This break is important. It is not a response to fleeting news or unrelated actions. it has to do with the developed reality that $90 oil is developing unlimited supply by way of shale oil in particular. That is just beginning. With a wall of oil at $90 a price reversal was inevitable. We can then expect price stability to be established at between $50 and $60.
This will allow costs to be brought back in line and excessive capitalization to be wrung out of the market. This is still only double what was paid during the last two decades of the twentieth century so this represents a return to general price stability.
More important it restores US competitive advantage and humbles the nouveau riche of the so called oil states. The USA balance of payments will continue to steadily improve. It will even allow the Keystone pipeline to be built on its original budget.
Even better, it restores the internal profitability of the West itself and ends this protracted recession.
As oil prices plunge, wide-ranging effects for consumers and the global economy
An
oil pump works at sunset in the desert oil fields of Sakhir, Bahrain,
in October. The price of oil has fallen about 40 percent since mid-June.
(Hasan Jamali/AP)
Tumbling
oil prices are draining hundreds of billions of dollars from the
coffers of oil-rich exporters and oil companies and injecting a
much-needed boost for ailing economies in Europe and Japan — and for American consumers at the start of the peak shopping season.
The
result could be one of the biggest transfers of wealth in history,
potentially reshaping everything from talks over Iran’s nuclear program
to the Federal Reserve’s policies to further rejuvenate the U.S.
economy.
The price of oil has declined about 40 percent since its peak in mid-June and plunged last week after the Organization of the Petroleum Exporting Countries voted to continue to pump at the same rate. That continued a trend driven by a weak global economy and expanding U.S. domestic energy supplies.
The
question facing investors, companies and policymakers is how low oil
prices will go — and for how long. Every day, American motorists are
saving $630 million on gasoline compared with what they paid at June
prices, and they would get a $230 billion windfall if prices were to
stay this low for a year. The vast majority of that will flow into the
economy, with lower-income households living on tight budgets likely to
use money not otherwise spent on gas to buy groceries, clothing and
other staples.
On Monday, the average U.S. price for a gallon of
regular-grade gasoline was $2.77, according to AAA, which projects that
prices could drop by an additional 10 to 20 cents.
Big
American companies are better off, too. Every penny the price of jet
fuel declines means savings of $40 million for Delta Air Lines, the
company’s chief executive said in a recent CBS interview.
“Despite
the impressive recent gains in natural gas and crude oil production,
the U.S. still is a net importer of energy,” William C. Dudley,
president of the Federal Reserve Bank of New York, said Monday at
Bernard Baruch College. “As a result, falling energy prices are
beneficial for our economy and should be a strong spur to consumer
spending.”
Although
falling oil prices lower inflation, the Federal Reserve tends to view
that as a fleeting effect that would not alter its underlying judgments
about policy. Nonetheless, Dudley said, “the slump in oil prices may
also help to persuade” the European and Japanese central banks to
implement further monetary easing as prices remain subdued.
The consequences of the decline in oil prices are also evident in politics and pocketbooks.
At
current prices, the annual revenue of OPEC members would shrink by
$590 billion, money that will instead stay within the borders of the
world’s biggest oil importers, led by the United States, China and
Japan.
The size of the global economy will “easily be between
0.5 percent and 1.0 percent higher as a result of the decline in oil
prices,” wrote Andrew Kenningham, senior global economist for
London-based Capital Economics.
The 40 percent drop in the price
of the international benchmark Brent-grade crude oil over the past five
months will reduce annual revenue to oil producers worldwide by a
whopping $1.5 trillion.
“Those losses are staggering,” Edward Yardeni, president of Yardeni Research, wrote to investors Monday.
The
losers include Russia, where the value of the ruble has been crumbling,
inflation has crept up to more than an 8 percent rate and oil prices
have done more to hurt the economy than Western sanctions.
In
Iran, whose economy and government budget rely heavily on oil sales, low
prices could intensify the effect of sanctions that have curbed the
country’s oil exports in an effort to pressure the regime into reaching a
diplomatic accord on its nuclear program.
In
Venezuela, dwindling oil revenue has exacerbated an economic crisis
that is also tied to fuel subsidies, price controls and generous social
programs.
In the United States, there are losers, too — mostly in the oil patch. The oil services giant Halliburton has lost 44 percent of its value since July 23. Heavily indebted Continental Resources,
a huge shale oil producer in North Dakota’s Bakken region, has lost
half its value since Aug. 29. Even BP, a big, integrated firm, has lost a
quarter of its value in just the past few months.
“It happened so fast, it’s been a shock to the system,” said Scott D. Sheffield, chief executive of Pioneer Natural Resources.
Sheffield said that if oil prices had stayed between $90 and $100 a
barrel, Pioneer would have added 10 new rigs to its fleet of 40, nearly
all drilling shale oil wells. Now he is going to wait and see before
announcing capital spending plans in February.
The prospect of
low oil prices over an extended period grew much stronger last week
after OPEC opted to maintain output instead of paring back to prop up
prices.
Saudi Arabia, OPEC’s swing producer, with about
9.7 million barrels of production a day, has usually adjusted its output
to moderate lurches in oil prices. But the kingdom has grown worried
that production will continue to grow outside OPEC, reducing the cartel
to a smaller and smaller share of the global market. So Saudi Arabia has
chosen to fight for market share by letting prices slide.
That
could jump-start global oil demand, currently about 94 million barrels a
day. But it could also slow down or halt the growth in global oil
supplies.
The
biggest target of this strategy: U.S. shale oil, which has grown from a
negligible amount six years ago to 4 million barrels a day, nearly half
of U.S. production and more than any OPEC member except Saudi Arabia.
Other high-cost oil projects, such as Canada’s oil sands, could also be
curtailed or postponed.
But oil prices have historically swung
from one extreme to another; it takes years for price signals to change
exploration plans and production levels. U.S. exploration firms might be
able to withstand lower oil prices than OPEC members that need oil
revenue to balance their budgets and keep their citizens content. A
Citibank analysis says that current prices will not eliminate growth in
U.S. shale oil output, only trim that growth by 30 percent.
Within
OPEC, there was discord. “It is not good for OPEC,” Iranian oil
minister Bijan Namdar Zanganeh said in an interview with the newsletter
Argus Global Markets. “Some of our colleagues in OPEC believe they
should wait and see what the market reaction is, especially in U.S.
shale investment.” He added that “it’s a very risky issue” and could
require “years, not months.”
There are risks in the United
States, too. Kathy Jones, fixed-income strategist at Charles Schwab,
said that while lower oil prices will boost consumer spending, which
makes up 68 percent of the U.S. economy, it could also hurt investment,
which runs high in the petroleum business. She also noted that oil and
gas companies account for 15 percent of the Barclays U.S. high-yield
index, double what it was a few years ago.
“High yield means more highly leveraged, and we don’t know what a 30 or 40 percent drop in oil prices will mean,” Jones said. “It’s going to show up in places, I’m sure. It’s just a question of where.”
The
Fed’s Dudley was less concerned. “Even after the large gains in recent
years, oil and gas investment remains a small fraction of GDP,” he said.
On Monday, traders and investors struggled to grasp OPEC’s stance; prices slid then rebounded sharply to $69 a barrel.
Although
analysts said that global production is running about 2 million barrels
a day over consumption, barely 2 percent of world demand, slight
economic changes or a renewal of paralyzing civil strife in Libya could
shrink that extra margin.
On the other hand, the sudden glut —
while small — could grow even larger if Libya restores more of its
former production, Iraq continues to expand output from its low-cost
reservoirs and Iran strikes a deal over its nuclear program that would
lift sanctions and permit a jump in exports.
Iran’s oil minister told Argus Global Markets that Iran could increase output by 1 million barrels a day within two months.
That has left people guessing. Richard Anderson, chief executive of Delta Air Lines, said on “CBS This Morning” on
Nov. 25 that the airline was planning on jet fuel costing $2.80 a
gallon in 2015, though he acknowledged that “all this is a bit of a
thumb in the wind.”
Robert McNally, president of
the Rapidan Group consulting firm, said OPEC seemed to be letting
non-OPEC countries resolve the market surplus and surprised the industry
by not scheduling another meeting until June 5. “This was about as
bearish a signal as OPEC could have sent to the market,” he said.
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