The oil price collapse is not just another bust cycle
Oil is the most valuable commodity in world trade, so any significant change in its price—whether upward or downward—has far-reaching economic consequences. Because oil also plays a pivotal role in world politics, such shifts can have equally momentous implications for international relations. It is hardly surprising, then, that the recent plunge in prices has generated headlines around the world. Many giant energy firms have announced massive cutbacks in employment and investment, and major producing countries like Russia and Venezuela have been forced to scale back government expenditures. While some analysts speculate that prices have now reached bottom and will soon begin climbing again, there are good reasons to believe that this descent is not just another cyclical event but rather the product of something far more profound and durable.
Before examining these factors, let’s consider the sheer magnitude of the price collapse. Last June, Brent crude was selling at about $115 per barrel, ensuring substantial wealth for the major oil corporations and oil-producing countries. Most analysts assumed, moreover, that prices would remain at this elevated level. As recently as October, for example, the Energy Information Administration of the Energy Department predicted that the average price of crude in 2015 would be $102 per barrel, about the same that it’s been for the past five years. Just three months later, Brent had fallen to as low as $46 per barrel, with some experts predicting a further slide into the $30s.
Why this sudden plunge in oil prices? That old mantra, supply and demand, is mostly to blame. The high prices of recent years have been driven, in large part, by ever-increasing demand from China and other rapidly developing countries of the Global South. Chinese consumption jumped from 7 million barrels per day in 2005 to 11 million in 2014; comparable increases were posted by India, Indonesia, Brazil and Saudi Arabia. Production increased to satisfy all this added demand, but not always fast enough to keep up—thus explaining those high prices. Over the past six months, however, the fundamentals have shifted. The economic doldrums in Europe and tepid growth elsewhere have resulted in less than expected levels of demand, while the flow of crude from America’s shale formations has reached flood proportions, producing a glut of supply and driving prices downward...more