Stanford, California - Global oil prices may stay low for the next 10 or 20 years, according to Stanford economist Frank Wolak.

The most likely medium-term outcome is $50 to $70 per barrel, according to Wolak. He is the Holbrook Working Professor of Commodity Price Studies in the Department of Economics at Stanford University.


And while geopolitical and environmental issues may unexpectedly arise that turn oil prices upward, Wolak said many factors point to lower oil prices for the foreseeable future. Crude oil prices fell from a high of $115 a barrel in June 2014 to a low of $45 in January of this year. The lower prices have generated ripple effects throughout the global economy.


The primary reasons for continuing low prices include the slowing demand for oil in the industrialized world and ever-advancing technological change in the extraction and use of oil, wrote Wolak in a new policy brief for the Stanford Institute for Economic Policy Research.

In his analysis, Wolak cited seven factors driving a long-term oil price decline:

• North American shale oil production: The shale oil and gas revolution in the United States has led to an increase of more than 4 million barrels per day in domestic oil production since 2008. Combined with an almost million-barrel-per-day increase from Canada's Alberta tar sands, the surge has significantly reduced American demand for imported oil.
• 
Declining role of OPEC: Most members of the Organization of the Petroleum Exporting Countries face massive fiscal shortfalls because of low oil prices. To avoid further domestic unrest, these 12 nations are unlikely to reduce oil output, which would lead to even larger fiscal shortfalls. This makes unlikely coordinating reductions in oil production among the OPEC countries aimed at raising the global price.
• Standardization of oil well drilling: The share of global oil production from the OPEC countries should continue to fall as more countries make use of shale oil and gas production technology developed in the United States.
• Cost difference between natural gas and oil: A key driver of a reduced global demand for oil is the development of technologies that are able to exploit the differential between the dollar per unit of energy price of oil versus natural gas. Even at $40 per barrel, the dollar per MMBTU (stands for one million British thermal units) price of oil is much higher than the dollar per MMBTU price of natural gas.
• Technology innovations: A new innovation – CNG-in-a-Box technology – captures the natural gas that was formerly being flared off at the oil well and produces compressed natural gas (CNG) for use in vehicles and in drilling equipment, reducing the demand for diesel fuel. This technology makes productive use of natural gas in regions without natural gas pipeline infrastructure.
• Shale oil and gas technology exports: Though the recent reductions in oil and natural gas prices have caused investments in oil and natural gas exploration and drilling in the United States to decline, exported natural gas prices in the remainder of the world, particularly Latin America and Asia, remain much higher. This fact and a robust global oil demand driven by China and the developing world will continue to support continued investments in oil and natural gas exploration outside the United States.
• 
Oil supply curve flattening: The technology of shale oil and natural gas extraction involves much higher costs associated with the production of each barrel of oil because of the rapid rate of depletion of the resource for each shale oil or gas production rig. Conventional natural gas and oil wells have significantly slower rates of decline. This logic implies that in order to sustain production from a shale oil or gas resource, the continual drilling of new wells is necessary. As a result, it is possible to scale up and scale back shale oil and gas production more rapidly in response to demand surges, which should lessen oil and natural gas price volatility.

'Fraught with uncertainty'

However, Wolak wrote, though all of the factors described above make the likelihood of $100 per barrel oil very unlikely, "predicting the future is always fraught with uncertainty."

For example, an environmental disaster could arise involving shale oil and natural gas extraction that results in the banning of these activities in the affected areas. Yet Wolak noted that during each of the past five years more than 30,000 shale oil and gas wells have been drilled in the United States with only a small number of adverse environmental incidents.

Another factor that could lead to higher oil prices in the range of $100 per barrel could be the inability of the natural gas and oil sector to master the geology of economical production of shale oil and natural gas outside of the United States, according to Wolak.

Another uncertainty concerning global oil prices is whether the United Nations' international climate policy process will put in place a credible and stable price of carbon, he said.

"As long as this price of carbon is not so high as to make all fossil fuels uneconomic, this action could further spur the demand for natural gas, as more countries attempt to switch from coal to less greenhouse-emissions-intensive energy sources, such as natural gas," Wolak wrote.