards. [5] As a result, net U.S. imports from OPEC countries have declined since 2008, led by lower exports from Nigeria, Angola, Algeria, Ecuador, and Venezuela. Exports from Nigeria declined by more than half between 2007 and 2012. (Nevertheless, U.S. imports from Persian Gulf countries 1 have in fact increased since 2009, after a drop between 2008 and 2009, suggesting that the region will continue to be of strategic importance to the country). [6]

Other non-OPEC countries such as Canada are also increasing their oil production, and some like Russia have significant shale oil resources. This will potentially lower the influence of Saudi Arabia and other OPEC countries on global crude oil prices. In its short-term price forecast, the EIA estimates that the price of Brent crude oil will weaken to $107 per barrel during the fourth quarter of 2013, and $102 per barrel in 2014, due to increases in non-OPEC oil supply. [7]

However, whether this materialises depends on additional factors. Unplanned supply disruptions in non-OPEC countries such as Syria are contributing to oil price volatility. In addition, shale oil is economical to produce with higher oil prices; were prices to fall and remain lower than current levels, for example, due to slow economic growth in countries such as India and China, OPEC countries might regain their influence in the geo-economics of oil, and the U.S. may once again look to higher oil imports.

The price differential between crude oil and natural gas determines natural gas consumption in, and exports from, the U.S. With continued high global crude oil prices, and expanding U.S. production of shale gas, natural gas could slowly replace oil in transportation, further dampening U.S. demand for oil, and oil imports. At the same time, U.S. LNG (liquid natural gas) exports would be more attractive in the world markets due to the link between global crude oil and LNG prices.

However, the ratio of oil prices to natural gas prices is expected to decline in the medium-term to long-term, after a significant increase in 2012, when U.S. natural gas prices fell due to expansion of domestic gas supply from shale and weak demand, and oil prices remained high. The decline in the ratio is expected despite a forecast increase in both oil and natural gas prices, since oil prices are expected to increase more slowly than the latter. As production from productive and inexpensive shale resource areas declines, production costs are likely to increase. In its Reference case for the Annual Energy Outlook 2013, the EIA expects U.S. natural gas prices to increase as a result, by an average of 2.4 percent per year between 2015 and 2040. [8] In this scenario, oil will continue to be important for transportation, unless there is a significant shift to electric vehicles and energy efficiency, particularly in emerging markets such as India and China.

Whether oil prices will remain above $100 or attain equilibrium at a lower level in the medium-term to long-term will depend on several factors, including continued production of crude oil in non-OPEC countries, the extent to which such countries are able to exploit shale resources economically, further technological developments, including in electric vehicles and energy efficiency attained by countries such as China and India, and regulatory limits on GHG (greenhouse gas) emissions that could create “unburnable” or stranded oil assets, among others. There is uncertainty regarding the path that oil prices will take given these factors, and associated uncertainty around which countries will dominate global oil and gas production, imports and exports.

For India, which depends on imports from Saudi Arabia, Iraq, Kuwait, the United Arab Emirates, Nigeria, and more recently, Venezuela, this uncertainty means potential volatility of import supply, and trade deficits. [9] Crude oil imports in India increased by about 80%, from around 96 million metric tonnes in 2004-05 to 172 million metric tonnes in 2011-12. [10] At the same time, the country began importing LNG from Qatar in 2004, until which point it was self-sufficient in natural gas, and became the world’s sixth largest importer of LNG in 2011. [11]

If robust North American unconventional oil and gas production were to continue in the medium term, it might provide some respite for India, but this cannot be taken for granted given the shifting oil and gas trade dynamics discussed above. While diversification of import sources is important, India cannot lose sight of improved energy efficiency in transportation, lowering dependence on kerosene, diesel and LPG, and improving energy access through distributed generation of renewables, and structural changes to its oil and gas sector to improve efficiencies.

Himani Phadke works at the Sustainability Accounting Standards Board in San Francisco, U.S. She has an MA in International Policy Studies, focusing on Energy and the Environment, from Stanford University, U.S., and an MSc in Economics for Development from Oxford University, UK.

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[1] United States Department of Energy, U.S. Energy Information Administration. (2013). Spot prices. Retrieved from website:

[2] Hamilton, J. (2009). Causes and Consequences Of The Oil Shock Of 2007–08comments And Discussion. (Vol. 10.1353/eca.0.0047, pp. 215-261). Brookings Institution Press. Retrieved from

[3] U.S. Department of Energy, U.S. Energy Information Administration. (2013). China: Country Analysis Brief Overview. Retrieved from website:

[4] U.S. Department of Energy, U.S. Energy Information Administration. (2013). International Energy Outlook 2013 (DOE/EIA-0484(2013)). Retrieved from website:

[5] U.S. Department of Energy, U.S. Energy Information Administration. (2013). Oil/Liquids From Executive Summary (International Energy Outlook 2013). Retrieved from website:

[6] U.S. Department of Energy, U.S. Energy Information Administration. (2013). Company Level Imports August 2013 Import Highlights. Retrieved from website:

[7] U.S. Department of Energy, U.S. Energy Information Administration. (2013). Short-term energy and winter fuels outlook. Retrieved from website:

[8] U.S. Department of Energy, U.S. Energy Information Administration. (2013). Market Trends — Natural Gas (Annual Energy Outlook 2013). Retrieved from website:

[9] Seshasayee, H. (2013, November 01). Tapping into latin america’s oil. Gateway House. Retrieved from and Bhattacharya, P. (2013, March 15). Iran slips to 7th among India’s oil suppliers. The Wall Street Journal. Retrieved from

[10] Ministry Of Petroleum & Natural Gas , (2011-12). Indian petroleum & natural gas statistics. Retrieved from Government of India website:

[11] U.S. Department of Energy, U.S. Energy Information Administration. (2013). India (overview). Retrieved from website:

1 The Persian Gulf includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and United Arab Emirates (UAE). Of these, Saudi Arabia, Iraq, and Kuwait are important sources of crude oil for the U.S. Other major exporters to the U.S. are Canada and Mexico.

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