Given the trajectory of the technological and economic policies of advanced economies, Leonid Grigoriev, President of the Institute for Energy and Finance in Russian Federation, predicts a decrease of oil intensity of the world economy in The global recession and energy markets (CASE Network E-brief 01/2010).  He explains, that this change will require time and investment, while the latter is at a shortage due to the global recession.  

Grigoriev expects the energy market to balance at the current price in 2010-2011, and continue to remain balanced at this level until demand grows.  Underpinning Grigoriev’s view is the expectation that the low investment outlook will result in a possible shortage of oil supply.  In combination with rising demand, the foreseen supply shortage will drive oil prices up in the long-term prospective.

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The global recession and energy markets
By Leonid Grigoriev

Given the immensity of the topic, several key points should be highlighted. First, the global economic boom of 2003-2008 overstressed energy markets given the insufficient levels of investment during the preceding two decades. Second, supply and demand are still the main dynamics of markets. The effect of financial speculation was important in the particular conditions developed between August 2007 and August 2008, but it did not overturn the laws of the market. Third, during the peak of the crisis in the fall of 2008, the drop in demand for oil was much steeper than the natural possibilities for the fast adjusting supply down. Only cartel OPEC, which has repeatedly been pronounced dead, could stabilize the prices on the oil market. At this stage of the recession, a price increase from $40 to $60 per barrel could be considered a success. Finally, the long-term oil price must allow for production and especially investments to recover to levels needed to stabilize markets in the long-run and to prevent wild fluctuations. This appears to be a price of $70-$90 per barrel – rather high prices for the difficult 2010. (…)