What are the economists long term view on the OIL Price? Rex Column 19 January 2015 A Brutal Business by Cees Bruggemans words 850 It is a brutal business, culling the non-OPEC production marginals & and the Opec geopoliticals, and it is an even more brutal business thereafter keeping them down. What did Churchill recommend again? Dont kick a man when he is down. But if you are going to kick him, thats the moment to do it. Sound familiar? What we are witnessing internationally is not a mere recession decking the oil business. Instead, it is an evolutionary struggle, in which the weaponry is price and market share. An old-fashioned capitalist struggle to see who is fit enough to survive, and who are the dodos of the moment. The Iranian Leader is predicting that Saudi will suffer more from this oil business than Iran which is already mightily hurting. That sends its own implacable message. It probably wont be the last. There remain many who think this oil price thing will bounce early, either because Saudi & friends (Kuwait & other Persian Gulf emirates) will blink or it is the natural thing to happen as demand & supply adjust, like after a recession ends, showing that the underlying structural reality hasn’t changed much. But something has changed. The oil demand outlook is not hot, as the world growth outlook has moderated and energy savings through technology breakthroughs keep gaining. The global oil supply reality was potentially explosive to the upside, possibly strange, so soon after the “peaking” scares barely seven years ago, but this completely being turned by fracking technology gains & their global implications. And also, the geopoliticals have changed, indeed deteriorated to a remarkable degree, inviting rethinks. One can see the Saud Royals in deep thought, and this already for some time. America gradually withdrawing from the region even as vigorous Iran is getting its tail feathers right, with nuclear the biggest threat. America inviting all well thinking countries in the region having benefited from oil & gas, and channeling for decades some of their wealth to what they consider worthy cultural and political causes, but with some of these going on to bite the hands that feed them, a rethink about priorities is perhaps overdue. It may all be coincidence, but then it might not be. The most vocal geopoliticals have high fiscal breakevens near $90 oil, below which their finances tailspin. Saudi has just lowered its breakeven to $78, and has a war chest of &700bn + access to global capital markets to see it through, something others dont have. There was an overnight news item, however, saying that Iran has lowered its fiscal breakeven to $40. The region, it seems, is preparing for a long siege. It looks like a race, in which the strongest can pump more, lowering their breakevens yet more, while heavily compromising the loudest geopoliticals which cant and which dont have access to additional global capital. All this under the cloak of addressing non-Opec production marginals, especially American ones, seen by all as infidels and therefore worthy of being taken out. Except, apparently, that American production is still slated to rise, while yet more efficiency technologies keep intruding, with most emerging economies still having to adopt these as well. So economically, to match the long-term intention of safeguarding the Saudi & Friends market share as high reserve, low cost producers, not only need the non-Opec marginals be taken out, but there needs to be enough disincentive to keep them out and to neutralise some of the other efficient technology trends. This suggests a disciplining marker price over a number of years, not just an overnight wonder, here today, gone tomorrow. With the dual function of also keeping the geopoliticals down (though hardly out). Thus perhaps the American inclination to tiptoe to the escape hatch, so that the region may stand more on its own two feet, be less of an American burden, taking far too much US presidential time & sapping American morale, given its impatient character wishing for quick results that in a patient region can take forever materialising, and then only at great cost. America pays a price, in seeing its energy sector thrashed, but then $100-120 subsidized oil was never a good basis to begin with, aside of environmental concerns in certain constituencies. Anyway, a small price to be paid by some in return for big dividends, as much own consumers & businesses directly via lower priced oil, and indirectly via lower government policing costs overseas. At least, such could be some of the American reasoning. And so it has come to pass that Brent oil has reached $50 today (and not $150), thereby changing economic prospects for the world and SA, and possibly also giving a twist to geopolitical prospects regionally (but for its full tale more time will be needed to see the playout, whether things went according to plan). For remember, last time someone messed strategically with a large country regarding its commodity dependence (Franklin Delano Roosevelt isolating the Japanese in the late 1930s over their China drift), it didnt take too long for all hell to break loose. What did Kissinger refer to again in connection with Richelieu’s doings? “Upheavals…” Cees Bruggemans Consulting Economist Bruggemans & Associates Website bruggemans.co.za Email [email protected] Twitter @ceesbruggemans LinkedLn
Posted on: Mon, 19 Jan 2015 05:37:05 +0000