December 18, 2014

Oil Bust

The collapse in oil prices since the summer of 2014, accelerating over the last month, promises to have lasting affects on international politics. Provoked by Saudi Arabia's determination to drive down the world price, the oil price collapse is sending out rippling waves that touch the entire planet. Herewith a series of charts intended to put what has happened into perspective.

First off, the fall in prices itself. This chart shows West Texas Intermediate Crude, the benchmark U.S. price. Brent (traded in Europe) was a few years ago at a spread of over $20 dollars a barrel, but the spread is now only 3-4 dollars. Here is a twenty year chart of the price of U.S. oil, followed by a two year chart

Recall that only a few years ago the cost of the marginal barrel of oil was approaching $100, and one gets a sense of how many projects are rendered uneconomic by a price at $55 a barrel. For projects already underway, of course, on which the capital has already been spent, the marginal cost of operating a well is far lower. The longer a low price regime lasts, paradoxically, the greater is likely to be the spurt upwards when it occurs (since future supply will be reduced by the paring back of investment programs in the here and now).

The following chart from the Financial Times (December 15, 2014) shows the dollar cost of net imports and exports from selected countries. The data, though labeled as 2014, comprises totals for the previous four quarters as of the third quarter of 2014. As most of the price drop has occurred in the fourth quarter of 2014, this will dramatically affect the amounts reported in the chart.

Probably the average price of oil over the next year (from the 4th quarter of 2014 to the 4th quarter of 2015) will be higher than $55, but it would not be unreasonable to forecast that revenues for exporters and costs for importers will be some 60-70% of the figures reported above.  Even if prices have rebounded six months from now, the interim period will throw the entire sector (and many countries) into crisis. It is in the nature of markets to overshoot; it is not inconceivable (though I think unlikely) that the lows of late 2008 ($35 a barrel) will again be tested.

More to come.

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