Exploding World, Cheap Oil

Geopolitical crises abound, but oil producers are still

pumping -- and pumping more than the world needs.
BY KEITH JH!"!-"E#TE$BE% &&, '(&)
Here*s a bit o+ a pu,,ler. The world is in -ames, with an Islamist terrorist
group on the rampage across the $iddle East, the .hite House
weighing another /ght in Ira0, %ussia and Europe still trading sanctions and
sal1os, Yemen imploding, !orth 2+rica reeling +rom one mess to another,
and, as i+ that weren*t enough, a deadl3 +e1er spreading e4ponentiall3 in
2+rica. Yet oil prices 5eep +alling and are now at their lowest le1els in more
than a 3ear.
But the mar5ets aren*t cra,36 "imple suppl3 and demand are at pla3. The
world*s econom3, especiall3 in 2sia, has hit a bric5 wall, which has dented
the growth in demand +or oil, pushing it down to le1els last seen during the
Great %ecession.
n top o+ that, oil producers ha1e 5ept pumping. The 7nited "tates has
added more than 8 million barrels dail3 in the last three 3ears, and the
annual 9ump in 7.". oil production 9ust set a record. #E: producers ha1e
been running +ull tilt, e1en ;ib3a, which doesn*t e1en ha1e a +unctioning
go1ernment, and "audi 2rabia, which used to act as the 1oice o+ reason to
5eep oil mar5ets more or less balanced. nl3 in 2ugust did the "audis start
to dial bac5 oil production, onl3 partiall3 o<setting surprising suppl3
increases elsewhere.
The result6 a glut o+ oil that has dri1en down benchmar5 crude prices to
le1els last seen at the beginning o+ '(&8. Brent crude in ;ondon traded at
about =>? a barrel Thursda3, "ept. &&, while .est Te4as Intermediate,
traded in !ew Yor5, threatened to dip into the high =@(s per barrel.
AI+ e1er there were a geopolitical world that should be dri1ing oil prices
higher, it would seem to be right now,A said Baniel Yergin, 1ice chairman o+
energ3 consultanc3 IH" and author o+ The Quest: Energy, Security, and the
Remaking of the Modern World. ABut what it tells 3ou is how power+ul the
+undamentals o+ the mar5et are, and right now the +undamentals are
winning out.A
The big 0uestion is whether cheaper oil represents a short-term hiccup or a
long-term, +undamental change, which could ha1e big implications +or
petrostates in the $iddle East, 2+rica, ;atin 2merica, and Europe, not to
mention would-be petrostates such as "cotland and the Kurdish region o+
Ira0.
%ather than as5ing wh3 oil prices are +alling gi1en all that*s wrong in the
world, it might ma5e more sense to as5 whether all the world*s troubles are
the onl3 thing 5eeping crude prices +rom collapsing.
The global econom3 can*t seem to /nd the recipe +or consistent growth6
Japan*s horri/c ? percent contraction in second-0uarter GB# ma3 be
e4treme, but other 2sian economies are also standing on the bra5es.
:hina*s 3ear-on-3ear demand +or oil Cand other raw materialsD is
essentiall3 -at, sending prices +or oil, iron, and other basic commodities
plunging. Europe is no help, e1en without worries o+ what the %ussian bear
will do ne4t. !e4t to all o+ them, the 7.". econom3 Cand its need +or oilD
loo5s almost robust. But e1en 7.". oil demand is at or below the a1erage o+
the last /1e 3ears -- a dismal hal+-decade, +or sure.
AIt*s a demand-led slowdown, and the e4tra suppl3 is 9ust adding to the
bearishness,A said 2mrita "en, oil anal3st at Energ3 2spects consultanc3 in
;ondon. AIt*s 1er3 hard to see how we come out o+ this an3time soon.A
:iting the sluggish econom3, #E: dialed bac5 its e4pectations o+ global oil
demand +or this 3ear and ne4t in its latest monthl3 report. "o did the
International Energ3 2genc3 in its monthl3 oil report. AThe recent slowdown
in demand growth is nothing short o+ remar5able,A the IE2 said Thursda3.
2nd the 7.". Energ3 In+ormation 2dministration CEI2D on Tuesda3 twea5ed
its outloo5 +or oil prices to re-ect the new mar5et d3namics. In the
re+erence case, the EI2 now e4pects prices to sta3 below =&(( a barrel until
earl3 in the ne4t decade. E1en when prices rebound, the EI2 slashed its
estimate +or how high crude will go -- to 9ust =&)& a barrel b3 '()(, rather
than the =&EF predicted 9ust last 3ear. I+ global economic growth remains
sluggish, the EI2 sees oil prices stuc5 below =?F a barrel +or decades to
come.
#rice -uctuation concerns e1er3one who pumps or burns oil, especiall3
states -- such as those in the $iddle East, %ussia, and parts o+ ;atin
2merica -- rel3ing on steadil3 rising oil prices to 5eep their economies a-oat
and their people paci/ed.
AI+ we are going to be in a wea5er price en1ironment, that certainl3 hits at
the re1enue assumptions on which a number o+ countries are running their
economies and running their political s3stems,A Yergin said.
Ira0, which is >8 percent reliant on oil +or the go1ernment*s income, needs
crude at or abo1e =&(E a barrel to balance its budgetG slipping prices
alread3 prompted a warning +rom the I$H this summer. $an3 other #E:
countries, +rom Iran to !igeria, are in the same boat.
%ussia needs to +etch =&&) a barrel to sta3 in the blac5G what*s more, i+
$oscow wants to maintain oil output b3 tapping tough but promising
reser1es in places li5e the 2rctic, it needs oil to be e4pensi1e. E1en :anada
needs high oil prices to ma5e the economics o+ e4tracting crude +rom tar
sands -- a tric53 business -- to wor5.
;ower prices wouldn*t hurt 9ust established producers. Kurdistan and
"cotland, which are hoping to turn blac5 gold into independence, stand to
lose too. Baghdad isn*t sharing oil re1enue with Ira0i Kurdistan an3more,
ma5ing it dependent on turning its ample oil reser1es into sales in order to
ma5e up the di<erence. Ira0i Kurdistan*s modest ambitions o+ selling
)((,((( barrels a da3 are being sorel3 tested b3 a gun-sh3 mar5et now.
How it would sell e1en more to account +or declining prices is unclear.
$eanwhile, "cotland*s dreams o+ independence +rom the 7nited Kingdom
will be determined b3 a re+erendum on "ept. &@. 2 "cottish state*s 1iabilit3
hinges almost entirel3 on the 0uestion o+ how much oil is le+t in the !orth
"ea and how much it will +etch.
Posted by Thavam