Most of the rules that once governed the oil world seem to have changed and it doesn’t seem likely they will be reverting any time soon. The old “system” was predictable: The price of oil would drop at some interval as demand slipped, and the oil producers would react by restricting output for a while. This artificial supply shortage would allow the glut to vanish, and the prices would start to come back to levels the producers wanted to see. These days are over now—at least for a while.
Non-OPEC states now control more of the world’s oil supply, and they rarely work in concert. The producers do not like the oil price right now and would much prefer a $100 per barrel rate as opposed to prices in the 50s and 60s. At this point, however, market share is more important to producers than the per barrel price. Each is essentially saying the same thing to the market: “I’ll cut production if you cut first”. None of the oil producing states is willing to take the first step and, thus, they compete aggressively, keeping prices low.
For the time being, demand is clearly not keeping pace with new supply. The United States has barely returned to consumption levels common prior to the recession. The Europeans still consume just about half what they once did, and the Asian states maybe two-thirds of what they did prior. The reasons for the demand reduction are mostly tied to slow economic growth, but there is also the fact that fuel consumption has been reduced as business and the consumer elect to use less. Cars are more fuel efficient, as are trucks, trains and airplanes. The power plants are also more efficient, while new oil-fired operations are rare. There is also the issue of climate change and the desire to reduce pollution.
The states that have been feeling the impact of low oil prices have mostly been in Africa and the Middle East. The costs of production are high in Nigeria and Angola and the other states in Africa. They need per barrel prices almost double what they are now. The Middle East is divided between those that can maintain an efficient system (Saudi Arabia, Kuwait) and states such as Iraq, Iran and Libya that can no longer produce oil cheaply.
- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence