Falling Oil Prices – Who’s to Blame?

Falling Oil Prices – Who’s to Blame?

A great deal of nonsense is being talked about conspiracies behind the Saudi decision NOT to cut output - to dish the Russians, to dish the American frackers, to regain OPEC control etc, etc.  In plain fact it is all quite straightforward.

There is now a huge world surplus of oil (with masses more coming on stream in the next few years), a growing surplus of gas (both piped and LNG-traded), a flattening of energy demand growth everywhere - including in Asia - and not just because of recession, but because there has been a step change in energy-use efficiency (and there will be a lot more, just as much in China as elsewhere). And as Japan gets back to nuclear, under re-elected and strengthened PM Shinzo Abe, expect a further big easing in global oil and gas demand there as well.

In these conditions the Saudis (and Kuwaitis, and Emirates) are not going to cut production. Why should they? They know it will make no difference. All that will happen is that they lose market share. Even if OPEC was a disciplined group, which no longer is, non-OPEC producers would simply fill the gap.

All this is occurring even while several oil producing regions are being held back -e.g Iran under sanctions, Iraq because of the ISIS threat, Libya because of political and tribal chaos, Syria submerged in war, Nigeria because of northern problems and so on. Think what happens to world oil supply if any of these areas begin to pick up and add a few more million b/ds, for which they have ample capacity.

[Tweet "'no-one saw these conditions of glut and weaker demand growth coming'. Rubbish."]So with technology pushing supply up and demand down it takes no rocket science to see that we are in for a prolonged period of low oil and gas prices. This is good for consumers everywhere, nasty for countries relying on oil and gas revenues to keep them afloat (think Putin) and tricky for 'unaffordable energy' greens, and nuclear builders who will now need even bigger subsidies - which one hopes they just won't get - and will now be really forced to cut costs right down harder than ever to survive.

The media economic commentators and so-called experts say they are surprised and 'no-one saw these conditions of glut and weaker demand growth coming'. Rubbish. It’s all been obvious for ages. Read my book 'Old Links and New Ties', published a year ago. Even highly paid bank economists, and even the IEA, seem to have been caught off guard. The dear old economics profession seems to miss every major turning point and event.

Eventually, as high cost producers and smaller ventures living on cash flow get squeezed out, and as new projects are postponed or cancelled, supply will gradually fall back and the next price rise will begin. That's what happens with all commodities, even the ones where both supply and demand are riddled with political interferences.

The only proviso foreshortening this otherwise quite lengthy low price phase now upon us is a really high impact event somewhere in the international energy system, such a major terrorist attack on a key oil installation, a sudden government overthrow in an oil producer state, a new war, someone letting off a nuclear weapon, another giant natural disaster, or some further really stupid political decisions - all, alas, possible -especially the last.”

David Howell. The Right Honourable Lord Howell of Guildford, was the Minister of State at the Foreign and Commonwealth Office for International Energy Policy in the UK between 2010 and 2012. He also served in Margaret Thatcher’s government as Minister of State at the Department of Energy in 1974.