19 Dec Oils Ain’t Oils Sol
The same way that I love Economists, I too love Analysts as I haven’t met too many who don’t love making forecasts.
It was only 5 – 7 years ago that I was reading reports of “Peak Oil” where some commentators/analysts were tipping the oil price to reach upwards of $250 $USD per barrel & would bring to an end the V8/SUV car collections in the USA & the rest of the Western world. Oil prices peaked at approx.. $140 $USD per barrel in late 2008, dropped back to $45 (at the zenith of the GFC), then increased to > $110 in 2011 and have now dropped below $60
In a paper published in November 2010 no less than The Consultant on Oil and Energy Affairs for the World Bank Dr Mamdouh G. Salameh made these predictions in his paper “An Impending Oil Crunch by 2015,”
“An analysis of the global oil market fundamentals indicates that by 2015 or thereabouts a severe oil crunch could cause wide spread problems for the world economy. By 2012, global oil production surplus capacity could entirely disappear if the global economy continues to grow and by 2015 the shortfall in oil output could reach nearly 10 million bpd causing a severe oil crunch.”
Furthermore he says, “Conventional oil production peaked in 2006…eight of the top oil producers in the world have already peaked, USA, Canada, Iran, Indonesia, Russia, UK, Norway and Mexico.”
So here we are today at the end of 2014 & oil prices have dropped 40% – 50% over the last 6 months & oil production increased. The stunning collapse in oil prices is great news for the global economy as it effectively provides a tax cut to businesses and consumers. Around Australia we already we are seeing prices of < $1.20 this week at the petrol bowsers and this would be reflected all around the world. Lower oil prices will stimulate world economic activity, but may take a while yet for it to flow through to official statistics (and time then for Analysts & Economists to make some more brave predictions !!!). It is very bad for oil & energy producers (gas prices tend to priced off oil) and also for our Federal Government income, as oil has dropped at the same time as prices for iron ore & coal (the latter 2 making up 50% of our exports).
Why has oil dropped in price then ?
For the conspiracy theorists the oil price actually peaked in 2014 the day before MH17 was shot down over Ukraine and has since then been falling in price. It costs Russia approx. $110, Iran $135 & you can name the price for ISIS nutcrackers to pull a barrel of oil out of the ground.
Oil traditionally has it prices smoothed out through production increases & cuts via OPEC (which is controlled by the Saudi’s – who sell 40% of their output to the Americans). So in keeping production at elevated levels there could be a geopolitical game going on here as the Americans get to pile on economic pressure onto Russia & Iran and stymie the cashflow of ISIS.
What Is In It for The Saudi’s you may ask given that they are accepting a lower price for their main export revenue– great question. They don’t like the Russians because they support Syrian President Bashar al-Assad, they have never liked the Iranians (and they are already fighting them in Syria – again a bit of Monty Python activity flowing through here refer to my blog “Isis What Crisis”). Lastly they also get to stick it to the USA shale oil industry as it costs the Americans approx. $70 per barrel to pull shale oil out of the ground. So the Saudi’s are effectively getting 3 for the price of 1.
Russia, is getting the ultimate “Happy Days Malachi Brothers Crunch” economic squeeze here and is already in a recession which will get much worse, before it gets better. With a 6.5% increase in their official interest rates this week (yes you read that right official interest rates in Russia are now 17%, having jumped this week from 10.5%) the local Russian economy will get crushed at the same time that their export income is declining rapidly (mainly oil & gas). This has caused the Russian rouble to fall > 10% in 1 day this week. The Americans will see if this can bring Putin back to the table to talk more sensibly at the same time about Ukraine.
Currency markets have experienced an overflow effect, given the strong $US Dollar & Weak Euro & British Pound, monies have flowed again into the Swiss Franc. This week the Swiss RBA have been buying francs to keep the price low & have introduced a negative rate of return on their Banks who wish to park cash with them (charging them 0.25% pa from 22/1/2015)
For other countries though like China, India & Indonesia and especially the USA (non-energy sector) falling oil prices is great news . As I have written previously (Refer to my last Blog “The Rise Of The Greenback”) the USA economy is continuing to motor ahead – retail sales on “Black Friday”: this year were up 15% on last year, so US consumers have certainly opened their wallets
Finally it would be remiss of me not to mention that tragic events that have taken place this week in Martin Place in Sydney. My heart goes out to all the families affected by this awful, awful tragedy. I only hope that time does heal all wounds for those people who have been directly affected by this tragedy. I can empathise with each & every one of them as myself, Silvia & our two children (then < 5 years old) were in Bali when the first bomb was let off & walked past the Sari Club < 8 hours before the bomb was detonated. Fear & the fear of the unknown is a very powerful motivating force & I know that we are eternally thankful for the “Big Flying Kangaroo” who got us & many others home to safety in the shortest amount of time then. Lets hope procedures can be put in place to stymie any of these types of attacks in future.
Lastly I would like to wish everyone a Safe & Merry Xmas & I look forward to us all enjoying a prosperous 2015