Putin's Prayer
A large number of Oil pricing experts – taking this to mean the interaction of oil, finance and the global economy – would likely agree that $75 a barrel is a reasonable and sustainable price. One expert who might agree is Citigroup's Edward L. Morse, but I do not speak for him. For almost any major or minor oil producer and exporter, $75 a barrel, under present conditions, would be manna from heaven. This would include all OPEC states, Russia, Norway, Canada and Mexico, US oil producers (not only of shale oil), and UK North Sea producers.
Taking this last group of stressed oil producers, leading experts on British offshore oil and gas including Robin Allen and Sir Ian Wood have come out in the British press with doomster forecasts on what it would mean for British offshore oil producers if current prices held for 1 year or more, ahead. Wood's forecast is the loss of about 35 000 jobs and a huge cutback in development and maintenance spending in 2015-16. The decline of UK oil production would go into overdrive – just in time for the next bounce of global oil prices! Treasury receipts, for example, would also decline faster than expected as output decline was accelerated.
The only upsides for much cheaper oil – prices of $50 a barrel or less – are simply claims. One is that higher cost producers would be squeezed out - what we can call the Saudi "philosophy", but the ironic real world result would be an acceleration of oil's decline as a share of world energy simply due to accelerated decline of world total output of oil. This would simply extend the 30-year decline trend of oil in world energy - mostly due to periods of blatantly overpriced oil, making oil economically insecure as well as physically insecure, and accelerating its substitution.
For mass media and the consumer horde, the supposed upside of an oil price crash is cheaper fill-ups at the fuel station forecourt for the family car, and basically nothing else. Expecting major cuts in transport costs, food production costs, fertilizer and pharmaceuticals production costs and market prices are all easy to dismiss. Minor impacts perhaps, but no major fall in final market prices when governments have taken their tax cuts and corporations have taken their windfall profit gains.
The claim that much cheaper oil will produce much higher economic growth, either nationally or globally, is even easier to dismiss. The global economic impact of the 57% oil price crash in 1986-1987 followed by over 15 yers of ultra-cheap oil did less nothing for economic growth in the most oil-intensve economies – the OECD group of richer countries, then taking over 50% of world total oil ouput for around 15% of the' world's total population. Global economic history shows that "the growth economy" exported itself from the OECD group, to China, India, and other emerging economies, and especially so for China. As we know, China's energy economy through the key period of around 1985-2000 and still today can be summarized by one word. Coal.
Oil, the Dollar and Gold
To be sure, suggesting a "nice price for oil" using dollars as the currency has its own dangers. For easily-analyzed reasons and already easy to prove, falling oil prices tend to bolster the world value of the US dollar in the short term. This is of course illogical, but is a fact, meaning the appreciation of the USD due to falling oil prices will sooner (rather than later) unwind and reverse. It was therefore no surprise at all that during the 1985-2000 cheap oil period, and most famously by way of the Plaza Accord, the US reacted to the uncontrollable aggravation of its annual trade deficits, including but certainly not only due to oil imports, and was forced to browbeat and force its major trade partners to revalue their moneys. Most spectacularly this concerned Japan. This could or might have been the real "coup be grace" death blow for the Japanese "expert growth economy" and the start of Japan's economic decline which continues to this day. As we know, the essential basic goal of "Abenomics" is to drive down the world value of the yen.
Overpriced oil following the Arab oil embargo of 1973-74 (called "Arab" but including Iran and Venezuela!) most certainly underpinned the first version of Petrodollar Recycling, directly used by the US Treasury to rationalize and engage a masive increase in dollar-printing, starting a runaway process of "fiscal incontinence", well described by David Stockman. Incredibly, this continued after oil prices crashed in 1986-87, and continues to this day!
The Oil Shocks of 1973-74 and 1979-81 were also green lights for a massive growth of oil prices in US dollars, feeding off president Nixon "de-linkage" of gold from the dollar before the first oil shock, helping destroy the notion of a "right price for gold". If we were to try being logical about falling oil prices today, a real but not massive increase of gold prices in US dollars would come about, but the gold price and "what it means" is an even more convoluted subject than the "right price for oil"!
However we can be 100% sure and certain the USA is not seeking a stronger dollar, more like the opposite, and a rise of oil prices to $75 a barrel would tend, if anything, to slow or reverse the recent increase in the world value of the dollar.To be sure, exactly the same applies to the euro and yen, making it hard to have a triple devaluation – of the USD, EUR and JPY – against anything except oil and gold.
World Oil Output and Oil Prices
This could seem an easier subject than the above, but is not. Oil is definitely overpriced, even at $60 a barrel, in energy-economic terms, comparing the price of oil energy with energy from coal or natural gas, and in a few "niche' sectors, solar energy, windpower, geothermal energy, biomass and other renewables. In a large number of end-use sectors, energy conservation is still cheaper than oil energy, as well as coal and natural gas energy.
Also, the argument heavily detailed by the IEA and other sources – that high oil prices ensure continued global oil production and export growth – can be turned upside down. The oil, even if it is overpriced, is purchased, supplanting cheaper and more efficient alternatives, handicapping the economy by imposing and forcing the wrong energy choice. High oil prices also distort national (and international) investment choices – as Vladimir Putin suggested in his December 18 Kremlin conference. The oil is produced and is quite easy to sell, so this happens to the detriment of better investment alternatives, both in the energy sector and outside it. The OPEC states, in particular all suffer from the "curse of oil", for example the wanton neglect of national agriculture.
The UK offshore oil sector, like its Norwegian counterpart, is a classic example of mal-investment and over-investment, one example being the extreme high costs of final decommissioning and safe removal of gigantic and cumbersome offshore oil installations, making the downside and exit-from-oil an expensive prospect.
Not yet on the press and media radar screen, any sustained period of oil prices below about $50 a barrel will inevitably produce a major fall in world total oil output, further accelerating the global shift away from oil energy. Not at all ironically but automatically this would cause an epic "spike" of oil prices, setting the scene for another oil price crash – and the value of all other assets hung on the shaky clothes hanger of overpriced oil.
The solution, which we have to admit is utopic would be a return to oil prices around $75 a barrel and a programmed, agreed and planned global energy transition.