ONLY For Students of Politics, Economics, History and International Relations..... World economy in turmoil as oil price plunges Written by Ben Peck Friday, 19 December 2014 16:06 Tweet 14 Tectonic shifts are taking place in the world economy. The price of oil has fallen dramatically in the past six months. The price of Brent Crude has now fallen to less than $60 a barrel. This marks a near fifty per cent drop in price from $115 a barrel in June. It heralds a new stage in the capitalist crisis, and its impact is being felt throughout the world. The IMF’s Christine Lagarde has called this ‘good news for the global economy’. But is this really true? Cheaper oil prices should mean savings being passed on to the consumer, boosting demand and further stimulating the so-called “recovery”. In truth the fall in oil is part of a more complicated picture. It has been caused primarily by the slowdown in the world economy, particularly China. This is the consequence of the worldwide crisis of overproduction, which in Chinas case had been masked by historical levels of state intervention. $586bn was pumped into the Chinese economy in 2009 as part of a huge stimulus package, in order to “keep the plates spinning”. Huge infrastructure projects were embarked upon that maintained employment and absorbed investment. The effects of Chinas adventure in Keynesianism are now coming to an end. GDP growth has slowed to around 7%. Europe and Japan, two of its main export markets, are in recession and not buying, having a knock-on effect on Chinese production. The slowdown in the world economy signals the oncoming of a new stage in the capitalist crisis. But it also has its roots in the previous period. The fall in demand for oil has also been accompanied by an increase in supply, particularly through the development of the shale oil industry. San Ardo oil field. Photo: Loco Steve Shale Shale oil, involving a more complicated and costly method of extraction, was developed in the years following the 2008 crisis, particularly in the United States. Since 2010, twenty thousand new wells have been opened up in this field - twice the rate of world oil leader Saudi Arabia. The capital investment necessary for the opening for this new field came from the excess glut of capital that accumulated following the 2008 crash. As a result of overcapacity, huge swathes of capital sought areas for investment outside of private industry. Hence, the stock exchange and luxury goods boom in a period of austerity and recession. Capital also found its way into developing the shale oil industry, which had been considered financially unviable. However, this proved lucrative as China continued to motor on following its stimulus, demanding oil and allowing for a high enough price to make investment in shale attractive. In this period the development of the shale oil industry in the USA boosted production by one-third to 9m b/d (barrels per day). Trade war The rise of US oil has now sparked a trade war with Saudi Arabia, leader of OPEC - the cartel of oil producing countries. As oil prices began to fall this summer, due to the waning strength of the world economy, the Saudis decided to embark on a tactic of not cutting production below the already agreed 30m b/d. Under capitalism, new entrants pile into a market that is experiencing high demand and where great profits are there to be made. Typically, however, these new entrants enter with a competitive edge and equipped with the latest production techniques. As the price comes down through production, those with the most productive techniques will capture the market. While shale oil exploration represents the latest in technique, it is far from the most cost-effective. Its cost of production is higher than traditional extraction, hence the previous hesitation of investors. The “OPEC-organised” price-fall goes even below the cost of production using traditional methods. But it is the new American boys in shale who are being squeezed. The Saudis have set out deliberately to cripple the shale oil industry. This was confirmed by Kuwait’s oil minister, Ali Al-Omair (Kuwait is a member of OPEC), who said maintaining production at existing levels was intended to hold on to market share, even if it meant that it “would negatively affect prices”, according to the Kuwaiti state news agency. OPEC is willing to take the hit, even at the cost of short-term losses. The Saudis sit on $750bn of foreign exchange reserves, which they plans to use to ride out the price war. Oil receipts in Saudi Arabia count for 85% of exports. Despite large reserves to fall back on, $60 oil means a fiscal deficit of 14% of GDP, according to Moodys. This means attacks by the government on many of the social programmes which the regime conceded under the pressure of the Arab Revolution in 2011. International relations However, this is not only an economic struggle, but a game of international power politics. The development of shale oil has increased the USs share of oil production on the world market, leaving Washington more independent of Saudi Arabia concerning its energy needs. This is not to the House of Sauds liking. Iran and Venezuela, both members of OPEC, reportedly begged the Saudis to cut production below the agreed 30m barrels a day, as the two countries need a high price of oil in order to allow for a balanced budget. But the Saudis want to hit out at Iran, its traditional rival in the area, whose influence has been growing. Iran has been recently courted by America and de facto brought into alliance with it against ISIS. Saudi Arabia wants to drive a wedge between the US and Iran by crippling the Iranian economy, which needs an oil price of $140 b/d to balance its budget. And by bringing American shale production to the point of ruin, the Saudis can bring the US back into its sphere of influence. The main reason for it is a political conspiracy by certain countries against the interest of the region and the Islamic world and it is only in the interest of some other countries. Iranian President Rouhani told his cabinet on December 10th. It is true, as the Saudis protest, that neither they nor Opec as a whole can set the price. But do they protest too much, as they do nothing to arrest the speed of falling prices? It is not just that the oil producers’ cartel, where Saudi Arabia still rules the roost, declined to cut output at last month’s meeting. As recently as September the Saudis were actually increasing supply to a glutting market. (Financial Times, December 9th) All this shows that the Saudis are playing a calculated game. According to the FT a senior Saudi official told US Secretary of State, John Kerry, this summer: “Isis is our [Sunni] response to your support for the Da’wa” – Da’wa being the Iranian-backed Shia Islamist ruling party of Iraq. This OPEC-led price war appears to be proving successful for the Saudis. The Economist on December 8th predicted a raft of shale oil bankruptcies, which it says have been spending more on new wells than they have been making in profits. The price war is also having its effect on the oil industry more generally. Oasis Petroleum and Goodrich Petroleum, two heavily indebted oil producers, have had to announce steep cuts in their planned capital spending for 2015. ConocoPhillips has announced it will cut spending by 20% next year. The consultancy Energy Aspects says that 12% of global oil production would now be uneconomic if begun at todays prices. On December 16th the FT warned: Almost $1tn of spending on future oil projects is at risk after the dramatic plunge in crude prices to nearly $60 a barrel, Goldman Sachs has warned. Goldman also warns that fields representing 2.3m b/d of output by 2020 have now become uneconomic. And this does not include shale oil production, with its higher cost of production. Shares in ExxonMobil have slipped 15 per cent in the past six months, while Chevron has fallen 21 per cent and ConocoPhillips dipped 26 per cent in the same period. Tensions in the world economy Beyond the shale and wider oil industry, the fall in oil prices is bringing out underlying tensions in the world economy. The impact on China itself is having mixed results. Whilst it is the worlds 4th largest producer of oil, its energy needs are so great that it is also an importer of oil. In the past decade, production has increased by 750,000 b/d, but consumption has risen by 3.7m b/d, underlining the colossal development of Chinese capitalism in the recent period. Chinas internal contradictions are being exacerbated. Outlying resource- producing areas are losing out to lower oil prices, whilst Chinas energy- consuming coastal manufacturing areas are benefiting. This is increasing polarisation and putting pressure on some regional state budgets. Already there have been strikes of teachers in the north-eastern province of Heilongjiang, which borders Siberia, home to the country’s largest oil .
Posted on: Fri, 19 Dec 2014 22:23:12 +0000
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