Oil prices surge: vindication is tedious
Well, we hate to say "We told you so," but... We told you so. We've been told for the past several years now that the depressed oil prices were permanent, that thanks to fracking and the surge in US domestic production, the price was now immune to Middle East instability, dramatic spikes and "oil shocks" forever banished. Well, futures for Brent crude just hit $63.37 per barrel, with the spot price for West Texas Intermediate at $57.34. (Panorama.am, Investing.com) Creeping toward the $100 per barrel we were so recently assured was a thing of the past. OilPrice.com blames Trump's announcement that the US will move its embassy in Israel to Jerusalem, which has of course unleashed unrest in the Palestinian territories and instability fears across the Middle East. But the jump really began almost exactly a month ago, seemingly prompted by the leadership purge in Saudi Arabia. That brought the Brent crude price up to $62, its highest level since July 2015. (The Guardian, Nov. 6)
And there are plenty of other factors building toward a price surge. Qatar remains diplomatically isolated and under embargo from its Gulf state neighbors, and this crisis has escalated to alarmingly bellicose rhetoric. Bahrain announced last month that it has the right to unilaterally take disputed territory awarded to Qatar by an International Court of Justice decision in 2001—raising the prospect of war between two major producers, with dire implications for the whole region. (Jurist, Nov. 6)
Nigerian production is suddenly in jeopardy as the oil-workers union PENGASSAN threatens a nationwide strike in response to what it calls a "mass sacking of workers that joined the union." There already was a mass stoppage at Exxon's Nigeria oil-fields in response to union-busting lay-offs earlier this year. (OilPrice, Reuters, Dec. 7; Reuters, Dec. 6)
And in crisis-wracked Venezuela, oil minister Eulogio del Pino and head of parastatal oil company PDVSA Nelson Martínez were summarily sacked and placed under arrest—to be replaced with members of the military. (BBC News, Nov. 30) This caused The Economist to note that Caracas' Chinese creditors are getting impatient with missed payments, and to warn that Venezuelan "[o]utput could plummet if the country or PDVSA fall into full-scale default," which "could push up oil prices" globally.
So, the popular conventional wisdom (avidly promoted by the industry) notwithstanding, the Middle East remains strategic and even determinant where the global price is concerned. Yes, the US and Russia both now have rough parity with Saudi Arabia as top global producers, with the US actually in the top position in 2016 according to the Energy Information Administration. But this is partially because Saudi Arabia has cut production in a bid to jack up prices. (Bloomberg, Feb. 20) There is still enough oil in the Persian Gulf to make or break any global power that controls it—or fails to. And it is this region that is up for grabs politically due to chronic unrest—not (for now) the US or Russia. And the resources of Nigeria and Venezuela, if not determinant, are still significant enough to be influential. Which is why we have repeatedly predicted that with the inevitable deepening of the world political crisis, prices would be rising again.
There was indeed a modest price spike after the ISIS irruption in 2014, but the US was able to contain it by boosting domestic production. This trick isn't going to work forever. Oil prices are still chiefly determined by politics—not geology or production levels or even market demand. And the political contradictions on the global stage, and especially around the Persian Gulf basin, are only deepening.
This is the second time we've been through this. Amid the price spike in 2011, we reminded readers that we had predicted the spike back when prices were chronically depressed in 2006. Prices began to rise in 2007 (along with chaos in Iraq), and in the subsequent market hyper-priapism, we were similarly told that inflated prices were permanent—and often blamed on the flawed thesis of "peak oil." Then they crashed, and the "peaksters" mostly retreated into cowardly silence. Be sure that they will be coming out the woodwork once again as prices rise in the coming months—oblivious to what is really driving the spike.
They never learn, do they?