Commodity Price Cycles: Explained by an Expert

Abstract

Economist’s Corner Oil and natural gas are the lifeblood of modern economies. Together, they account for close to 60% of global commercial energy consumption. Even in future scenarios with a high penetration of alternative energy sources or technologies, oil and gas are expected to maintain a share of about 50% by the middle of this century; more business-as-usual scenarios forecast a share of 60% or more. The transportation sector depends on oil products such as gasoline, diesel, bunker fuel, and jet fuel almost exclusively. The ability to travel and ship goods are the key ingredients for a successful economy; the lack of transportation infrastructure or its low quality has often been a major roadblock for emerging economies to attract investment. It will be difficult and time-consuming to switch millions of vehicles on land, sea, and air to alternative fuels. None of the alternatives, including biofuels, electric cars, and fuels derived from natural gas, appears to be ready to replace oil products in necessary scale although they are certainly making progress. What is the Interplay Between Oil, Natural Gas, and Alternatives? Natural gas is an important feedstock in many industrial processes such as methanol or fertilizer plants, but the growth in gas use has come primarily from the electric power sector, where it has been replacing oil and other fuels (primarily coal) in many countries, in addition to meeting new demand growth. In some markets, more than half of the electricity is generated in gas-fired power plants. The share of natural gas in power generation is expected to increase in most countries as countries try to lower their emissions and as more gas resources are proven and developed across the globe.