Anyone wanting to know more about one of the most consequential developments of the last months of 2014, the plummeting of the price of oil and what it means must read this piece by Richard Heinberg at the Post-Carbon Institutes blog (and note that its filled with interesting links to other pieces)! Tom Usually when there is a mismatch between supply and demand in the global crude market, it is up to Saudi Arabia—the world’s top exporter—to ramp production up or down in order to stabilize prices. But this time the Saudis have refused to cut back on production and have instead unilaterally cut prices to customers in Asia, evidently because the Arabian royals want prices low. There is speculation that the Saudis wish to punish Russia and Iran for their involvement in Syria and Iraq. Low prices have the added benefit (to Riyadh) of shaking at least some high-cost tight oil, deepwater, and tar sands producers in North America out of the market, thus enhancing Saudi market share. The media frame this situation as an oil “glut,” but it’s important to recall the bigger picture: world production of conventional oil (excluding natural gas liquids, tar sands, deepwater, and tight oil) stopped growing in 2005, and has actually declined a bit since then. Nearly all supply growth has come from more costly (and more environmentally ruinous) resources such as tight oil and tar sands. Consequently, oil prices have been very high during this period (with the exception of the deepest, darkest months of the Great Recession). Even at their current depressed level of $55 to $60, petroleum prices are still above the International Energy Agency’s high-price scenario for this period contained in forecasts issued a decade ago. Part of the reason has to do with the fact that costs of exploration and production within the industry have risen dramatically (early this year Steve Kopits of the energy market analytic firm Douglas-Westwood estimated that costs were rising at nearly 11 percent annually). In short, during this past decade the oil industry has entered a new regime of steeper production costs, slower supply growth, declining resource quality, and higher prices. That all-important context is largely absent from most news stories about the price plunge, but without it recent events are unintelligible. If the current oil market can be characterized as being in a state of “glut,” that simply means that at this moment, and at this price, there are more willing sellers than buyers; it shouldn’t be taken as a fundamental or long-term indication of resource abundance... There is at least a possibility that the oil price crash has important geopolitical significance. The US and Russia are engaged in what can only be called low-level warfare over Ukraine: Moscow resents what it sees as efforts to wrest that country from its orbit and to surround Russia with NATO bases; Washington, meanwhile, would like to alienate Europe from Russia, thereby heading off long-term economic integration across Eurasia (which, if it were to transpire, would undermine America’s “sole superpower” status; see discussion here); Washington also sees Russia’s annexation of Crimea as violating international accords. Some argue that the oil price rout resulted from Washington talking Saudi Arabia into flooding the market so as to hammer Russia’s economy, thereby neutralizing Moscow’s resistance to NATO encirclement (albeit at the price of short-term losses for the US tight oil industry). Russia has recently cemented closer energy and economic ties with China, perhaps partly in response; in view of this latter development, the Saudis’ decision to sell oil to China at a discount could be explained as yet another attempt by Washington (via its OPEC proxy) to avert Eurasian economic integration. Other oil exporting nations with a high-price break-even point—notably Venezuela and Iran, also on Washington’s enemies list—are likewise experiencing the price crash as economic catastrophe. But the pain is widely spread: Nigeria has had to redraw its government budget for next year, and North Sea oil production is nearing a point of collapse. Events are unfolding very quickly, and economic and geopolitical pressures are building. Historically, circumstances like these have sometimes led to major open conflicts, though all-out war between the US and Russia remains unthinkable due to the nuclear deterrents that both nations possess. If there are indeed elements of US-led geopolitical intrigue at work here (and admittedly this is largely speculation), they carry a serious risk of economic blowback: the oil price plunge appears to be bursting the bubble in high-yield, energy-related junk bonds that, along with rising oil production, helped fuel the American economic “recovery,” and it could result not just in layoffs throughout the energy industry but a contagion of fear in the banking sector. Thus the ultimate consequences of the price crash could include a global financial panic (John Michael Greer makes that case persuasively and, as always, quite entertainingly), though it is too soon to consider this as anything more than a possibility. commondreams.org/views/2014/12/19/oil-price-crash-2014
Posted on: Sun, 21 Dec 2014 21:21:53 +0000
Trending Topics
Recently Viewed Topics
© 2015