THE ECONOMIST: Volatility around the trend

Simon Baptist Chief Economist and Asia Regional Director
Simon Baptist, Chief Economist and Asia Regional Director
The recent fall in oil prices took many people by surprise, but the underlying trends have been building for some time. The downwards price pressure is coming from increased US oil output, more competition from natural gas, weak GDP growth in the OECD and improving energy efficiency in the emerging world. None of these factors is going away anytime soon, although OPEC is doing its best to counteract the first. At the EIU we think that oil prices will keep falling on average for at least the next two years, although we expect average prices in 2015 to be a bit above the current lows.
Some countries, including Indonesia, have been taking the chance to reduce their fuel subsidies, while others, like China, have raised fuel taxes. Increasing fuel taxes is a sensible fiscal strategy for many countries: it raises revenue, reduces pollution, encourages energy efficiency and, in the longer term, can reduce congestion. If you are an oil importer it is even better, because some of the pain is borne by your foreign suppliers. Despite the determination to hold oil output steady, we predict that markets will eventually force Saudi Arabia to take some remedial, potentially unilateral, action to boost prices. This will most likely happen before the next OPEC meeting scheduled for June, encouraged perhaps by the growing strain among small and medium-sized US shale producers. We therefore expect Saudi production to decline slightly next year, from an estimated average of 9.7m barrels/day in 2014 to 9.55m barrels/day.

What do you think will happen to oil prices? Will the Saudis hold their nerve? Let me know your thoughts on Twitter @Baptist_Simon or via email on simonjbaptist@eiu.com.

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