Question

Oil prices rose more than 20% this year but there were no sharp spikes and crude futures barely sniffed $70 a barrel despite attacks on the world’s biggest oil producer, sanctions that crippled crude exports of two OPEC members and gigantic supply cuts from big oil producing countries. The price gains in crude oil benchmarks were all in the first quarter of 2019, even as the next several months featured supply shocks that in the past would probably have propelled crude past the $100 mark. Prices are likely to remain rangebound in 2020 as swelling supplies, particularly from the United States, offset cuts from the Organization of the Petroleum Exporting Countries and weakening worldwide demand, brokers and analysts said. US crude oil is on track to end 2019 roughly 35% higher. Since the end of March, it is up just 3%, after rallying early in the year after the United States introduced sanctions on Venezuela. Brent has gained 26%, but is off by 1% since the first quarter. Investors and analysts say US production and weak demand kept prices under control. The United States is on track to be a net petroleum exporter on an annual basis for the first time in 2020. Output is expected to average 13.2 million bpd, an increase of nearly a million bpd from 2019. “Demand growth cratered while US production continued to barrel along at high rates and geopolitical risk eased,” Bob McNally, president of Rapidan Energy Group. “And now, at the end of the year, weary investors are looking to next year and seeing a tsunami of oil.” Investor concern over peak oil demand is expected to weigh on prices next year, particularly as the urgency around action against climate change has increased. Also, a long-term resolution of the US-China trade war seems elusive, keeping market watchers wary of predicting energy demand growth in the world’s two largest economies. “There is growing concern around the long-term sustainability of US oil and gas companies for investors in an ESG (environmental, social and governance) driven world,” said Greg Sharenow, portfolio manager at PIMCO, who co-manages more than $15 billion in commodity assets, reported Reuters. The US Energy Information Administration expects average crude oil prices will be lower in 2020 than in 2019 because of rising inventories. Outside the United States, production is expected to continue to grow in Brazil, Norway, and Guyana. Prices did spike, but only briefly after drone attacks on Saudi Arabia’s biggest oil facility and US sanctions on Venezuela and Iran. September attacks on Aramco facilities briefly pushed Brent above $72 a barrel, but within 10 days, oil prices sank back as Aramco brought production back online. Notably, the market barely wavered in its view of where prices would end up. Implied volatility, a sign of how the market prices future gyrations in WTI and Brent futures, was largely muted in 2019 after a see-saw 2018, a sign that investors focused on broader supply trends. Both Brent and US West Texas Intermediate (WTI) futures were locked in a $22-$23 a barrel range during the year, well below last year’s levels. While the rate of annual US production growth is expected to slow, the country should still account for about 85% of the increase in global oil production to 2030, according to the International Energy Agency. PIMCO’s Sharenow said US crude supply would need to slow for the price outlook to brighten. “If we can move down to supply growth in a much more sustainable way of about 500,000-600,000 bpd, then all of a sudden the world is much better in 12 months,” Sharenow said.

Question: consider a related energy market – natural gas – and the impact of a decrease in oil prices. Describe, in words and graphically, what happens to supply, demand, equilibrium price and quantity in the U.S. market for natural gas. Be clear about the mechanisms at play. Then, label the areas in the graph and use a welfare table to show changes in consumer surplus, producer surplus, and total surplus. Explain in words who gains and who loses

Answer 1