What You Need to Know About the Oil Price War
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- Published on Tuesday, 09 February 2016 23:00
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A Socialist Project e-bulletin .... No. 1219 .... February 10, 2016
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What You Need to Know About the Oil Price War
Eric Ruder
The dramatic crash in the price of oil is rewiring the circuits of global capitalism by creating enormous volatility in the world's stock exchanges, hammering banks that made billions of dollars in loans to energy firms, and ravaging the budgets of the world's largest oil-producing countries. Today, oil is trading at around $30 a barrel -- roughly 75 per cent below its price of $114 a barrel in the summer of 2014 -- that is, a year and a half ago. The collapse has been as sharp as it has been sudden, confounding economic analysts, energy producers and global financial centers.
Daniel Yergin, one of the world's leading oil analysts and the... author of The Prize: The Epic Quest for Oil, Money and Power, predicted in early November 2015 that oil prices were at or near the bottom of their fall -- when oil was selling at $47 a barrel. Yergin, like other analysts, counted on two factors to put a floor under the price of oil. One, he assumed that Saudi Arabia and the rest of OPEC (the Organization of Petroleum Exporting Countries) would curtail production in order to keep prices from falling further, and two, he expected a sharper contraction in production among ‘higher-cost’ producers -- such as Canada tar sands, U.S. shale oil and various offshore drilling operations -- that would further limit supply.
Instead, Saudi Arabia has kept pumping, and though the low price of oil will likely wipe out more expensive fracking and tar sands operations in North America, it's not happening fast enough to bring supply in line with falling global demand -- at least so far. By January 13, Yergin was reassuring investors that oil probably wouldn't go as low as $10 a barrel. Dramatic oversupply is what drove oil prices down to $10 a barrel in the late 1990s, when a sharp contraction in growth that swept through Asia's developing economies weakened demand.
