The oil and gas industry is grappling with what Harvard economist Kenneth Rogoff describes as the “mother of all shocks.” This tumultuous period, triggered by the pandemic and exacerbated by geopolitical events, has set the industry on a path marked by extreme volatility and uncertain recovery.
Rogoff, a Harvard professor and former chief economist at the International Monetary Fund, reflects on the dramatic fluctuations in energy prices over the past few years. The industry saw Brent crude oil plummet to a mere $14 per barrel in 2020, only to skyrocket to $133 per barrel by June 2022. U.S. gas prices mirrored this volatility, dropping to $1.77 a gallon in 2020 and peaking around $5 a gallon in 2022.
Recent months have brought some relief, with Brent crude stabilizing around $80 a barrel and gas prices cooling to about $3 a gallon. This respite is largely attributed to recession fears in the U.S. and their potential impact on demand.
However, the long-term outlook suggests that oil and gas prices will continue to trend upwards, punctuated by significant volatility. Rogoff emphasizes the magnitude of the pandemic’s impact, likening it to the most substantial shift in demand since World War II.
The International Energy Agency estimates that global oil demand increased by 2.3 million barrels per day last year. Forecasts by the Energy Information Administration (EIA) suggest that by 2050, demand could surge by as much as 42%.
In response to this growing demand, energy giants are ramping up investments in crude oil production. The U.S. witnessed over $100 billion in oil company mega-mergers in 2023. Yet, experts warn that it could take years for these investments to resolve the industry’s chronic undersupply issues, indicating that higher prices may persist in the interim.
Rogoff predicts that unless there is a significant increase in investment, which appears unlikely under current policy guidance, energy prices are poised to rise. The market will continue to be influenced by supply and demand shocks, affecting not only the energy sector but the global economy at large.
Amidst this backdrop, U.S. oil producers have experienced a boon, with production hitting an all-time high in 2023. The EIA forecasts that the U.S. will maintain this momentum, producing an average of 13.2 million barrels per day in 2024 and 13.4 million per day in 2025, setting new records for the next couple of years.
For investors and industry stakeholders, understanding the dynamics of the oil and gas market is crucial. The path to recovery appears long and winding, with challenges and opportunities emerging from global demand shifts, policy changes, and ongoing market volatility. Staying informed and adaptable will be key to navigating this ever-changing landscape.