October 22nd, 2014
06:27 PM ET

A power shift in global oil dynamics

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By Global Public Square staff

Since the financial crisis of 2008, the global economy has been in slow motion. As a result, commodity prices have fallen dramatically. But there was one great puzzle – the price of oil had continued to go up, up, up.

In 2007, before the crash, oil cost $72 a barrel on average. By 2012, Brent Crude was trading at over $111 a barrel on average, a second year of historically high levels, according to the U.S. Energy Information Administration.

Well, now the trend has turned. Prices have dropped, dramatically. Last week, Brent oil, the global benchmark, fell to about $80 a barrel, nearing a four year low.

Why?

Well, today the world is awash in oil. There's too much supply and too little demand. The world's largest and second largest economies are probably the most responsible. That would be the United States and China. The China piece of this story is fascinating.

Ruchir Sharma, the head of Morgan Stanley's emerging markets investments, points out that over the last decade, Chinese oil demand had been increasing on average 7 percent every year. Until now. The Chinese juggernaut's seemingly insatiable appetite for commodities like oil has screeched to a halt.

Growth in Chinese demand for oil is currently running at about zero. This comes as a huge surprise. China accounted for about 50 percent of the increase in oil demand over the past 10 years, Sharma points out.

The second reason for the plummeting oil prices – too much supply. The newest report from the International Energy Agency, the energy industry's watchdog, shows that global oil supply in September was almost 2.8 million barrels per day higher than the previous year.

It's not all about the Saudis pumping more. It turns out there's a new player in town that's worrying the old oil giants.

That's the United States. Thanks to the shale revolution, demand for oil is down. But additionally, domestic oil production is at record levels. Citigroup predicts that the U.S. could export as many as one million barrels of oil per day by 2015.

And the oil prices could dip even lower. Reuters reported last week that Saudi officials were saying they would "accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two." They hope perhaps that by doing this they will discourage the search for shale, natural gas, and other such alternatives to their oil.

But are these low prices really sustainable?

Well, Sharma's team at Morgan Stanley compiled data for GPS that shows what each country would have to charge for a barrel of oil in order to balance its national budget. Saudi Arabia just has to charge $88 per barrel to balance the books, according to Sharma's analysis. This is up from only a few years ago as it expanded its welfare state in the wake of the Arab Spring. Still it's affordable for the Saudis.

But, not every country is as lucky. Libya, for instance, needs oil to be at about $180 per barrel to break even. Iran has to charge $143 to be out of the red. Russia, which is highly dependent on energy, has to charge roughly $110 a barrel. (And remember, Russia's economy is already being squeezed by Western sanctions, so much so that declining oil prices have decimated the ruble, Russia's currency). In fact, energy fluctuations have historically played a large role in Russia. The collapse of the Soviet Union was prompted (in part) by a plunge in oil prices, which weakened the government. Perhaps President Putin ought to watch his back, with oil now trading at 30 dollars below his break-even point.

So, let's see how this plays out and how low the Saudis are really willing to push the price of oil. However low they go, we are witnessing a true shift in the power dynamics of oil. Sharma put it best when he said: "There are winners and losers. The winners are in the oil consuming countries, the losers are in oil producing countries. So, basically, the world has been turned on its head from a decade ago."

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Topics: Energy • What in the World?

soundoff (66 Responses)
  1. deniz boro

    welcome to the water wars. However you are already too late. Global warming issue was real enough and the map was commonly advertised. All the nice waterfronts are already taken.

    October 25, 2014 at 5:33 pm | Reply
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