Petro Perspectives 1 –How Global Media Interprets the Current Oil Price Plunge

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A review of the more respectable opinions, analyses and predictions published by pundits has revealed the following convergence of themes:

Oil Supply Glut and Accompanying Dampened Demand

There is remarkable agreement among many authors/articles surveyed that the single biggest factor is the operation of the Law of Supply and Demand in economics. And here the industry has been caught in a “double-whammy”: a glut in oil supply largely owing to increased shale oil production from the US, and a lowering of demand due to slowing economies in China, Europe and Japan.

The Economist, in a very succinct article, opines that the impact of the Law of Supply and Demand on oil is predicated on two aspects: 1) the actual supply and demand situation; and b) the expected situation and how it affects price forecasts. Basically, an expectation of high price will invite investment in new projects which, after a so-called “time lag”, will bring to market additional supply. An expectation of a price drop leads to “investment drought” which will reduce production in time.

The said article summarizes the key factors driving the oil price plunge, namely:

1.       Low demand brought about by slow economic activity, continuing gains in efficient use of energy, and the increasing use of substitute fuels.

2.       Output has not been disrupted by ongoing troubles in Libya and Iraq whose combined production amounts to four (4) million barrels per day.

3.       America, by virtue of its having attained the position of biggest oil producer in the world, has significantly reduced its oil import and thus has contributed greatly to available oil supply.

4.       Saudi Arabia has not chosen to curb its production, a move supported by other Gulf producers, and practically imposed on OPEC not to intervene in the oil supply situation.

Pundits and analysts belonging to this group are considered “market theorists”.

 

Sheikhs against Shale

Most authors have also posited the view that the precipitous drop was due to Saudi Arabia’s decision not to intervene in the market to shore up falling prices by cutting production -- as it had done in the past through OPEC and in keeping with the cartel’s charter to stabilize oil prices. Instead, it has prevailed upon other cartel member-countries to sustain production levels and let the price drop further.

Where there is some divergence among the authors’ views is the set of objectives Saudi Arabia is supposedly pursuing as it prosecutes what some have referred to as “energy warfare”.

The significant point of agreement among many observers is that Saudi Arabia wants to regain its pre-eminent share of the market at whatever cost and even despite noticeable grumblings from other and poorer members of the cartel (or even from affected oil interests within Saudi Arabia itself). A common denominator among such analysts’ theses is that Saudi Arabia is targeting US shale production to the point of causing the latter to scale back operations and stall further development in US shale fields especially the Bakken.

 

Fracking the Bakken Formation in North Dakota –Retrieved February 2, 2015 from "Frac job in process" by Joshua Doubek - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons -

 

House of Saud and the White House versus Iran and Russia

Where some variation arises is the thesis that the House of Saud has its eyes also to weakening two countries that have traditionally incurred its ire as rivals, threats, or even downright enemies: Iran and Russia – two major economies heavily dependent on oil revenues.

The narratives also change somewhat as to whether or not the Saudis are actually in collusion with the US. Here a number of authors offer three plausible reasons why the Americans are part of this supposed “conspiracy” to bring down the price of oil at least in the short-term:

a)      They want to punish the Russians for their inimical moves against  Ukraine and hopefully temper Putin’s expansion plans against the latter;

b)      They want to add further pressure on Iran to come to the negotiating table and curtail its nuclear ambitions; and

c)       They want Iran and Russia punished for their support to Syria’s Assad regime.

Observers belonging to this so-called “conspiracy-theorists” group contend that reduced oil revenues, which normally make up about 80% of these countries’ budget, will have the salutary effect of reducing appetite for weapons build-up and military adventurism.

 

Whether one considers himself a “market theorist” or a “conspiracy theorist”, many industry observers’ concern now is when the industry will settle at a new crude oil price equilibrium. What sort of forecasts do pundits and analysts hold? How do they vary? How optimistic or pessimistic are they? What are the observable impacts of the plummeting oil price? These items will be surveyed at the sequel to this blog which I tentatively call Petro Perspectives 2 – Forecasts and Expectations on the Current Crude Oil Price Event.

In the meantime I recommend the following articles as part of your reading fare on the subject:

·         The Economist explains: Why the oil price is falling -http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4

·         The new economics of oil: Sheikhs v shale -http://www.economist.com/news/leaders/21635472-economics-oil-have-changed-some-businesses-will-go-bust-market-will-be

·         Did The Saudis And The US Collude In Dropping Oil Prices? -http://oilprice.com/Energy/Oil-Prices/Did-The-Saudis-And-The-US-Collude-In-Dropping-Oil-Prices.html

 

If you are leaning towards themarket theorists” camp, The Economist will be your best source. If you gravitate towards the “conspiracy theorists” group, Oilprice.com is a good place to examine various conspiracy theses on the subject.

Have a great read (or re-read), straight from the horses’ mouths. But, please, don’t lose sleep.

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