15 January, 2016

There have been any number of important, even critical, developments around the world over the last eighteen months — but the one that towers over all of the others, indeed is directly or indirectly responsible for most of them, is the collapse in the price of oil (and natural gas).


Almost needless to say, fierce disagreement attends the vexed question of what caused this extraordinary decline. But the one thing that cannot be argued with is that in the summer of 2014, the price of a barrel of West Texas Intermediate — the main American crude benchmark — was between $100 and $110 a barrel, while that of Brent, its European counterpart, was in the $110-120 range, whereas today both of them are struggling to remain above $30.


In passing, let me note that the collapse-within-a-collapse of the premium that Brent had over WTI, and that has now turned into a slight discount, is an important issue in its own right, and has major implications for Europe, especially the UK — but that can wait for another time.


The widespread belief that someone or some group of someones — nations, perhaps even persons — is directly responsible  for what has happened, is indicative of the relentless rise of conspiracy theories that characterizes the current age.


Thus the list of suspects is long, encompassing Saudi Arabia (obviously), Iran (less plausibly, but more obviously), OPEC as a whole, Russia (back in its traditional bogeyman role), America and, in addition to others, combinations of these. For example:  The Saudis and the Americans are in cahoots to gut Russia (each for their own reasons); Russia and Saudi, or Russia and Iran (which also controls Iraq) are doing it to kill off the resurgent American energy sector; and so on…


Excess supply or deficient demand?


The common thread linking these suspects is that they are the main oil producing nations, in other words they supposedly control supply. You might think that the suppliers would work together to reduce supply and force prices UP — think OPEC in 1973 — but no, now one or more of them are increasing supply to force prices DOWN and thereby inflict damage on rival producers.


This level of analysis, which clearly requires Einstein-like intellectual capabilities, is sufficient to blow a large whole in most or all of the conspiracy theories. The speed, scale and intensity of the price decline are surely overwhelming evidence that this is not something that was planned, let alone executed, by any single entity — least of all one that is a major producer and whose budget and, in many cases, national existence, depends on oil being above 100, 80 or 60 dollars .


If the producers weren’t responsible, the alternative is that the primary cause of the collapse is demand-side deficiency, which is a convoluted way of saying China. The collapse of oil is merely — ‘merely’! — one major side-effect of the mega-event of this decade (so far…), namely the end of the Chinese economic miracle and of the attempt to extend that miracle by artificial means.


The rise of China (and its spin-off positive effect on many other countries, from Brazil to Korea) was the driving force behind the rise in the price of oil — and of virtually every other commodity in the world — from the late 1990s onwards. The demise of the Chinese growth story is now the driving force behind the decline, collapse and slump in the prices of oil, copper, and everything else, beginning in 2011-2012 and gradually gathering speed since then.


We are nowhere near the end of this process, although there are some grounds for hope that we are at or near the middle of it. It therefore behooves everyone, especially people with financial assets, who delude themselves that they and/or their brokers or asset managers are the geniuses who generated all those profits for them over the years — when in fact they were just passengers on the boats that the rising tide lifted — to try and change their way of thinking. The upheaval in the markets over the past two weeks, like the previous bout in August, are strong hints of the need to make that change before it’s too late.


So long Saudi…


One key element of the change required is to stop assuming that because something has been in existence and behaving in a certain way for a long time, it will continue to do so. A simple example is the Kingdom of Saudi Arabia — ‘Hatred’s Kingdom’, as Dore Gold titled his book on the topic a decade or so ago. This entity is simply a marriage of convenience between a desert tribe and an extreme Islamic sect, the Wahhabis, consecrated by huge amounts of black gold conveniently located under their parish.


But the Saudi royal family is now a busted flush, for both personal and financial reasons. Even if the Iranians don’t undermine and destroy them — that delightful regime may not last long enough to do so — the Ibn Saud family business, aka Saudi Arabia, is under greater stress than ever before. But before you raise a toast to its demise, spare a thought for what has happened in and to Libya. The demise of the evil Gaddafi was a genuine (Western) conspiracy which everyone considered entirely justified — but no-one bothered to think through what might come next. You would have thought that lesson had been learnt a few years earlier in Iraq…

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