Six months ago, OPEC and some non-OPEC oil producing countries agreed to cut production in order to raise the price of a barrel of oil. The main reason for this is that in just 8 short years, the price of oil has fallen from $130 per barrel to now just under $50 per barrel . But six months into the process, oil producing countries and companies are starting to figure out just how tough this endeavor will be. Countries and companies alike have shut down production to their economic limits and have found that this has not raised the price of oil enough to their satisfaction. The continued pressure on the price of oil is both a supply and demand issue. Some of the problem can be attributed to more oil having access to get to the market. Also, the demand algorithm around the world for oil is changing with sustainable sources grabbing an increasing larger part of the market.
Not 10-15 years ago, the world was of the opinion that the oil supply would likely be used up in a couple of generations. Prices were over $100 per barrel for more than a few years. Is anyone familiar with Hubbert’s theory of “Peak Oil”? This first gained major traction in the 1970’s and again in the 2000’s as the price of oil reached over $100 per barrel. The main issue that constricted the supply of oil were the wars in Iraq and Afghanistan. It removed them from the marketplace. Also restrictions on Iran also left their oil generally off the market. Now that both Iraq’s and Iran’s oil is back on the market, prices are falling. Also, when the market was riding $100 per barrel, the US market has increased production with the Dakota Bakken fields now reaching the market. Now, without conflict removing oil from the market, and increased oil production capabilities with shale in the US and around the world, oil will likely continue to have a high supply.
While demand has still increased, it has increased at a slower rate than expected. The reason is mainly that the demand has been stunted by the growth of renewable sources of energy. It is getting hit with vehicles on a growing macro level. I touched on this in an earlier post (here). This success has spawned new technologies in other industries to find out new non-oil ways of manufacturing.
This all leads to the reason behind the post. The only likely action that will successfully bring back the price of oil to higher than $50-60 per barrel is war. War between countries creates a situation that restricts supply and kicks up demand. It is not a coincidence that the price of oil dropped considerably as military operations in the country slowed down starting in 2008. Supply increased and demand from the US military declined. Most of the big oil producing countries (Russia, Saudi Arabia, Iraq, Iran, Kuwait, etc.). are dependant on oil for their GDP growth. While there are areas of the United States that are dependant on oil, the country as a whole is diversified enough to handle the downturn in prices. These countries should be watched carefully over their behaviors in order to raise the price of oil. One important lens that needs to be used when analyzing certain countries actions is the “price of oil” lens. If these production cuts don’t raise the price, watch out for the bombs.
