Summary of the Presentation on….
The Geo-Political Ramifications
of the Rapid Decline in Global Oil Prices
The world is suddenly awash in oil and the global price in crude has rapidly declined. Dr. John Scire discussed what the global and U.S. oil situations were before the recent decision by Saudi Arabia and OPEC to abandon their quotas and increase production. Scire noted that virtually no observer anticipated the combination of the surge in supply and the drop in oil prices to the extent that has occurred (now below $29!). He noted the dramatic decline of oil from over $120 a barrel, down to $65 a year ago, and now below $30 and falling.
The situation before Saudi Arabia decided to abandon its quota restrictions within the OPEC structure and start flooding the market with oil related to losing market share. The Saudi market share for the world supply of oil was diminishing because other OPEC countries were exceeding their quotas and non-OPEC countries like the United States, Canada, and Russia were increasing production.
However, the drop in the price of oil from over $100 a barrel to under $30 a barrel in 14 months was probably more than the Saudis had expected. The unforeseen factors were that the competition did not reduce their production, but actually increased it, much to the surprise of the Saudis. The second big factor was that worldwide demand for oil diminished in some areas and the growth in oil demand slowed markedly in places like China. The third factor was that the non-Saudi producers underestimated the Saudi willingness to use up their currency reserves to cover their huge budgetary shortfalls. The combination of the increased production with the softening demand led to the price collapse.
The sustainability of Saudi Arabia flooding the oil markets is questionable because of the high fiscal price per barrel that the Saudis and other oil-based economies require. The fiscal price relates to the price per barrel those oil-dependent governments need to meet their budgetary requirements. The Persian Gulf countries can produce oil for under $30 a barrel, but they need to get well over $50 a barrel to sustain their current levels of domestic spending. The same applies to Russia, Venezuela, and other non-Persian Gulf producers. Countries like the United States will be impacted negatively in the oil-producing states/provinces, but positively impacted in the oil products consuming states/provinces. The United States has improved its oil dependence situation, but remains a net importer.
Dr. Jerry O’Driscoll focused on the fiscal impact on countries with significant dependence on sales from oil to balance their budgets. He underlined Scire’s point about the severe impact this has had on Saudi reserves, but he felt the immediate crunch would fall on countries like Venezuela and Nigeria in the short term. Here in the United States, we have benefitted from lower balance of payments deficits and improved our security situation by becoming less dependent on oil imports from volatile parts of the world. Domestically, the drop in oil prices is a net plus. He noted some states have been winners– the major energy consuming ones– while major producers such as Alaska, Texas, and North Dakota have suffered. O’Driscoll and Dr. Ty Cobb underlined the severe impact on Russia, which depends on oil exports for as much as 60% of its annual budget! Dr. Xiaoyu Pu noted that while China has been a major beneficiary as an oil importing country, its economy and growth rates are continuing to decline.
The discussions concluded around projections for future prices of oil. No one could foresee any willingness on the part of major producers to reduce output, and that, along with slowing global demand, will probably indicate that the price of oil will rise very little over the next year.
The link to a very interesting PowerPoint put together by Dr. Scire is below!