What’s up (or down) with oil prices?

I’m sure you’ve noticed that gas prices have come down at the pump.

If you follow the economy or the stock market, you’ve certainly noticed that oil prices have come down … a couple of years ago it was selling for over $130 per barrel … now it’s selling for under $35.

Most pundits chalk it up to slowing economic growth in China.

But, that sounded too simple to me, so I started asking some questions … why’s it happening? who’s getting helped or hurt?

 

image

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Here’s my current theory of the case …

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There is a slow down in economic growth …. especially in China.

Slower economic growth means less demand for oil and lower oil prices.

That is, until suppliers rebalance their output to support prices.

Usually, OPEC just cuts its aggregate production.

This time, Saudi Arabia bolted from the pack and increased crude oil output. See chart above.

Say, what?

Why would the Saudis do that?

There are a couple of theories that are floating around.

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First, the Saudis are on record as being disappointed with the growing U.S. fracking industry which they view as a long-run threat.

Specifically, The Financial Times reports that Saudi Arabia is getting ready to borrow funds in the international bond market to further finance its big effort to protect its market share in the oil world and make life impossible for U.S. shale. Source

Industry experts generally agree that frackers breakeven when oil is around $70 per barrel.

So, if the Saudis want to hurt the U.S. frackers,  then $35 oil is a way to do it.

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Second, the Saudis are disappointed with Iran and Russia for supporting Assad in Syria, and “punishing” them  in oil markets.  Source

Apparently, the Saudis think they have deeper oil reserves and more staying power to fight an oil war with their adversaries.

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Third, following from the above point, there’s some thinking that the Saudis are simply stepping up in the battle to eradicate ISIS.

I wondered why the Saudis weren’t more active in the anti-ISIS military efforts.

Answer: Due to “internal political considerations”, the Saudis can’t bomb & kill ISIS.

But, apparently, they can tighten the noose on ISIS financials.

How?

By suppressing oil prices.

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I’m also intrigued by the impact on President Obama’s prized Climate Change Initiative.

The cheaper that oil & gas are, the harder it is to nudge people into hybrids and electric cars.

Hmmm.

Maybe the Saudis are climate-deniers …

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#HomaFiles

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One Response to “What’s up (or down) with oil prices?”

  1. Deepak Gupta Says:

    Prof Homa,

    You post intrigued me on this topic. For last several days i have been researching on this topic and I have published a post on linkedin related to it.

    “Oil Consumption: An untold story” on @LinkedIn https://www.linkedin.com/pulse/oil-consumption-untold-story-deepak-gupta

    Wish you and yours a very Happy and Prosperous 2016!

    Thanks,
    Deepak

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