Crashing energy prices have dramatically altered the landscape for the energy industry, leaving some industry stalwarts struggling to catch up. But according to the latest oil price forecast by one leading economist, it’s about to get a whole lot worse.
“I’m sticking with my forecast of US$10 to US$20 a barrel,” Gary Shilling, President of A. Gary Shilling & Co. Inc, wrote in an op-ed for Bloomberg earlier this week. (Source: Get Ready for $10 Oil, July 21, 2015.)
Shilling is used to being outside of the consensus on oil prices. In February, the economist started calling for oil prices to hit $20.00, back when a barrel of West Texas Intermediate was selling for $57.00 per barrel. On Thursday, Shilling reiterated his view, saying little has changed in the energy market.
“The logic behind that February projection still seems valid,” he continued. “Cartels exist to keep prices above equilibrium. But that encourages cheating, as cartel members want more than their allotted share and outsiders sell more to take advantage of the artificially elevated price.”
“The Saudis got tired of seeing their market share shift to others, so they and the other financially strong Persian Gulf producers decided to play a high-level game of chicken.”
Meanwhile, a final accord over Iran’s nuclear deal with the international community is another price depressing factor. Oil is believed to make up 80% of Iran’s exports. Iran is the fourth-largest oil producer in the OPEC cartel. Prior to sanctions, Iran was pumping about 2.8 million barrels per day.
“It could step up output quickly, by about 1 million barrels a day, if Congress approves the deal curtailing its nuclear program and sanctions are lifted,” Shilling continued. “Around 500,000 barrels a day would be available almost instantly from Iranian oil stored in floating tankers.”
When will the carnage come to an end? Shilling says we’re not going to see production cuts until the cash flow from an additional barrel drops to zero.
“In Texas’s Permian Basin and in the Persian Gulf, the marginal cost is $10 to $20 a barrel, and even lower for some Saudi oil fields,” Shilling described. “As long as prices exceed marginal cost, more (not less) production is encouraged to make up for lost revenue.”