Where Are the Price of Oil and Economy Headed?
What will happen to oil prices in coming months and years? Much speculation on this question appears in the media, but little agreement. Many predict that the price of oil will rise by the end of 2016 while other analysts speculate that the price of oil could fall much further before it begins to recover.
Wall Street analyst Ed Morse, global head of commodities at Citi Research, said oil prices could slide further over the next couple of months. “The market is not really trading now with reference to any kind of production costs and what, on average, it costs to produce crude oil,” [Morse] said in an interview. “It’s just trading on sentiment that has to do with perceptions about oversupply in the market, worries about China’s economy and the potential for slower oil demand growth.”
Veteran Calgary oilman Jim Gray argues that the low price of oil this time around has unique characteristics. In the past, Gray states, the organisation of Oil Exporting Countries (OPEC) and particularly Saudi Arabia acted as “swing players” who would lower production when the world price fell. This is no longer the case as Saudi Arabia fights to retain its market share in the face of the growth in U.S. production. Gray considers hydraulic fracturing (fracking) and horizontal drilling a game-changer. The development of those production techniques have made possible the exploitation of the vast shale oil deposits in the U.S. and elsewhere, which means the glut of oil is here for the long term.
Others disagree and point to the uncertain future of U.S. shale oil, as the productivity of new wells falls very quickly. Many consider the boom a form of Ponzi scheme that rapidly collapses without new wells being constantly brought into production. Total U.S. shale oil production in January 2016, is forecasted to be 4.67 mbd (million barrels a day), down from the peak of 5.3 mbd in March 2015. This is a decline of 630,000 bpd (barrels per day), with 500,000 bpd of the decline coming from Eagle Ford, one of the largest fields in Texas.
Extensive financial and human losses are coming with this decline including stranded workers, over-extended loans being called in by financial institutions, and means of production and other assets put in mothballs or even left to rust. Mining giant BHP Billiton this month logged its largest-ever write-down, a staggering $7.2 billion charge on its U.S. shale gas assets, which it had purchased for $20 billion. This disappeared money or value has consequences that are set to ripple through the economy.
The re-introduction of oil from Iran as sanctions are lifted will further increase supply.
From this murky picture a contrast stands out. Oil sands production has a long lead-time to bring a project into production; projects put on hold or cancelled take a long time to be re-started. Conversely, shale oil can be quickly shut down and brought back into production.
Boom and bust cycles are a consistent part of the economy as private interests go for the big score disregarding any rational planning of production in harmony with the needs of the economy and demand. Predatory politics of regime change and war also play a role in disrupting the economy. The U.S.-NATO drive to wreck the economies of Russia, Iran and Venezuela in its drive for world hegemony was a major factor in facilitating the latest oil glut, although that unleashed genie is generating uncertain results and cannot easily be put back in the bottle.
Considering all these factors, the outlook that everyone should be patient and ride out the drought makes as much sense as praying for rain. A new direction for the economy is needed.
– A change that recognises the importance of a proportional balanced economy.