(ESAI, Energy Security Analysis Inc, is a Massachusetts-based energy consultancy. The opinions expressed here are those of ESAI.)
The crisis is over, economies all over the world are recovering, record unemployment is slowly subsiding, and oil demand is growing. The logical question now is where will oil prices go from here? The question is not what the price of oil should be, as discussed at last month’s International Energy Forum. Likewise, it is not what is the equilibrium price.
Equilibrium price is a concept, offered by classical economists, which asserts that there is a price at which supply and demand balance. Price behavior, especially in recent years, has proven that this is an overly simplistic and unworkable concept for the oil market. There is never a point in the global oil market when supply equals demand, and thus there is no such thing as an equilibrium price. The right question is what is the fundamentally sustainable price?
The distinction between equilibrium and sustainability is important.
Equilibrium implies perfection and stability, ideas that are not endemic to the modern global oil market. Sustainability is a created word from the environment community that implies the ability to maintain or endure. Whereas equilibrium suggests certainty, sustainability suggests survival amidst uncertainty.
The difference between a market that is perfect and stable and one that endures has implications for forecasting. In short, it is foolhardy to try to project an equilibrium price, but identifying a fundamentally sustainable price range is a useful endeavor.