Kristian Rouz – Global oil prices dipped this past week, ending a month-long rebound, which some observers saw as a good sign for both the corrupt petrocracies around the world and the mired in near-deflation and slow growth Eurozone and Japan.
The recent dynamics in oil prices have affected each major economy in different ways, and in turned out that the United States, now also the world’s largest crude producer, are the only beneficiary of cheaper oil, while a more expensive energy would help the Eurozone and Japan spur growth. Oil producing countries would be saved if oil appreciated, as many of them are entering muddy waters of local economic crises.
However, the US is now facing another oil-related challenge: they are extracting so much oil they might soon run out of proper storage capacity – even after several shale oil companies have decommissioned roughly 100 drilling rigs in late January-early February. Given that the global economic growth is slowing down further, with industrial capacity of China – one of the biggest oil consumers not so long ago – shrinking dramatically, oil has little to none potential for appreciation, while there are several major factors, determining a collapse in crude prices in the nearest future to as ‘little’ as $10 a barrel.
It is worth noting, the peaks in crude valuation of about $140 a barrel and $107 a barrel seen in 2008 and 2014, respectively, are far from being a historical normality. Early 2000s have become an era of bizarre fluctuations in the energy markets, with global consumption far exceeding oil production with rapidly growing China, booming Eurozone and overtly-financialized US. During most of the past century, oil rarely cost more than $20-30 a barrel, even during the major crises, but it was during the last 15 years when pertrocracies were thriving on defiantly expensive energy, exercising in the ever-growing insanity of domestic authoritarianism, exported corruption and occasionally international escapades.
The US response, whether conscious or not, to the recently emerged political challenges is truly astonishing. Volumes of crude oil in storage have hit their record high in almost 80 years. According to the Energy Information Administration (EIA) data, the total amount of readily available oil in storage rose by 7.7 million barrels this past week to 425.6 million barrels, some 20 percent above the five-year average.
These data have outlined some major threats to the global energy market. As soon as this enormous oil reserve is put on sale, the collapse in oil prices will be dramatic. This is truly an economic weapon of mass destruction the US has created, now waiting for the right moment to use it.
The oil prices, however, are not bound to slump before the winter’s end, as it has proven way too cold and stormy for a large part of North America, contributing to a sort of stabilized crude valuation in January. But the pace of oil extraction in the US is indeed fascinating, fastest since 1972.
Economic growth in the US has been 2.3% a year on the average since 2009, while the rest of world is dong far worse, meaning there is no perspective for a buildup in oil consumption anytime soon. The OPEC cartel has lost its power to determine the price of oil and to manipulate the global energy markets last year after 40 years of dominance. Meanwhile, in 2015 the US is forecast to increase their current oil production of 9.1 million barrels per day (bpd) by another 300,000 bpd. That said, other oil-producing nations, including the overtly dependent on oil petrocracies and the more diversified economies, would not fancy losing their market share to the Americans, increasing their production as much as they can as well. This continued ‘race to zero’, started last year as the ‘US-Saudi price war’, will effectively take its heavy toll on crude valuation.
According to the EIA data, the global oil demand will fall by 230,000 bpd to 93.3 million in 2015, with global supply being 400,000 bpd above demand.
In the US, petrol prices are falling, having retreated by some 40% (in some states more, in some – less than that). Now roughly $2 buys you a gallon of regular nationwide, and America hit its roads with more pickup trucks, SUVs and old-fashioned ‘yank tanks’. Traditionally more petrol-consuming American-made cars are likely to push economical Asian automobiles off the US market, further exacerbating growth issues in Asia – and taking a toll on oil prices.
All in all, the economic reality is playing against oil. This means, the energy factor should be ruled out when developing a strategy of growth in Japan and the Eurozone, finding other sources of larger inflation like money-printing (Japan) or foreign trade surpluses (Germany). As for the emboldened in the last 10-15 years petrocracies, they now must prepare for the worst economically, as no windfall of stray money lasts forever – and, hey, the ill-gotten wealth does not buy everything in this world, meaning the export of corruption (which some parts of Europe have been eagerly importing) from the world’s spots of lawlessness may soon be finally over.