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Do oil gyrations signal fundamental changes?
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Today, as oil producers scramble to gain market share, prices remain down more than 70 percent from summer 2014. In the West, the price plunge is often attributed to China and other emerging economies. In this view, the collapse of prices originates from China’s growth slowdown.
It is a great story but not entirely valid. In 2014, China became the world’s largest consumer of oil accounting for one-third of global oil demand growth. Moreover, China’s oil consumption went up 8 percent in 2015; it was the second-highest annual increase after 2010.
Another favorite scapegoat has been Iran. In this case, plunging prices have been attributed to Iran’s re-entry into the oil market. In reality, oil prices plunged for months before the lifting of the Iran sanctions and stabilization at below US$30.
Today, the US is the largest oil producer (13.7 million barrels per day), as opposed to Saudi Arabia (11.9mb/d), Russia (10.9mb/d), China (4.6mb/d) and Iran (3.4mb/d). In that list, Iran doesn’t yet make it to the top-20. In the short-term, it hopes to increase production to 700,000 barrels per day.
In reality, the price plunge has more to do with geopolitics. Saudi Arabia does not want to give market share to US shale producers, while low prices are harming even more Iran and Russia.
The net impact has been cheap oil and overcapacity. More cheap oil could cut annual revenue among OPEC member-states almost in half, to US$550 billion. Since the OPEC still accounts for about 40 percent of total output worldwide, it is no longer united. Smaller oil exporters, including Venezuela and Nigeria, advocate price cuts.
Recently, oil ministers from Saudi Arabia, Russia, Venezuela and Qatar agreed to a conditional freeze of their oil output levels. However, in the present status quo, that is not likely.
.Current speculation and abrupt price movements are reminiscent of those in summer 2008, when Goldman Sachs predicted that oil prices would exceed US$200 by the year-end. In reality, prices collapsed to US$32 in December. While many industry players took a heavy hit, the projection reportedly paid off handsomely to those banks that shorted the market with leveraged derivatives in oil futures.
Today, there is a sense of a déjà vu all over again.
Two years ago, major oil producers (e.g., ExxonMobil, Chevron and Shell) began to let go of their shale leases. Unlike big oil, shale is dominated by mid-size oil companies. As banks have predicted ultra-low prices at the US$20 range, they have reportedly lent billions of dollars to shale players. The more the prices decline, the more shale players suffer defaults. While that’s painful to industry players, it allows big banks to gain greater share of their ownership.
In the US, the giant banks’ huge involvements with commodities, including oil and gas, and the associated market manipulation were publicized by a 2014 Senate Subcommittee report which concluded that “Wall Street banks have acquired staggeringly large positions and executed massive trades in oil, metal, and other physical commodities.”
Today, there has been a wealth transfer of an estimated US$3 trillion a year from oil-producing (emerging) economies to oil-importing (advanced) economies. In this status quo, disruptive price fluctuations benefit the financial players — as they did during the global crisis.
Dr Steinbock is the CEO of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). For more, see www.differencegroup.net
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