If you haven’t heard about the recent collapse of global oil prices by now, the likelihood is you’ve been living under a pan. Nonetheless, I use oil in pans, so you have no excuse. The price of oil has fallen by more than 40% since June. We all know oil is an extremely important commodity, virtually adding to the cost of almost everything you buy. So when these oil prices began to plummet, the markets were understandably left bewildered with a metaphorical “OMG WHAT IS GOING ON?!” expression. Well, let’s discuss what’s going on.
Essentially, there is a global disproportion of supply and demand that is rippling across the world economy. There is weak demand in many countries due to insipid economic growth, coupled with surging US production. Brent crude oil slumped 47 percent to an estimated $61 late last week from its high this year of $115 a barrel, dragging down energy stocks, as the Organization of Petroleum Exporting Countries – a cartel of 12 nations including Saudi Arabia, Iran and Venezuela that holds enormous power over global energy markets, producing 40 percent of global oil supply – sought to defend market share amid a U.S. shale expansion which is also rather problematic. OPEC failed to reach an agreement on production curbs a few weeks back, and this caused prices to fall faster than Ashley Young in the penalty box. Basically, the price of oil is dependent on supply and demand. When there is disparity between these, stuff goes down like it did when Jay-Z, Beyonce and her sister where left in an elevator together (pun intended).
At the moment, demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Secondly, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output whatsoever. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could easily curb production, but Iran and Russia would reap the benefits, and they don’t particularly like them. That said, Saudi Arabia’s Oil Minister Ali al-Naimi recently stated “the spread of misleading information and speculation” had contributed to the 40% price fall, claiming they have no political agenda whatsoever. Indeed, a deep slump in prices might heighten geostrategic turmoil across the Middle East.
Who is this affecting the most? The greatest pain is in countries where the regimes are dependent on a high oil price to pay for costly foreign adventures and expensive social programmes. These include Russia (which is already hit by Western sanctions following its meddling in Ukraine) and Iran (which is paying to keep the Assad regime afloat in Syria). Is the collapse of oil merely the US Government trying to punish Putin? Uh oh, controversy in the oil rig. However, here at The Commercial Cartel, we like to remain as neutral as Howard Webb during a Manchester United game. Thus, we direct your attention to the end of Q.E in the U.S. A trillion dollars a year of credit easing, asset support and indirect motorization is finished, over, caput, gone. The dollar has been slapping down anything in its path, especially the anti-dollar commodities, namely gold and oil. Interesting…
By Garry Caprani