Low oil price: calm before the storm?

We've long maintained that global oil prices are not determined by scarcity or even the laws of supply and demand so much as by politics—the price rises or falls in response to war or comparative stability in the Middle East. Oil fields don't have to actually go up in flames—the mere fear that this will happen is sufficient to drive up the price: it is about perception. We've also noted that the global petro-oligarchs are hoping to reap a windfall from the multiple global crises, plugging the North American energy boom as a key to security and low prices. But ultimately, high prices are needed to fuel continued expansion of the industry, whether in North America, the Arctic, Persian Gulf or Caspian Basin. So, to an extent, the global price is manipulated—we are alternately told that energy self-sufficiency is reducing reliance on unstable global markets, and that instability threatens our "way of life" so we had better loosen burdensome environmental restraints on new exploitation. At the moment, we are on the first part of the cycle: After an initial price shock when ISIS seized northern Iraq, prices have now stabilized, and we are being told it is thanks to domestic fracking and tar-sands oil. Soon enough (just you wait) they will be surging up again, especially if (as seems all too likely) the Middle East continues to escalate. This much is admitted in a Sept. 15 National Public Radio report, "With Turmoil Roiling Abroad, Why Aren't Oil Prices Bubbling Up?"…

The price of oil has been falling — a drop that you may already have noticed at the pump. Gasoline prices have dropped noticeably since June, and oil is now well below $100 a barrel.

That decline has happened even as conflicts have flared in or near oil-producing regions. Normally, oil prices are expected to spike higher amid turmoil — so why have they been trending lower?

The global price did rise to just under $112 a barrel in June, when ISIS first swept into northern Iraq. But the price of crude has trended down since then — despite the U.S. decision to enter that fight, despite the conflict in Ukraine and despite sanctions levied against Russia, one of the world's largest oil producers, for its role there.

Then there's the fight between Islamist militants and the government in Libya, a significant oil producer.

So why, then, are petroleum prices falling?

"There are two factors to keep in mind," says Robin West, a senior adviser at IHS Global Insight. "One is supply, and one is demand."

It really is as basic as that, West says. "Frankly, the global economy is slow. Demand is low, and so there's very little growth in demand. And so, supply is strong, and demand is fairly weak."

The International Energy Agency made that point last week, when it said a weaker economic outlook in China and Europe is causing a remarkable slowdown in global demand growth. And demand is declining, West says, as global supplies surge due to the energy boom in North America — including shale oil production from North Dakota and Texas.

"There's another 3 billion barrels a day that's coming into the market and staying in the market," he says. "This has really changed the global supply-demand balance very substantially" — and helped bring more stability to the market.

Michael Levi, senior fellow for energy and the environment at the Council on Foreign Relations, says it is true that a surge in North American production has added significantly to global supplies. But he doesn't believe it is responsible for the decline in oil prices of the past three months.

"I think the U.S. oil boom has helped stabilize prices over the last few years, but that's because it's been a surprise," Levi says. "And it no longer is a surprise. And that leads me to conclude that people are expecting too much from it, in terms of stabilizing oil prices in the future."

Levi says the added production from North America has lulled market participants into believing they're in an era of stability.

"I think there is excessive complacency in the ability of the global oil market to absorb disruptions that we haven't seen yet," he says.

See the game of good-cop-bad-cop? IHS Global Insight reassures us, while the Council on Foreign Relations rasies the alarm. The aim is to keep us (as one politician put it a century ago) in a "salutary equilibrium between a dangerous and exaggerated apprehension and a proper degree of wholesome fear."

  1. Fracking approved in George Washington National Forest

    Despite strong opposition from both elected officials in the affected areas and environmental groups, the US Forest Service (USFS) has approved fracking in George Washington Forest. Straddling Virginia and West Virginia, this is the largest national forest on the east coast. It contains the headwaters of the Potomac River, which feed into the Chesapeake Bay and provide drinking water for millions of people. The USFS had initially proposed to ban fracking in the 1.1 million acre forest, the first outright ban of the practice in a national forest. But when the plan was released in 2011, energy companies exerted pressure on the USFS. About 10,000 acres of the forest are already leased to oil and gas companies, with private mineral rights existing under another 167,000 acres. The newly released plan will only allow fracking on that land, which is located in sparsely populated rural Highland County, Va. The plan also puts off limits another 800,000 acres that were available for drilling. (EcoWatch, Nov. 18)

    See our last post on the struggle for public lands.

  2. OPEC price war keeps oil prices low

    At the OPEC meeting in Vienna, Saudi Arabia's oil minister Ali al-Naimi prevailed in convincing fellow cartel members they must protect their market share from the US shale oil boom by keeping production high and prices low. As OPEC met, oil hit a fresh four-year low below $72 per barrel. (Reuters)