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Daniel J. Graeber

Daniel J. Graeber

Daniel Graeber is a writer and political analyst based in Michigan. His work on matters related to the geopolitical aspects of the global energy sector,…

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Oil Prices Drop, But Probably Not For Long

Oil Prices Drop, But Probably Not For Long

The price for a barrel of oil fell on word that more production was coming from key OPEC members, but a report from the International Energy Agency (IEA) says the drop may not last because Middle East oil producers are facing a shortfall in investments.

A Bloomberg survey of oil companies, producers and analysts show production from members of OPEC rose in May by 75,000 barrels per day (bpd), to 29.98 million. Production levels were boosted by a 70,000 bpd output from Saudi Arabia, its first increase this year.

Even more oil is expected this week from Libya, which has struggled to keep production levels close to the pre-civil war mark.

More oil from key OPEC producers pushed the price of Brent crude, the global benchmark, to around $108.4 per barrel, a relative low point when compared with prices so far this year.

The price of oil can influence everything from corporate earnings to inflation. For consumers, higher oil prices usually means higher gasoline prices, which can deplete cash that would be normally reserved for things like groceries. A lower price per barrel, then, means more money to spend on other things.

A June 3 report from the IEA said a major portion of the estimated $40 trillion in investments needed to keep the lights on through 2035 will need to come from Middle East oil producers. Without those investments, oil prices may increase.

Related Article: Is The Shale Industry About To Experience A Shakeout?

Right now, OPEC production is up against the glut of oil coming from North American shale. Oil supplies from non-OPEC producers are expected to increase by more than 4 million bpd between 2013 and 2018, with much of that coming from North America. That relieves some of the pressure on OPEC, which meets around 40 percent of the world's oil demand.

OPEC Secretary-General Abdalla el-Badri has cautioned, however, that the addition of non-OPEC oil supplies to the global market “should be viewed as a periodic shift."

By the mid-2020s, the North American shale boom cycle will bust and Middle East oil producers will need to pick up the slack, the IEA's report concluded.

The IEA also said a lot of the money needed in the future will be used just to keep current oil production levels static. An estimated $8 trillion will be needed for energy efficiency to make up for the expected decline from maturing oil and gas fields.

The price per barrel of oil tripled during the six-month oil embargo from Arab members of OPEC in the 1970s. The IMF said global inflation rose to 7 percent in part because of the embargo, compared with 4 percent in 1972.

"If investment doesn't pick up as needed, we will have much more volatile oil markets, and in the 2020s we will have higher oil prices," IEA Executive Director Maria van der Hoeven said.

By Daniel J. Graeber of Oilprice.com


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