The Motley Fool

Quick Thought Of The Week: Oil

With all that has been going on between America and China, it is easy to overlook the potentially damaging effects of rising oil prices.

Who would have thought – so soon after a barrel of crude oil plunged to $30 – that we would be talking about $100 for a barrel of the black stuff? But some experts, who think they know better, are predicting precisely that.

They could be right.

However, oil prices are notoriously difficult to predict, as we saw in 2016. There are so many factors that could affect its price.

Apart from the blindingly obvious such as economic growth rates and global conflict, there are also weather conditions, alternative energy sources, the strength of the US dollar and new production methods to consider, too.

But now that Brent crude has breached $80 a barrel, we could say that oil prices are closer to $100 than $30….

…. Additionally, with sanctions against Iran set to kick off  in the fourth quarter of this year, and OPEC’s inability to fill the void, triple-digit oil prices are more than just a possibility. It is becoming  quite probable.

So, whose fault is it?

Um… the market’s fault of course.

The market was so positive over the advent of US shale oil production that it drove down crude prices to levels that destroyed some companies. Healthier companies survived, though, but only by the skin of their teeth….

…. They cut back on exploration and disposed of assets.

But now the chickens have come home to roost.

Those cut backs on oil exploration means that fewer fresh oil fields will come on stream to replace the older ones. And when supply lags demand, prices could rise, until such time that they are brought back in sync.

Ironically, that is unlikely to happen until sustained high oil prices give oil companies the confidence to start spending on exploration again.

So, the cure for high oil prices is, paradoxically, high oil prices.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.