Will oil prices stay in their current ‘sweet spot’?


Oil prices are high enough to make it economical for producers to invest in capacity expansion, but low enough to encourage steady economic growth.

Crude prices rose slightly during trading on the New York Mercantile Exchange last week, but prices remain in the vicinity of $100 per barrel. In a recent interview with the New York Times, Paul Bledsoe, a senior fellow with the German Marshall Fund's Climate and Energy Program, asserted that this is a "sweet spot" for oil prices.

"It's high enough to incentivize remarkable investment in new production techniques and equally large investments in efficiency improvements," he explained, adding that he believes prices will remain in this beneficial range because "the underlying factor of relatively modest economic growth seems to be with us for quite a while."

Market analysts at Raymond James recently released a forecast that predicts the average price of a barrel of oil will drop to $95 in 2014 and $90 in 2015. Citing the increasing utilization of contemporary oil production equipment to tap shale formations in the United States and so-called oil sands in Canada, some analysts have predicted that crude prices could fall even further in the coming years.

If prices were to decline too quickly, budgetary uncertainty could cause oil and gas companies to cut back on their capital investment plans, which could inhibit the growth of their production capacity. However, a spike in energy prices could also prove disruptive for the industry, as faltering economic growth could cause demand to plunge, dragging prices down.

Adequate supplies should preserve stability of pricing

According to Miguel Galluccio, chief executive officer of Argentina's national oil company, a broadening base of stable sources will help keep crude prices stable, even in the face of a contingency that causes a short-term spike.

"There is enough oil," Galluccio told the Times. "If tomorrow you have major military action in the Middle East, the speculators will panic and push the price to $130 a barrel, but then it will come back down again. The source of supply is there."

Efficiency increases will also play a major role in maintaining a workable balance between supply and demand. The U.S. is in the process of adopting new fuel-efficiency standards for light vehicles, as are several other major nations, including China. The growing use of natural gas in electricity generation and as a transportation fuel is also relieving pressure on oil supplies, allowing prices to remain in the "sweet spot" described by Bledsoe.

Michael Lynch, president of the consultancy Strategic Energy and Economic Research, added that stable oil prices will help keep inflation low and encourage constructive economic activity.

"By reducing uncertainty, investor and consumer confidence should both be increased, boosting higher spending and investment, and thus economic growth," Lynch said.

This virtuous cycle of economic growth and investment in energy production should continue to deliver positive results for some time to come. However, investment will be required on the part of all stakeholders and well operators will need to remain proactive in their approach to implementing new oil production equipment at their properties.

For example, the installation of a hydraulic jet pump can facilitate the process of starting or resuming production from an oil well. This versatile solution can be deployed in straight, horizontal or deviated wells and will even be effective at sites where there are issues with the completion of well casing.

Furthermore, with no downhole moving parts, the jet pump has minimal maintenance needs compared to other solutions. When the unit needs to be retrieved for optimization, the process can be completed through manipulation of surface valves and reverse circulation of fluid, with no need to use a work-over or wire-line unit.