Just a few weeks ago, the tumbling international price of oil burst upon the news scene. Prices per barrel dropped from $107 during the summer to $81. Analysts, commentators and others wondered why, by whom and what the impacts would be on various enemies and allies. And the finger-pointing began.
Tom Friedman of the New York Times argued that a “global oil war” is underway, “pitting the United States and Saudi Arabia … against Russia and Iran,” with the latter two countries facing bankruptcy as a result.
Another analyst suggested Saudi Arabia was “applying a highly predatory pricing strategy” which would hurt the US, Iran, Iraq, Ecuador, Venezuela—and “the key target,” Russia. In response, the US could be “cutting a deal with Riyadh,” including not pursuing a deal with Tehran and, perhaps eventually, even “bombing Bashar al-Assad’s forces.”
Still others have wondered if Saudi Arabia will simply let the price of oil drop until US shale oil producers (frackers) are forced out of business, their costs far higher than their income from sale of the oil (here and here). However that may be, the sudden drop in oil prices does undercut arguments for the US to lift its ban on exporting crude oil.
As for the Saudis, Charles Ebinger at the Brookings Institute reminds that Saudi Arabia did try halting the oil price slide by cutting production 400,000 barrels/day, but the effort failed.
Following that, and with the backing of allies Kuwait and the United Arab Emirates, the Saudis “decided to send a message to the world market that it will do whatever is necessary to maintain its market share, even accepting a near-term loss in revenue over the next two years.”
Who turned on the faucets?
Much of the increased oil output came from Libya, Iraq, Nigeria, and Angola.
Back in June 2014, Libya’s oil production was below 200,000 barrels/day (compared to the 1.6 million barrels/day prior to the 2011 war). Oil fields and shipping ports were under frequent attack by rebels and there was no expectation that Libya could significantly increase its production for at least six months. Libya’s crippled oil output, according to analysts, kept oil prices hovering around $110/barrel during the summer.
Late in August, Libya was pumping 562,000 barrels per day and the blockade of Libya’s top port was lifted. Libya was back in business and, even though renewed attacks hit the oil fields and refineries, Libya was soon producing 670,000 barrels/day. Toward the end of September, Libya’s production had reached 925,000 barrels/day, though rebel attacks continued to cause fluctuating production levels.
Iraq, in considerable turmoil, reached its “highest level [of oil production] in 35 years in February” 2014, 3.6 million barrels/day, only to be cut to 3.1 million barrels in July as troubles continued.
By the end of September, however, Iraq was producing 2.542 million barrels/day, showing signs of continued recovery despite violence throughout parts of the country.
Nigeria was hailed as the leader in OPEC’s increased oil production during August 2014, at 2.3 million barrels/day, “the most since January 2006.” Nigeria’s stepped-up efforts against “sea piracy, illegal bunkering and oil theft” were apparently paying off.
And, finally, Angola, too, increased production, by about 140,000 barrels/day.
Surprise, surprise! Between June and the end of September, the price of oil dropped by 29% which “caught traders and forecaster by surprise.”
This slide happened so quickly, and was so “relentless,” that Barclays Plc cut its forecasts twice during October, “citing a global surplus.”
And then there is the role of the hedge fund managers in all of this.
According to one analyst, they just might have “bit off more than they could chew” — they didn’t pivot quickly enough when the price slide began and sell crude as quickly as they should — and are now being forced to sell.
The future? One prediction is that oil prices could drop to $77 before things turn around and there’s a big bounce back.
Who loses and who wins?
Using the October 15th price per barrel of $85, and comparing that with the price the exporting country needs, shows the “Break-Even Point” per country. Yemen has the greatest discrepancy ($200 needed vs the $85 price), followed by Iran ($140), and Bahrain ($130). Then there are Algeria and Venezuela ($121 each), Nigeria and Ecuador (around $118), followed by Libya, Iraq and Russia ($110 to $105), and so on—with Saudi Arabia at $93.5, not too far from the break-even point.
Indeed, Saudi Arabia is said to be in a very good position to ride out $80/barrel “for at least a year or two” given its huge cash reserves.
While some countries may be able to cope with the price drop for a while, others will be hard hit, and their populations will suffer as a result.
Nigeria’s economy, for example, relies heavily on oil exports, and with an election coming soon, the political impact of the oil price drop could be major. Yemen is already in great turmoil internally—rampant poverty, widespread corruption, major human rights violations—and its oil pipelines are routinely sabotaged by angry tribesmen. (Yemen also has only about 9 years of oil production left.)
Venezuela, also highly dependent on oil exports, is roiling with internal unrest due to “shortages of everything from baby diapers to medicines to car parts.”
President Nicolas Madura keeps assuring the country that social policies, funded largely by oil exports, will somehow continue and the oil price will, inevitably, rise at some time in the future.
Nonetheless, when coupled with sanctions imposed by the West for Russia’s Ukraine interventions, the loss of oil revenue could “strike a significant blow to Russia’s economy.”
Falling oil prices are a “harsh blow to Iranian President Hassan Rouhani,” who pledged economic improvement.
He’s now faced with a weakened position in negotiations over their nuclear program, too. Continued sanctions against Iran seem certain, which, coupled with low oil prices, indicate that economic growth in the near-term is unlikely.
Clearly, oil importers are the winners. China, for example, “is the world’s second-largest importer of oil [and] every $1 drop in the oil price saves it an annual $2.1 billion.” At the rate things are going, China could see its import bill lowered “by $60 billion, or 3%.”
Lowered oil import prices coupled with continued success of manufactured goods exports makes for a rosier future. India, too, should benefit as oil accounts for 1/3 of the country’s imports and cheaper oil means reduction in subsidies the country spends on fuel and fertilizers.
The impact on the US is more a toss-up since “the country is simultaneously the world’s largest consumer, importer and producer of oil.”
Lower oil prices should have a positive effect on consumers, freeing up some money for other purposes. Meanwhile, the US is building up oil reserves, thus decreasing dependence on foreign oil. US shale oil did contribute to the surprising oil glut over the summer, but continued production could be negatively affected if oil goes below $85/barrel.
OPEC is aware of this and are being watched to see if they maintain current production levels, since experts fear another $20/barrel fall in oil prices could “choke off the U.S. energy boom.”
Drillers “have taken on a lot of debt,” and lack pipelines to move oil quickly. As a result, around half the oil from shale fracking could be “uneconomic” though the industry estimates a negative impact only if prices hit $60 – $65. Time will tell.
While falling oil prices “will help … it is hard to get too optimistic.”
After all, Europe “is struggling with a dangerous mix of austerity, deflation, weak growth and debt” and lower oil prices offer little relief in that scenario.
The sudden surge in oil production was so surprising that analysts initially scrambled to make sense of it. And since it occurred in the precarious world we inhabit, with high stakes and high rollers capable of playing nefarious games with each other, suspicions about who (or which country) did what to hurt another was part of the conversation. As things calm down, and more information becomes available, there will be better opportunity to sort things out and more accurately assess the actions of major players and the impacts of events on various populations.
We are being urged to “welcome” the oil price drops for the negative impacts on “countries like Iran, Venezuela and Russia.”
This focus diverts attention from more critical issues, including the increased harm done to millions of people, struggling to survive, far removed from the realm of the high rollers.
If anything, this recent event with its global repercussions underscores that “it’s critical we maintain investment in all forms of alternative energy, including renewables.”
Under such an approach, we might be able to improve lives, reduce the probability of war, and rescue the planet.
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