Analysis & Opinions

Oil prices could go even lower, Harvard economist says

| November 11, 2014

Italian energy economist Leonardo Maugeri has been getting attention lately for his 2012 prediction that growing oil supply capacity “could lead to a glut of overproduction and a steep dip in oil prices.” In October, he declared victory. In an interview, the associate at Harvard’s Belfer Center told the Globe how he made his forecast and how long low oil prices could last.

How did you see this coming in 2012?

There was huge spending underway to develop or redevelop oil fields around the world. That’s why I gave that warning: There is a growing production capacity that will grow even more over the next few years. Sooner or later, we will have an oil price collapse. Instead of using abstract econometric models, people should give a deeper look at what is happening in the real world.

So low prices are bad for oil companies. But what about the global economy?

It’s good for the global economy. Higher prices significantly decrease the rate of growth. But dropping prices could have very, very dangerous effects on countries that are key for world stability–Saudi Arabia, Iran, and Russia. The government revenues of these countries depend more than 50 percent on oil and gas. In the past, these countries would use oil revenue to subsidize any kind of internal need. But if Saudi Arabia lost its grip on internal stability, this could be a major problem.

Why are we seeing gas prices move, and not prices for other major expenses?

In the States, unlike Europe and many other parts of the world, taxes on gasoline are very, very low, so the cost of oil is the primary determinant of the price of gasoline. In Europe for example, more than 50 percent of the consumer price of gasoline is made up of taxes.

It takes a few days to adjust the price at the pump to the price of the raw material. Big companies won’t feel the effect in the very short term because they already have contracts that are written in marble. But they will start feeling effects over the next year.

How much longer could low oil prices last?

There is no immediate possibility for oil prices to rebound considerably. I think we are in a new phase of low prices. The big question is, could oil prices remain around $80 to $90 dollars per barrel, or could they go even lower than that? For one year, at least, I think the new range of prices could be between $75 and $90.

The next several years will be years of lower oil prices. The bulk of the new production capacity has already been created, but there are countries—Brazil, Kazakhstan, Canada—that can add production capacity. And the possibility to have a huge rebound of demand is capped because of energy efficiency legislation and environmental legislation.

Find the interview in The Boston Globe.

For more information on this publication: Belfer Communications Office
For Academic Citation: Newsham, Jack. "Oil prices could go even lower, Harvard economist says.", The Boston Globe. November 11, 2014.