If you've filled up your gas tank at Stop-In recently, you've noticed that gas prices have been low--possibly the lowest since my time at W&L. Given that I'm from Houston (the oil & gas mecca of the world), and I worked in energy finance this summer, it is always interesting for me to follow the ups and downs of the energy industry. As of right now, the industry is watching an oil price slump that many analysts say is reminiscent of the "price collapse" seen in the mid '80's. Here is an image of the price of crude oil the past year:
So here are the conventional "stories" about why the price of oil is falling so rapidly (I will break it up into supply and demand):
Supply:
1) The US is experiencing one of the largest energy "booms" in the past century. With new technology and drilling techniques (ie "hydraulic fracking" and horizontal drilling), the US is "awash" in oil. New 'plays' in North Dakota, Texas, Illinois, Pennsylvania, and Louisiana, are now back online because of these technological innovations. Essentially, the US is flooding the global oil market with new "fracked" oil, which is pushing a the price of crude oil down. That's story #1.
2) Story #2. OPEC seems it is unwilling to cut back on it's production (OPEC has about 1/3 of global oil supplies), which means that these 12 countries will continue to drive the price of oil downward. This "unwillingness" stems from Saudi Arabia desire to retain its market share within the global market. Keep in mind that Saudi Arabia is one of the few OPEC countries left that is not producing at "full capacity"--meaning that could "open the spigot" if they felt the need (or close it more...). I will analyze later why this decision may have severe political consequences for the Middle East.
3) Story #3. Libya, one of the worlds largest oil producers, is back online. After political turmoil for the past several years, the nations largest oil field, Sharara, is back to producing around 250,000 barrels a day. This development is also contributing the the downward pressure on global prices.
These are typical "supply stories" for why the price of oil has been dropping so much recently.
Demand:
1) The IEA (International Energy Administration) cut is energy growth estimates for energy consumption this upcoming year. News like this (and this:http://www.bloomberg.com/news/2014-06-16/imf-cuts-u-s-growth-forecast-sees-scope-for-zero-rates-longer.html), combined with the knowledge of plentiful oil, signals to the market that prices are likely to continue their downward trend.
2) Story #2. People in the oil and gas industry love to use China and India as their indicators that oil will still be in high demand in the coming years. They quote the massive populations in each country and then quote some statistic about how a larger portion of each population is entering into the middle class and looking to purchase a car (meaning looking use more gasoline). However, recent reports show that economic growth in these countries is not living up to previous estimates (http://www.reuters.com/article/2014/10/06/us-worldbank-asia-idUSKCN0HV03D20141006)
For oil companies, this implies a lower demand for their products.
3) Story #3. As alternative energy technology increases, dependence on petroleum based fuels will decrease. People love to reference the rise of Tesla and the increased use of public transportation (http://www.nytimes.com/2014/03/10/us/use-of-public-transit-in-us-reaches-highest-level-since-1956-advocates-report.html?_r=0). The only hiccup people forget to mention in this narrative is--ironically--price. The price of petroleum products, for now at least, is much more economical for corporations and the average consumer than to switch to alternative energy sources. If this paradigm shifts, this narrative could become the lead story in oil prices.
So, in conclusion:
Lower demand + higher supply = lower price.
So, how does all of this play into the International Political Economy? Well, beside being an input variable cost for almost every company in the world, oil is an important source of revenue for many countries. So here's is a few IPE stories worth mentioning (and yes, even one conspiracy theory):
1) The Middle East (and OPEC) story. Many countries in the Middle East have state-owned oil companies and many of them are apart of the international cartel, OPEC. It is possible for a scenario to happen where these nations (notably Russia (not a member of opec), Angola, and Venezuela) are not able to adequately fund their state budgets because the price of oil has dropped too far. This kind of financial turmoil could lead to rift between the powers within OPEC asking each member nation to decrease its production so that they could raise the price. Pretty crazy to think that a country might become insolvent because of a technological innovation in nowhere, Oklahoma (http://www.shale-world.com/2014/03/24/fracking-invented/) . Want to talk about globalization? That's probably a good story to follow.
2) Another interesting story to follow will be how the US deals with its current ban on crude exports. As of now (and since the early '70's) oil companies have not been able to export their crude product, only refined petroleum products. However, now with a flood of oil in the US market and downward pressure on prices (which hurt oil companies profits), there will most likely be a call to lift this ban so that companies may sell their product in markets with higher prices. This "call" I allude to will most likely take form in the political debate during the upcoming election--and if not then--during the 2016 presidential election. Should be an interesting development to watch.
3) Time for the conspiracy. There have been rumors that the US government is in collusion Saudi Arabia to drive down the price of oil so that it hurts the Russian and Iranian economy. While this may seem out of left field, many "analysts" (http://economictimes.indiatimes.com/news/international/business/global-oil-war-underway-between-us-saudi-arabia-and-russia-iran/articleshow/44824097.cms?curpg=2) believe this exact tactic was one employed by the US during the cold war and a possible explanation for why the Soviet Union fell. Again, pretty crazy to consider that a boom in the oil industry in the US could lead to the (possible) immediate decline of several world powers. Talk about globalization.....
So that's all I have on the oil industry for now. Definitely should keep an eye towards the WTI price and the Brent price (and your gas prices) as we continue through the school year. Who knows? StopIn having a lower price could lead to a revolution in Iran. Globalization speculation is fun.
all for now.
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