The price of oil: is it low and is that bad?

Abstract

This paper is adapted from a speech given by James Bond at the International Energy Agency, 14 May 1998. The views expressed in this paper are those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organisations, or to members of its board of executive directors or the countries they represent.The long-term price of oil should rest near its long run marginal cost (LRh4C). Past price history and both demand and natural supply factors suggest that an oil price in the low teens is closer to the LRh4C than the prices experienced over most of the last 25 years. For oil producing countries, this low price might not be as damaging as is often supposed -and might indeed encourage higher long-term growth. For oil consumers, low prices offer the opportunity to reform markets and reduce subsidies, with positive impacts on electricity rollout, development and the environment. For oil companies, low prices suggest the need to create new profit opportunities, but some of the more flexible and competitive players have already begun to show that this is possible.