Craig Pirrong - Director Energy Management Institute, University of Houston, Bauer School of Business

1. Global Energy Outlook:
How Low Can It Go?
Craig Pirrong
Bauer College of Business
University of Houston

2. WhatA Long, StrangeTrip
• The past year has been a tumultuous one for energy prices, even by
their historically wild standard
• After a period of relative quiescence, oil prices cratered starting in
July, 2014
• Where do we go from here?
• If I knew that, I’d be lounging on a yacht that would make a Russian
oligarch jealous

3. HowYou Know Economists Can’t
PredictThe Future

4. WhereWe’ve Been: Oil
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5. The Boom-Bust-MiniBoom-Bust
• Story pretty well-known: unprecedented demand shock, primarily
EM/Chinese in origin, ran up against stagnant supply, particularly in
energy: booming prices resulted
• Forces originating primarily in the developing world, namely the
GFC, caused demand to plunge, resulting in a stunning price bust
• Prices recovered along with the world economy, and stimulus in
China was particularly favorable to a price rebound
• Prices remained relatively flat 2010-2015. Unprecedented low
volatility in FH 2015.

6. The Bottom Falls Out
• The price collapse since mid-2014 is historic
• Widely blamed on surging US supply, but US and world supply
growth did not exhibit a pronounced increase
• Likely culprits: demand decline (particularly in China), and perhaps
anticipated future demand decline & supply increase
• Note other China-driven commodities, namely iron ore & coal, also
have experienced substantial price declines
• Swelling inventories, especially in US

7. Disregard ConspiracyTheories
• One commonly heard theme is that SaudiArabia engineered the price
collapse in order to drive out US shale producers
• Saudis did not increase output dramatically as they did in‘86: KSA
output basically flat
• Given KSA market share and elasticity of oil demand, maintaining
output profit maximizing
• Predatory pricing strategies almost never work, and the Saudis know
this
• The oil & the expertise aren’t going anywhere: prices go back up, and
shale E&P will rebound

8. Whither Demand?
(Or is itWither Demand?)
• This means that the future course of oil prices will depend on
demand, and that will depend primarily on China
• That, in turn, depends crucially on Chinese policy
• Will China successfully transition to a new, less resource-intensive
growth model?
• In two out of three alternatives (successful transition, failed transition
leading to a hard landing) commodity demand growth will drop,
perhaps precipitously (and even decline)
• In the third alternative (unsuccessful transition, continued reliance on
credit stimulus) the growth will continue . . . For a while

11. WillWe See $100/bbl again?
• Many say the era of $100 oil is over: but the same people used to say
the era of $100 oil would never end, so . . .
• Given extreme short-run elasticity of supply, the variability of
demand, and the susceptibility of production to geopolitical risks, oil
will always be vulnerable to both spikes and collapses
• That said, the shale revolution has changed the fundamentals
significantly: supply more elastic and flexible.The long run happens
sooner
• Will productivity continue to surge?Will there be an analog to
Moore’s Law in Oil? (Color me hopeful.)Will shale production
migrate outside NorthAmerica? (Color me skeptical.)