Riding the Energy Coaster Roller Coaster

For the past few years, world energy markets have endured a whirlwind of changes because of dramatic fluctuations in the price of oil. Oil can be a driver of economies, or it can reflect underlying economic trends happening within an economy.

Oil prices steadily increased starting in 2009 from $40 to $50 per barrel to more than $100 per barrel in 2011. Prices then remained at or above $100 per barrel for several years. These high prices, coupled with advancements in oil extraction technology, enabled the development and use of oil resources that previously were not economically feasible.

The development of these new technologies caused an oil boom in many parts of the world, including the United States. Oil development in areas such as North Dakota, Wyoming, Western Colorado and Eastern Utah expanded quickly, helping the economies of many small, rural areas and providing high paying jobs to those who wanted to work in the oil fields.

However, this development presented a challenge to the traditional oil producing nations in the world, the most significant of which is Saudi Arabia. Oil ministers in Saudi Arabia did not appreciate the increased competition from these new developments and wanted to put a stop to it. Their strategy was to flood world oil markets with cheap Saudi oil in 2014. The impact was immediate. From June 2014 to January 2015 the price of oil fell from more than $100 a barrel to around $50 a barrel.

The impact of lower oil prices started to hit almost as quickly. Communities that thrived under higher oil price conditions began to see reductions in oil exploration and production. Job losses quickly followed as energy companies responded to a less profitable environment. These losses continued for the past two years, as energy production continued to contract.

Just when it seemed that oil prices were starting to settle down, in mid-2015 the world was hit by a weakening Chinese economy, which caused a second drop in oil prices. As the Chinese economy continued to weaken, China demanded less oil, as did countries with close economic ties such as Africa and South America. The result was oil prices dropping to under $30 a barrel in early 2016.

Although Saudi Arabia wanted oil prices lower, their actions backfired when prices fell so low so quickly and caused them to lose control of the market. Now, countries that rely on oil exports are suffering. Countries such as Russia and Venezuela have seen civil unrest because they can’t provide public assistance like they promised. And even the deeper pocketed countries of the Middle East will suffer if oil prices remain very low.

However, 2016 has continued the trend of dramatic swings in oil prices. In mid-2016, oil prices rebounded from the low $30 range up to the $50 range. The dramatic reductions in production and exploration created greater scarcity and forced higher prices on the oil market.

The OPEC cartel has failed to retake control of oil markets and dictate prices and production as in the past. At several recent meetings, OPEC has been unable to hold participating countries to specific production ratios. Perhaps this organization, which effectively controlled energy markets throughout world, may be losing some of its power.

Will oil be able to return to the $100 range and stay there for a sustained period of time, or could it return to the $30 range seen in early 2016? No one knows for sure. What we have learned from the last two years is that oil markets are extremely complex and difficult to control. Markets always find a way to adjust, and they can hurt those who try to manipulate them.

To read more economic news compiled monthly, please view our Economic Snapshot report on www.zionsbank.com/economy.