Mitchell is the pioneer of hydraulic fracking, the breakthrough that has increased U.S. crude oil production by 80% since 2008. Combined with more conservation, and growth hiccups of varying severity in emerging economies, all that oil has pushed the price of crude down nearly 30% since July even as U.S. economic growth picks up.
That brings us to this week’s meeting of the Organization of the Petroleum Exporting Countries, and all the lousy regimes whose suffering it will lay bare.
No such discussion would be complete without mentioning Vladimir Putin’s Russia, which Sen. John McCain has aptly described as a gas station masquerading as a superpower.
Russia needs $101 crude to balance its budget, not the $79 Brent price on Tuesday, Goldman says. Russia’s finance minister recently said the crude crash is costing them $90 billion to $100 billion a year, and Western sanctions over Putin’s Ukraine adventurism cost another $40 billion.
Oil is in a perfect storm: Too much new supply is coming on line just as demand is dropping because Europe is on the verge of a new recession while Japan is already there.
China’s growth, which drove the much-hyped “commodities supercycle” of the 2000s, also has slowed a lot.
Russia may be the biggest loser of all from falling oil prices. It needs crude of $100 a barrel to balance its budget and keep its citizens quiescent while President Vladimir Putin and his cronies line their pockets in Russia’s kleptocracy.
Result: The Russian ruble has plummeted 30% this year, and Russia has already spent 15% of its foreign-currency reserves to prop up its faltering currency and economy. Moody’s recently downgraded its sovereign debt to two notches above junk, while Putin himself acknowledged that a “catastrophic” fall in oil prices was “entirely possible.” “I wouldn’t rule out a debt default crisis if the price of oil continues to fall,” wrote economist Ed Yardeni.
The current commodities supercycle ran from 1998 through 2011, said Driscoll — the same length as the last one. “We think of the peak in the commodities supercycle as roughly early April 2011,” he told me.
That’s when copper topped $4.40 a pound; it’s barely above $3 now, a drop of more than 30%. Gold, which peaked around $1,900 an ounce that year, changed hands near $1,150 on Monday, almost 40% off its high.
And Brent crude oil, trading just above $80 a barrel, is more than 40% below its July 2008 record high of $146.
How low can prices go? Driscoll says oil may bottom out around $50 a barrel over the next 10 years, and gold at about $800. That’s more than three times the yellow metal’s lowest price from 1999 and around its peak in the previous supercycle.
Morgan Stanley said the over-supply in the global crude market is “vastly overstated”, and likely to reverse soon.
Tumbling oil prices are a bonanza for global stock markets, provided the chief cause is a surge in crude supply rather than a collapse in economic demand.
HSCB says the index of world equities rose 25pc on average over the twelve months following a 30pc drop in oil prices, comparable to the latest slide. Equities rose 19pc in real terms.
But it comes at a time when stocks are already high if measured by indicators of underlying value. The Schiller 10-year price earnings ratio is at nose-bleed levels above 27. Tobin’s Q, a gauge based on replacement costs, is stretched to near historic highs.
Much of the immediate glut is due to a supply surge of 800,000 barrels a day in Libya after export terminals were reopened over the early summer following a truce by tribal militias. This truce is already unravelling. Output has dropped by 400,000 barrels a day since September.
“Libya is getting worse by the day,” said Alastair Newton, head of political risk at Nomura. “Iraq is producing at the top of its band, and Russia’s output always goes down in the winter for weather reasons. The 2m barrel surplus could disappear in no time.”
DYI
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