Oil prices are governed by cycles, and recent indications are that we are moving back into a cycle that will be governed by fear of insufficient oil supplies.

The price of oil has always been driven by cycles of fear and complacency. During the cycle of fear, geopolitical events can send the price of oil soaring. During the cycle of complacency, oil prices will fall on bad news (e.g., the appearance of too much supply or weakening demand), but often seem immune to bullish news.

Over the past decade, the world has experienced both cycles.

The Cycle of Fear

A decade ago “peak oil” was helping drive the fear cycle, as many credible voices asserted that a terminal decline in oil production was imminent. For a while, it looked like they might be right.

Production in Saudi Arabia remained flat even as global demand continued to grow, and oil prices skyrocketed above $100 a barrel (bbl). These were just the types of consequences predicted by those who predicted an imminent terminal decline.

But the reality was that Saudi Arabia and OPEC were happy with $100/bbl oil, and they were slow to increase production, arguing that the world was well-supplied. Fear mostly had the upper hand from about 2005 until mid-2014.

Enter the Shale Oil Boom

As oil prices rose, some oil resources that were previously uneconomic to produce became attractive for the first time. After falling for nearly 40 years, U.S. oil production began to surge as a result of the marriage between hydraulic fracturing and horizontal drilling. The upturn in oil production began in 2009, and then U.S. oil production proceeded to grow at the fastest rate in history.

Global demand for oil remained high. In fact, despite government mandates in support of biofuels and the explosive growth of electric vehicles (EVs), global oil demand has grown at an average rate of 1.1 million barrels per day (BPD) for more than 30 years:

Global oil consumption 1965-2016.

Complacency Returns