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The relationship between oil prices and gas prices, and of both to the U.S. dollar, is likely to continue to be unstable, but in the long run, the prognosis is for continued growth in global energy demand--and a shift to more natural gas use.
“If you change the value of the dollar, you change the value of oil, but natural gas is not nearly impacted as much,” said Dr. Peter Hartley, Rice University chair and professor of economics and a fellow at the James A. Baker III Institute for Public Policy.
He spoke on macroeconomic issues at Oil and Gas Investor’s 5th annual Energy Capital Conference in Houston in June.
Hartley is optimistic about global energy demand, citing a predictable path of energy-demand growth. “Industrial demand increases then peaks, while household use keeps growing. Transportation follows. As an economy expands, more energy use occurs in the form of electricity. Therefore we see an expansion of natural gas use in the next few decades. Natural gas combined-cycle electricity is more economic than coal, nuclear or wind.
“Once countries reach the ‘take-off point’ they undergo rapid energy-demand growth as the labor force redeploys from agriculture to industry. But once people have made that move, economic growth rates slow down again.”
Less-developed countries can maintain higher per-capita growth by accumulating physical and human capital and adopting the technologies and production techniques of more-developed countries. “Eventually, however, countries converge to the same long-run growth path of the leading nations,” and this affects demand for oil and gas.
In every case, transportation demand shows the strongest continued growth with economic development.
The long-run issue for oil is the inefficiency of national oil companies and how they run their business, so that is another reason Hartley said Rice University expects the price of oil to remain high. The Saudis need to spend heavily on their internal social issues, so that is a reason for the country to maintain a fairly high oil price.
U.S. monetary policy can affect oil prices, he said. Money supply has soared since the crisis of 2008 but a lot of that money is being “hoarded” by the banks, prolonging the economic slowdown,” he said. One real threat to the system is …“the big explosion in federal debt, which is approaching $16 trillion--or 100% of our GDP (gross domestic product).”
U.S. debt held by foreign entities is approaching $5 trillion. “The only thing saving us from disaster is the fact that the U.S. dollar is in demand,” Hartley said.