I just can’t resist sharing this Bloomberg story with the
readers of my blog.
Oil is so much more than a fuel. It’s a force even bigger
than its $3.4 trillion market. It’s a weapon, a strategic asset, a curse.
It’s a maker and spoiler of fortunes, a leading indicator and an echo
chamber. All these roles have a part in setting oil prices. The result is a
peculiar market that says as much about global economics and politics as it
does about supply and demand.
The Situation
After four years when the highest average oil prices in
history seemed to defy economic gravity, petroleum fell in mid-2014. It had
risen to $107.73 a barrel that June, even as Americans and Europeans drove
fewer miles in more efficient cars, curbing consumption of gasoline, the
biggest source of oil demand. Meanwhile, supply expanded as the sustained
higher prices made techniques such as deep water drilling and fracking pay
off. Those fundamentals started to register in the summer, as
Chinese imports sagged, Europe teetered on the brink of recession,
and the stronger U.S. economy made barrels priced in dollars relatively more
expensive. Instead of stanching the glut by pumping less oil, Middle East
exporters engaged in a price war to defend their market share. The price had
dropped to $42.03 in March, the lowest since 2009, as U.S. storage tanks
brimmed with oil. Then came a rebound above $50 a barrel after the conflict in
Yemen. The price collapse had forced high-cost drillers in North Dakota and
Texas to idle rigs while international giants like BP, Shell and Halliburton
cut thousands of workers and billions of dollars in spending. Those
developments led OPEC to declare its strategy a success at its June
meeting and to maintain current production levels. With several members
eager to increase their own production, Iran poised to ramp up exports after
reaching a nuclear agreement with six world powers, and shale output
proving surprisingly resilient as drillers cut costs and focused on the best
terrain, the supply glut showed little sign of abating.
Crude Oil: Maker and spoiler of fortunes
I just can’t resist sharing this Bloomberg story with the
readers of my blog.
Oil is so much more than a fuel. It’s a force even bigger
than its $3.4 trillion market. It’s a weapon, a strategic asset, a curse.
It’s a maker and spoiler of fortunes, a leading indicator and an echo
chamber. All these roles have a part in setting oil prices. The result is a
peculiar market that says as much about global economics and politics as it
does about supply and demand.
The Situation
After four years when the highest average oil prices in
history seemed to defy economic gravity, petroleum fell in mid-2014. It had
risen to $107.73 a barrel that June, even as Americans and Europeans drove
fewer miles in more efficient cars, curbing consumption of gasoline, the
biggest source of oil demand. Meanwhile, supply expanded as the sustained
higher prices made techniques such as deep water drilling and fracking pay
off. Those fundamentals started to register in the summer, as
Chinese imports sagged, Europe teetered on the brink of recession,
and the stronger U.S. economy made barrels priced in dollars relatively more
expensive. Instead of stanching the glut by pumping less oil, Middle East
exporters engaged in a price war to defend their market share. The price had
dropped to $42.03 in March, the lowest since 2009, as U.S. storage tanks
brimmed with oil. Then came a rebound above $50 a barrel after the conflict in
Yemen. The price collapse had forced high-cost drillers in North Dakota and
Texas to idle rigs while international giants like BP, Shell and Halliburton
cut thousands of workers and billions of dollars in spending. Those
developments led OPEC to declare its strategy a success at its June
meeting and to maintain current production levels. With several members
eager to increase their own production, Iran poised to ramp up exports after
reaching a nuclear agreement with six world powers, and shale output
proving surprisingly resilient as drillers cut costs and focused on the best
terrain, the supply glut showed little sign of abating.
Source: Bloomberg
The Background
Through the mid-20th century, a group of multinational oil
giants known as the Seven Sisters (including the companies that became Exxon
Mobil, Chevron and BP) dominated the market. Controlling the barrels from the
wellhead to the gasoline tank, they traded mainly with each other on
confidential terms; there was no open market. Countries with oil fields wrested
more control with the formation in 1960 of the Organization of Petroleum
Exporting Countries. The cartel’s Arab members used their power for political
and economic ends, shocking the global economy with an embargo in 1973. Prices
spiked again in 1979 because of the Iranian revolution. In the 1980s, OPEC
infighting, the emergence of new suppliers and the development of futures
exchanges gave rise to new market-based prices. Today the international
benchmark is Brent crude from the North Sea. The U.S. benchmark, West Texas
Intermediate crude, started trading at less than the Brent price in 2010
as supplies of shale oil became plentiful. In 2013, the European Union raided
offices of Shell, BP and others to investigate possible manipulation of
reference prices produced by the publisher Platts.
The Argument
As the world industrializes and consumes more energy, each
new barrel of oil costs more because the cheapest and easiest oil has already
been pumped. This observation gave rise to a theory called “peak oil,” which
holds that world production will eventually max out and decline as oil fields
deplete. Skeptics of this notion point to the technological innovations that
let U.S. producers extract oil and gas from previously impermeable shale,
unlocking vast new resources, albeit at greater expense; the issue isn’t
quantity but cost. The other variable is demand; no one knows oil’s future as consumers
grow more efficient and switch to alternative fuels such as natural gas
and renewable power. Oil supplied 31 percent of the world’s energy in 2012,
down from 46 percent in 1973. There may come a day when oil gets cheap because
it’s unwanted. That’s the argument often advanced by advocates of divestment.
They warn of a financial crisis caused by a bursting “carbon bubble” of
inflated energy-company valuations after fossil-fuel prices rise to account for
the costs of contributing to global warming.
Source: Bloomberg
The Background
Through the mid-20th century, a group of multinational oil
giants known as the Seven Sisters (including the companies that became Exxon
Mobil, Chevron and BP) dominated the market. Controlling the barrels from the
wellhead to the gasoline tank, they traded mainly with each other on
confidential terms; there was no open market. Countries with oil fields wrested
more control with the formation in 1960 of the Organization of Petroleum
Exporting Countries. The cartel’s Arab members used their power for political
and economic ends, shocking the global economy with an embargo in 1973. Prices
spiked again in 1979 because of the Iranian revolution. In the 1980s, OPEC
infighting, the emergence of new suppliers and the development of futures
exchanges gave rise to new market-based prices. Today the international
benchmark is Brent crude from the North Sea. The U.S. benchmark, West Texas
Intermediate crude, started trading at less than the Brent price in 2010
as supplies of shale oil became plentiful. In 2013, the European Union raided
offices of Shell, BP and others to investigate possible manipulation of
reference prices produced by the publisher Platts.
The Argument
As the world industrializes and consumes more energy, each
new barrel of oil costs more because the cheapest and easiest oil has already
been pumped. This observation gave rise to a theory called “peak oil,” which
holds that world production will eventually max out and decline as oil fields
deplete. Skeptics of this notion point to the technological innovations that
let U.S. producers extract oil and gas from previously impermeable shale,
unlocking vast new resources, albeit at greater expense; the issue isn’t
quantity but cost. The other variable is demand; no one knows oil’s future as consumers
grow more efficient and switch to alternative fuels such as natural gas
and renewable power. Oil supplied 31 percent of the world’s energy in 2012,
down from 46 percent in 1973. There may come a day when oil gets cheap because
it’s unwanted. That’s the argument often advanced by advocates of divestment.
They warn of a financial crisis caused by a bursting “carbon bubble” of
inflated energy-company valuations after fossil-fuel prices rise to account for
the costs of contributing to global warming.
