Real Global Price of oil in the unconventional era

Abstract

The Real Global Price of oil is the price corrected for inflation and for fluctuations in the value of the US dollar on global currency markets. Since the U.S. abandoned the Bretton Woods Agreement in 1971, the US dollar's value has varied as much as 35%. OPEC countries obtain 70-90% of their revenue from oil sales that were, until recently, exclusively priced and traded in US dollars. An historical analysis of the Real Global Price (RGP) of oil shows when OPEC was most vexed by drops in the value of US dollar. When the RGP fell in 1973, 1979, 1995, and 1997, OPEC reacted with nominal price increases and calls to abandon the US dollar. (The nominal price is the price in ‘dollars of the day.’) When the RGP is low enough, non-OPEC countries collaborate with OPEC to push up nominal prices, e.g., Mexico and Norway in 1998; Russia in 2015. From 1975 to 1985, and 2006 to 2014, oil was manifestly overpriced, as shown in a RGP analysis. These two RGP spikes ultimately led to global over-production and nominal price declines. Relatively lower nominal prices of today are a repeat of the late 1980s price decline. However, at today's nominal oil price of $45/bbl (WTI spot), the RGP of oil falls into the 2000-2005 RGP trading range - a halcyon period of relatively low nominal prices (avg. $35.4/bbl), but relatively strong OPEC purchasing power with respect to the RGP. Gold provides a standard measure of a currency's strength. Up to 1986, one ounce of gold bought 11.5 bbls. From 1986 to 1996, oil was undervalued: one ounce of gold bought 21 bbls. From 2000 thru 2005, one ounce of gold only bought 10 bbls. Today, one ounce buys 25 barrels of oil. The probability that nominal oil prices return to $100 per bbl is low when analyzed in an historical RGP context. Conversely, today's nominal oil prices are weak relative to gold, possibly suggesting upward price pressure on oil (or high gold prices are anticipating another drop in the US dollar). The probability that nominal oil prices will drop to $25/bbl is manifestly unsustainable; such low nominal prices would put the RGP below 1969 and 1997 (the previous nadirs of oil's value) and be short lived. This RGP analysis shows that in the absence of a decline in the US dollar's value, nominal oil prices will most likely be in the $40 to $60 range. Exploration budgets will need to be configured accordingly.

AAPG Datapages/Search and Discovery Article #90266 © 2016 AAPG Pacific Section and Rocky Mountain Section Joint Meeting, Las Vegas, Nevada, October 2-5, 2016