Low energy prices helped many property managers cut their heating bills last winter - particularly if their heating systems relied on natural gas. But how long can the good times last?
A long time, according to projections from the International Energy Agency (IEA), based in Paris, France. Oil prices are likely to stay relatively low. That’s because low prices were caused by increasing supplies of oil and gas-and the companies that produce energy are relatively unlikely to cut back on production.
“What is different this time is that it is fundamentally an increase in supply,” says John Felmy, chief economist for the American Petroleum Institute (API) at “The Energy Outlook and What It Means for Apartments,” a session at the 2015 NMHC Research Forum, held April 1-2 in Washington, D.C.
The price of oil collapsed in recent months from over $107 per barrel all the way down to $44 per barrel. Oil prices are likely to slowly recover-through 2020, the increase in demand for oil will be slightly greater than the increase in supply, according to the IEA. Oil prices are likely to stay in the $50 dollar-a-barrel range in 2015, rising to the $70 dollar-a-barrel range in 2016, according to IEA.
The supply of oil produced in the U.S. is unlikely to drop quickly, despite low oil prices. It takes years of investment to build up the capacity to produce oil. Once the investment has been made, it doesn’t make sense to stop production even if prices drop - just like an apartment developer with new units under construction won’t scrap a project even if prices drop.
Many energy companies have leases on sites to that they will lose if they fail to drill. An energy company that has already invested to build a deep-sea drilling platform is likely to do everything it can to bring on production, says Felmy.
Energy companies can afford to keep producing oil even as oil prices fall party because because the cost of drilling for shale oil has fallen too-by 42 percent since 2009, says Felmy.
Why oil prices collapsed
In 2014, for all four quarters of the year, the growth in the supply of oil and gas was greater than growth in demand. Because of shale oil and gas drilling, the U.S. is now the number one producer of natural gas and will soon be the number one producer of oil, says Felmy.
As U.S. production grew continued to grow in 2014, the amount of oil produced in troubled countries such as Libya and other parts of the Middle East recovered, creating growth in the world supply of oil of about five percent. Every one percent increase in the supply of a commodity like oil can lead to a 10 percent decline in price.
“That’s pretty much what you saw-a five percent increase in supply led to a 50 percent decline in price,” said Felmy.
At the same time, demand for oil gas was flat in 2014. “Demand in the U.S. has been lackluster. It’s been lackluster in Europe,” says Felmy.
Energy jobs create demand for apartments
Since energy companies plan to keep drilling for oil, apartment properties near these oil wells should continue to see demand from energy company workers.
“Places around the country are going to see development. They are going to need housing,” he says, particularly in places like North Dakota and Pennsylvania, in addition to states like Illinois, Indiana, South Carolina and Northern Michigan.
Developing these resources will make sense even with relatively low energy prices, because shale development continues to become more efficient. “There is going to be a lot to these plays going forward,” says Felmy.