It Takes the Right Ingredients: The Recipe for Sustainable Oil Prices and the Perfect Cake Have Common Elements
In baking, much like in many areas of life, all of the ingredients must come together in perfect harmony. Baking is not just about measuring out the right amount of quantities of what you are adding in, baking it at the right temperature and hoping for the best. No, baking also requires patience, finesse and foresight – but above all, it requires planning and the right ingredients.
Achieving sustainable oil prices is much the same – numerous components must all come together in harmony for sustainable growth and stable pricing to be the result. A little patience, finesse, foresight and planning don’t hurt the process either. One or two factors do not, alone, cause a stable price environment – it is the combination of many ingredients, each playing a role.
I recently got my layer cakes down pretty well; however, then I got a little over-confident and substituted in eggnog on a whim while baking a Christmas-themed layer cake. I did not think through the role that room-temperature milk actually played in a cake, nor did I think through the impact that the substitution may have on the other ingredients. Luckily, my cake still worked out, but it was just a little off.
Lesson Learned: Sometimes you just cannot substitute one of the crucial ingredients on a whim.
Some, But Not All of, The Crucial Ingredients for Sustainable Oil Prices
When one sits down to think about what all goes into the recipe for sustainable oil prices, it is easy to see how opinions on this subject can differ so greatly. There does seem to be a general consensus on a few of the critical ingredients:
- Supply and Demand
- International Relationships and the Global Economy
- Infrastructure and Drilling Efficiencies
Supply and Demand
Although some question whether supply and demand have that significant of impact on pricing, most people recognize that this simple and basic economic principal is a foundational component of the sustainable oil prices recipe.
While it is widely accepted that high oil prices leads to more drilling, thereby increasing supply, some question whether OPEC’s supply cuts have a true impact on price. Others feel that production cuts support prices and give momentum to increases in price.
A recent article featured on Investing.com entitled, Oil Prices Gain 2 Percent, Extending Rally From December Lows, reports that the slight recent increases in oil prices are “drawing support from an agreed supply cut by the Organization of the Petroleum Exporting Companies, [as] well as some non-member countries such as Russia and Oman” and discusses in detail that “[t]he aim of the production cut is to rein in a surge in global supply, driven mostly by the United States, where production grew by nearly a fifth to over 11 million bpd in 2018.”
International Relationships and the Global Economy
Now, more than ever, the global economy and the state of international relationships play a critical role in whether oil prices will be volatile. We frequently consider circumstances in Venezuela, Iran, Saudi Arabia, Russia and other far-away countries when we look at predicting the future of oil prices. Forbes discusses the international relationship impact on oil prices in its recent article entitled, Oil Markets Are In For a Wild Ride in 2019.
Infrastructure and Drilling Efficiencies
Planning, from an infrastructure standpoint, such as pipelines, plays an important role on the stability of pricing as well. Advances in technology that promote drilling efficiencies are similarly essential.
The unavailability of pipelines has been an issue for years. In fact, a recent article in Bloomberg entitled, Permian Shale Oil Boom Holds Good News and Bad News for OPEC, discusses current pipeline constraints in the Permian and also limitations in the United States export infrastructure in detail.
Further, advances in drilling technology have resulted in efficiencies that have helped profitability increase. A recent article in Forbes entitled, U.S. Shale Oil and Natural Gas, Underestimated its Whole Life, mentions the benefits of drilling efficiencies in oil price consistency and future production.
Bottom line – both sustainability in commodity prices and baking each require the right ingredients.