Auburn University supply chain management professor comments on oil prices

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Auburn University professor of supply chain management Glenn Richey discusses how oil production in both U.S. and the OPEC countries affects gas prices for consumers and how it influences oil company profitability.

Richey is the Harbert Eminent Scholar researching supply chain management in Auburn’s Harbert College of Business. He teaches “The International Business Experience” in Auburn’s No. 2 ranked online Executive MBA Program. Richey also serves as associate editor of the Journal of Business Logistics and the Journal of Supply Chain Management.

What are the top 3-5 factors impacting oil prices right now?

At the highest level—the equation is quite simple—the factors are supply and demand and market sentiment. Market sentiment relates to both investor sentiment and consumer sentiment. Supply and demand are dynamically complex and heavily influenced by sentiment and government intervention. General factors include:

  • World economic growth (or in this case a suggested slowdown)
  • Seasonal usage (travel and heat in December)
  • Supply disruption (supply chain inefficiency—trucking crisis, natural disasters like Hurricane Harvey, manmade disasters in Iraq)
  • Industry-based production agreements for supply management (OPEC)
  • Interventionism in free markets (Canada and perhaps the USA)


What’s going to happen when OPEC production is cut this time?

OPEC likes to float policy and price changes to the media to test the water for where production might land. It seems that once again, consumers and the media were caught off guard, but I don’t believe the sky is falling. Short-term estimates suggest Brent (one of two crude pricing benchmarks along with WTI) around 72-75$ in early 2019 and WTI around $65-$68 (USD). Derek Leith, a global oil and gas tax leader with the global corporation EY, suggests a 2019 price near $70. U.S. shale producers are penciling in $55-$60-a-barrel prices for their 2019 budgets. OPEC has a heavy hand in determining global prices since they still account for 60 percent of the petroleum traded internationally.
  
What is the ideal oil price for global economic prosperity and why?

The answer is balance. Truthfully, if anyone could really pinpoint the answer to this question within ten dollars, he or she would be one of the most important people in the world.

Ten out of the last eleven U.S. recessions have been correlated with economic downturns preceded by oil price hikes. Major price fluctuations interfere with consumer’s spending and business strategies. We need stability and that is why our countries have pushed for energy independence, but complexities in global supply make price volatile and difficult to predict.

What’s the long term vision for oil price and production?

The long-term vision is efficiency, innovation and exploration of alternative sources. The reality is that fossil fuels remain highly sought after and will continue to be one of our most important resources. If you watch the nightly news, you might expect that we will all be driving electric cars soon. That isn’t what the U.S. Energy Information Administration is forecasting. They report that the 2,747 billion light vehicle miles recorded in 2016 will reach will reach 3,302 billion miles by 2050.  The growth trend is steady. In fact, only domestic shipping shows a 1 percent mileage decrease heading toward 2050, which I find highly unlikely as we continue to UBERize urban freight delivery. We are probably trading modes of transportation and consuming more oil and gas in the process.

How do consumer behavior and environmentalism factor into oil demand?

My research shows that even the most environmentally oriented customer will “morally disengage” from alternative forms when they incur new costs. Liberal-leaning college students like electric cars for environmental reasons, but as a group simply refuse to spend more for the alternative transport. In fact, they don’t even want to spend more on recycled commodities (e.g. paper). Only extreme changes in policy and major world events will change this behavior. Consider the fact that 17 countries have now proposed some form of ban on non-electric vehicle sales with start dates from 2020 to 2050, yet the worldwide consumption projections continue to grow.

For environmental adjustment to take place it must be global. For instance, in Alabama we ship dirty coal to Colombia in exchange for clean burning coal. It is a four-hour flight to Colombia from here—so that’s not doing a lot to help the environment of the Americas, but it does comply with our national environmental policy. It certainly isn’t an actual solution that works. Again, we aren’t there yet. Nevertheless, emission reduction is a major environmental issue and political platform, so expect the electric and alternative options to become more of an issue past 2050.

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