The Fire Sale of the Millennium and the Politics of Oil

Global stock markets have been in freefall beginning in China and spreading through the wider world. While there are many causes for this decline, one of the likely culprits is the precipitous fall in the price of oil. This decline is attributable tothe changing nature of its global supply and demand.

Supply

• Fracking technology has raised US production of oil to historic levels. Having been pioneered domestically, the technology is being marketed globally. Many countries including China have shale fields exploitable through fracking.

• The détente between Iran and the rest of the world and the end of economic sanctions means that Iran will be selling oil in the global market for the first time in many years. Iran has already announced that it will be expanding its production significantly.

• Venezuela’s political change and likely moderation may enable it to finally welcome foreign industrial partners to help it upgrade and manage its aging infrastructure and increase its production through the exploitation of new offshore reserves.

• OPEC has continued to avoid setting production quotas, permitting member states to sell as much oil as they can pump.

Demand

• Increasingly efficient engines and the adoption of hybrid and electrical vehicles are reducing the oil requirements of many countries.

• Awareness of climate change is creating political pressure to reduce the use of fossil fuels like oil.

• Global economic malaise especially in large markets such as China and India have reduced global demand for oil.

Growing supply and shrinking demand is putting downward pressure on the price of oil with no end in sight. Saudi Arabia, the nominal leader of OPEC is clearly aware of this. They have chosen not to curb OPEC’s production in the hopes of driving shale oil producers out of the market. Low oil prices also benefit their regional political aspirations by reducing the revenue of other oil dependent competitor states such as Russia and Iran as well as ISIS. It’s a fine line however as Saudi Arabia and other Gulf states are also heavily dependent on oil revenue. Their stock markets are falling even faster than more prominent ones.

Now comes word that Saudi Arabia is considering the sale of its crown jewel, its oil monopoly ARAMCO. For many years, it was fashionable to speak of peak oil production; that point in time when the oil production reached its zenith. Perhaps the question today should be: have we reached peak oil consumption? Oil is used overwhelmingly to power vehicles but the advent of electric vehicles is already steadily eroding that market. Fracking activities are scaling down as the price of oil falls below production costs but oil companies are ready to flip the switch once the price begins rising again and resume production. Iran, which has large, inexpensively exploitable oil reserves and is interested in rebuilding its economy after years of sanctions will be producing oil at a furious pace for the foreseeable future.

Saudi Arabia’s decision to sell ARAMCO may be the result of a calculated decision that oil production will continue to exceed demand in the short to medium term at the least. Selling its petroleum assets is likely to be a far less risky course of action for a country dependent on oil revenue. What this means for the rest of the world depends on where you are. Oil dependent states will suffer economic and perhaps socio-political unrest. For oil importers, low prices may prove to be an economic boost. What is true globally is that the global oil market is entering a period of extended uncertainty and that even heavy weights such as Saudi Arabia are hedging their bets.

Originally published at gildshire.com.