In May 2008 the price of oil soared to around $147 on sheer speculation but by the end of the year it was back down below $50. From one extreme to another. Then, as it started to rise towards the end of 2009, there was concern from OPEC that as it exceeded $70, recovery would falter and the high oil price and OPEC would get the blame. As it was, the price continued upwards and once established over the $100 level during the second half of 2010, OPEC declared that the price was satisfactory to both consumers and producers. From that point on, use of oil started to decline, research in to alternative fuels and conservation picked up and so too did non-OPEC production in the form of shale exploration primarily in the US while, in the background natural gas began to increase its market share.
Demand from OECD countries did not recover from the shock of 2008 and subsequent recession and then, in the second half of 2014, as oil output exceeded demand and stocks began to build up, the price started its next downward trend and this was further enhanced by the OPEC decision in December 2014 to continue pumping oil, supposedly to maintain market share while at the same time exerting pressure on the main non-OPEC suppliers, the USA and Russia which had presumably assumed that the oil price would remain for ever over the $100 level, as had the OPEC producers.
As a consequence of this action the following effects could have been expected:
Around that time, Walmart announced improved figures based on the fact that lower gasoline prices had meant that consumers were able to make more use of their cars and drive to and spend money in Walmart stores. However, from that point on there has not been much in the way of any significant improvement in the economic output due to lower oil prices and one has to accept that there is usually a time lag of perhaps one to two years before this filters through, but, having said that, unlike previous occasions when oil prices have collapsed, the world is today less dependent on oil than it was certainly pre-2008. So, the time lag is still in its infancy and perhaps will not be as predominant as one would traditionally have expected.
Global competition has had a detrimental effect on many industrial sectors, with claims of dumping of cheap goods from China, whether they are solar panels or steel. Whatever the developed world can produce, China can produce cheaper and as the developed world has strived to rise out of the global recession of 2008, its competitiveness has been stifled by China and other Eastern countries able to undercut them.
Furthermore, many of the oil producing countries have used their Sovereign Wealth Funds to invest overseas in both OECD and non-OECD countries and with those funds so heavily dependent on oil wealth, their ability to invest has been seriously curtailed and has not been forthcoming. Countries such as Nigeria and Venezuela have not managed their wealth wisely and have not re-invested in their infrastructure while countries like Iraq and Iran have suffered as the result of invasion and war over recent years and are now trying to rebuild theirs infrastructures. They do need the support of Western technology but the sources of those technologies are often seen as much as a threat to their existence as a saviour and the building of trusting relationships will take time to materialise. There is much oil related debt around the world and with banks tied in to this debt, investment loans are further restricted, creating financial uncertainty.
Looking ahead, many can claim to be able to forecast the oil price accurately and while we have an understanding of the fundamentals and the technical analysis to guide us, ultimately, it is the whim of the OPEC leaders that will determine the price. There has been much hype recently over the supposed oil price freeze agreed between Saudi Arabia and Russia and maximum output levels. These are supposedly the levels beyond which neither is able to go anyway so, in effect, to set at these levels is meaningless. Furthermore, the fact that some OPEC and non-OPEC producers may meet in Doha next month has created further conjecture that some decisive action will follow although Iran will not comply with any agreement to cut or curtail output below 4mbpd. There is little trust between Saudi and Russia and Saudi is unlikely to cut now to support Russia, so, in my view today, nothing conclusive will come out of this meeting and we shall need to wait until the end of the year to see by how much US shall output has fallen and by how much extra oil Iran has put in to the market.
Overall, we have to assess the balance between 1 global competition, 2 lack of investment from Sovereign Funds and 3 Oil related debt before we can count on a rapid increase in domestic output from those countries that are net-importers of oil. It may come later but my guess is it will take its time and we shall have to suffer the current economic uncertainties for a while longer before it will stand a chance of coming through.
Written By – John Hall