“People will start investing again as soon as the oil price increases”

Is there already a shortage of crude oil, how has demand for oil developed and what is the situation regarding international investments in the oil and gas sector? Christian Growitsch, lecturer in economics at the University of Hamburg, addresses those issues in an interview.

Mr. Growitsch, until a few years ago people were saying that global oil reserves would soon run low. What’s the situation today?
There’s certainly no shortage of oil. Output is at one of its highest levels in the past decades. That’s mainly due to production from unconventional sources in the United States. Fracking was the game changer that brought about a dramatic increase in production. The United States have in the meantime produced up to ten million barrels of oil a day. That figure was just five million five years ago. At the same time, other producers such as Saudi Arabia didn’t reduce their production quota until last month, in the hope of driving shale oil and shale gas back out of the market.

How has demand for oil developed?
It’s risen less strongly than forecast, for example because China’s economy hasn’t performed as anticipated. Output has increased more steeply than demand since the first quarter of 2014. As a result, the price of oil, which was above $80 a barrel for a long time, fell to just over $40. We won't have much higher prices in the foreseeable future. The recent increase to around $50 a barrel won’t change that either.

What are the economic consequences?
The fall in the price of oil is having a destabilizing impact on some producing countries. Venezuela’s economy has collapsed, for instance. Overall, however, this trend is stimulating the global economy, since people spend the money they save on consumer goods. In addition, companies have lower input costs. According to figures from the International Monetary Fund, a drop of ten dollars in the price of oil produces 0.2 percent higher economic growth worldwide. The “Economist” has calculated that more than two trillion dollars have been redistributed as a result of the decline in price.

What impact is the low price having on unconventional production in the United States?
Of course, the low price hampers production and investment in this business. However, production is highly flexible, since the facilities are mobile and can be started up quickly again at any time and used to develop new fields. People will start investing again as soon as the price rises to $50, as it did recently. Shale gas reserves will also not just last for 15 years, as many forecasts predict. If technology advances continue as they have done up to now and the price that can be obtained is right, it will be worthwhile developing new sources or getting more out of existing ones.

The International Energy Agency has just presented the latest figures on energy investments. What are the main trends?
According to “World Energy Investment 2016,” global energy investments have fallen sharply, in particular in the crude oil and natural gas sector. That is due to the changing challenges facing investors, such as macroeconomic uncertainty, a faster pace of technological progress in the energy sector and low energy prices. We can see an unprecedented decline in upstream investments for oil and gas: In 2015 they were 25 percent down on the previous year and in 2016 they’re expected to fall by a further 24 percent. However, that’s attributable to the now very low price of oil. Even at the current price level, I expect investments to increase again.

How do you assess the prospects for shale gas in Germany?
Fracking to produce gas from unconventional sources would be a new idea in Germany. In principle, I believe you should initially be open to new ideas and try them out with scientific underpinning and support. However, I think that Germany, as is also the case with other technological innovations, lacks the courage here. Consequently, I regret to say, we won’t see CCS, i.e. CO2 capture and separation, here. However, one thing is certain: We’re not reliant on domestic shale gas. We can obtain natural gas from other sources as well.

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