Oil Prices Are Rising Again, But Will They Keep Going Up?

May 6, 2015
Originally published on May 7, 2015 12:41 pm

Oil prices hit a new high for the year Wednesday — closing at just under $61 a barrel. They've been rallying for a month, but nobody's predicting $4-per-gallon gasoline anytime soon. And some analysts say weak demand will send oil prices down again.

The recent rise follows an historic drop in prices, which were as low as about $45 a barrel less than two months ago.

So to understand what's going on now, let's look at what sent prices tumbling in the first place

"I think prices were pushed down by a realization on the part of Saudi Arabia," says Philip Verleger, an economist and consultant who has been watching the oil market for more than 40 years. He says he's never seen what he's seeing now.

And he says Saudi Arabia could see it too, and it decided to let oil prices crash. "What the Saudis could see was new forms of renewable energy consumption — windmills, tidal power, solar power and the Tesla," Verleger says.

He says in the longer term, electric cars and those other technologies could mean less demand for oil. Shorter term, the global economy has slowed and that means less thirst for oil right now. At the same time, with fracking the U.S. is now rivaling Saudi Arabia as an oil superpower.

"This rapid technological change in oil supply that hadn't been predicted, with fracking in the United States, [was] threatening to displace their production," Verleger says.

So he says the Saudis now want cheaper oil, in part to slow down the fracking revolution in the U.S. — and to signal to the developing world: Don't worry — you don't need to invest in alternative energy. You can buy cheap oil from us.

"They want to be the Wal-Mart of oil," Verleger says, "the low-cost supplier."

So what's pushing prices higher now? For one thing, cheaper oil prices have stunted fracking — or at least new drilling in the U.S.

Hillary Stevenson is an oil analyst at Genscape, which tracks oil production. She says that since the price crash, there are a lot fewer drilling rigs punching holes in the ground. "Since then, 982 oil rigs have been cut for a 57 percent drop," she says.

Still, most of the fracking wells that were already there are still pumping oil. So Stevenson says there is still a tremendous supply glut. That's why she and many other analysts don't see how this latest price increase can last.

"The fundamentals do not point to the level of price increase that we've seen recently in the market," Stevenson says.

Verleger says he expects to see prices back down around $50 by the end of the year. Of course nobody really knows where the price of oil is headed. But if Verleger is right, that probably means gasoline prices this summer will be about a dollar cheaper than last year.

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Oil prices hit a new high for the year today, closing at just under $61 a barrel. It's part of a month-long rally, but nobody's predicting that we're going back to the days of $4 a gallon gasoline anytime soon. And as NPR's Chris Arnold reports, some analysts expect oil prices to fall again.

CHRIS ARNOLD, BYLINE: OK, oil prices are up, but that's after an historic drop in prices down to about $45 a barrel just less than two months ago. So to understand what's going on now, let's take a look at what sent prices tumbling in the first place. We called up an economist who's been watching the oil market for more than 40 years.

PHILIP VERLEGER: I think prices were pushed down by a realization on the part of Saudi Arabia.

ARNOLD: That's Philip Verleger, he's an economist and a consult, and he says his whole life, he's never seen what he's seeing now. And he says Saudi Arabia could see it, too, and decided to let oil prices crash.

VERLEGER: And what the Saudis could see was new forms of renewable energy consumption - windmills, tidal power, solar power and the Tesla.

ARNOLD: Verleger says in the longer term, electric cars and those other technologies could mean less demand for oil. Shorter-term, the global economy is slowed, and that means less thirst for oil right now. At the same time with fracking, the U.S. is now rivaling Saudi Arabia as an oil superpower.

VERLEGER: This rapid technological change in oil supply that hadn't been predicted with fracking in the United States that was threatening to displace their production.

ARNOLD: So Verleger says the Saudis now want cheaper oil in part to slow down the fracking revolution in the U.S. and to signal to the developing world - don't worry, you don't need to invest in alternative energy. You can buy cheap oil from us.

VERLEGER: They want to be the Walmart of oil - the low-cost supplier.

ARNOLD: All right then, so what's pushing prices higher now? For one thing, cheaper oil prices have stunted fracking or at least new drilling in the U.S. Hillary Stevenson is an oil analyst at Genscape, which tracks oil production. And she says since the price crash, there are a lot fewer drilling rigs punching holes in the ground.

(SOUNDBITE OF ARCHIVED RECORDING)

HILLARY STEVENSON: Since then, 982 oil rigs have been cut for a 57 percent drop.

ARNOLD: Still, most of the fracking wells that were already there are still pumping oil. So Stevenson says there's still a tremendous supply glutting the market. That's why she and many other analysts don't see how this latest price increase can last.

STEVENSON: The fundamentals do not point to the level of price increase that we've seen recently in the market.

ARNOLD: Verleger, for his part, expects to see prices back down around $50 a barrel by the end of the year. Of course, nobody really knows where the price of oil is headed, but if he's right, that probably means gasoline prices this summer will be about a dollar cheaper than last year. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

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