Oil Price Crisis

By Alfonso Elizondo   

Created Friday February 5 2016

The company Bloomberg Business has compiled the average of 17 forecasts in different countries from which the conclusion is drawn that by the end of 2016 WTI oil price would reach $ 46 per barrel, while Brent will cost about $ 48. It is expected that the United States will reduce its current production of 620,000 barrels per day according to the information from its Energy Agency. However, the International Energy Agency (IEA) also expects oil production in countries outside OPEC to be reduced to 600,000 barrels per day. 

These figures have been confirmed by several major international banks such as Citigroup, UBS and Societe Generale, while Goldman Sachs experts estimate that in the last quarter of 2016, production in the United States will fall to 8.49 million barrels per day. Although on the 20th January WTI fell to $ 26.55, its lowest in nearly 13 years, while Brent closed at $ 27.88 and OPEC traded at $ 23.85. This was followed by a rebound due to possible production cuts by OPEC and Russia, even if these possibilities were not confirmed. 

These very low prices have affected Western economies because in the last five years everyone has been accustomed to low economic growth with high oil prices. Therefore many companies went bankrupt and the global economy is heading towards a recession. The serious difficulties faced by oil-producing countries are reflected negatively on investment plans in the energy sector and in 2015 these were reduced by 20%. The excess availability of hydrocarbons led to the fall in demand for alternatives, including renewable energy reserves. Also cheap money has disappeared too, as that exporters were confused and invested in a variety of projects across Europe. 

The IEA (International Energy Agency), which advises the United States and other industrialized nations, said in a monthly report in January that global oil demand would rise by 1.21 million barrels per day in 2016, this would mean a decrease of 150 thousand bpd from last month’s forecast. The cut in demand is due in part to a weaker global economy and makes estimates of the IEA on demand growth in 2016 are lower than those of the other two major agencies, whose reports are closely followed by the marketplace: the Energy Information Agency of the United States (EIA) and OPEC. 

Oil supplies from non-OPEC nations fade quickly and the stronger slowdown is the one of the United States where production of oil and condensate has begun to fall. OPEC increased the crude oil supply in September to 90mil bpd, according to figures estimated by the IEA, which expects oil production of the group to remain around 31.5 million bpd in the coming months. 

Production from countries outside OPEC is estimated to decrease in 2016, while drilling have been contracted in the United States. The summary of the situation in million barrels per day would be: USA 12.4, Saudi Arabia 11.6, Russia 10.6, China 4.4, Canada 4.3, Iran 3.4, Iraq 3.3, Arab Emirates 3.2, Kuwait and Mexico 2.8. 

In the midst of this conflict the Russian Prime Minister Arkady Dverkovich said his country could not consider an agreement on prices with OPEC through a reduction in production, because its oil sector is largely owned by the private sector and is not under direct state control. Although oil prices got to a low level for an extended period of time it would be inevitable to have a correction in productive investment and this would lead to a certain decrease in production, even though it wouldn’t be a resolute act of the State. Something similar and as cautious was said by Alexander Novak, Minister of Energy, regarding any negotiations between OPEC and oil exporters that are outside of that group. 

Many and varied theories might arise from this crisis in oil prices, but it is obvious that regardless of what will happen between the large producers and OPEC there are several visible events on the world stage that can help the development of prospective oil price in the coming years: 

  1. There is no doubt that the world is entering a strong economic decline that soon will generate a recession, perhaps worse than that of the 30s.   
  1. The main military powers are developing very modern war weapons and processes, where the use of energy based on hydrocarbons is excluded. 
  2. The strongest military powers – excluding China – are bankrupt, so they will try to circumvent any confrontation of great proportions, where ocean liners, large fleets of aircraft and weapons of mass destruction are required, even thought they will try to preserve their military companies and mercenaries to fight in not very large territories where they can use their new mechanisms such as drones, robotics and artificial intelligence. 

Addendum: All this leads to an immediate future with the lowest rate of war violence and destruction of the planet. So the apocalyptic scenarios described by some analysts and commentators of geopolitical events regarding the present and the immediate future are totally unexplained.