The Secretary-General of OPEC predicted that oil prices have hit the bottom and will begin surging towards $200 a barrel, though he didn’t estimate a timeline for the price increase.
The current prices of $45 to $55 a barrel denote the market’s bottom, said OPEC’s Secretary-General Abdulla al-Badri. The drop in oil prices have resulted in oil companies cutting back on budgets and future growth. The Secretary-General warned that continued reductions will trigger drastic price increases.
“If you don’t invest in oil and gas, you will see more than $200 [a barrel],” said al-Badri.
The Motley Fool’s Matt DiLallo explained the reasoning behind the Secretary-General’s remark:
“Oil production naturally declines and oil companies need to invest in new production to not only replace this decline in production from legacy oil fields but to add new production to meet growing demand,” said The Motley Fool’s Matt DiLallo. “However, oil companies are reluctant to invest in new production as their cash flows decline. Over time this could become a problem as oil fields around the world naturally decline by an average of about 5-percent per year.”
For the alternative fuel vehicles industry, news of oil price increases may mean good news for business. This segment posted slow sales across the globe, with many experts citing low petroleum prices as a key cause. As prices for gasoline increase, sales for plug-in hybrid and battery electric cars are likely to follow.
Not everyone is convinced that oil prices will rise so steeply, however.
“It’s possible that oil might have reached bottom: but the idea that oil will ever reach $200 a barrel in real terms for any significant length of time is extraordinarily unlikely,” said Tim Worstall, a fellow at Adam Smith Institute and a Forbes contributor.
Worstall noted that new methods led to major changes for the oil industry’s economics.
“It’s as if people really still don’t get the deep economic change that has happened in the oil market as a result of the fracking revolution,” Worstall said. “We are simply no longer in a world where the development of an oil field is a tens of billions of dollars problem taking a couple of decades to bring to fruition. Because we’re no longer in that world we’re simply not going to end up with the sort of supply and demand mismatches that could lead to a $200 oil price.”