A BOARD showing currency exchange rates in Moscow on Monday, when oil prices fell to their lowest in five years. Russia’s ruble dropped more than 4 percent against the dollar while Malaysia’s ringgit, also oil-dependent, was on course for its biggest two-day fall since the 1997-8 Asian financial cri.
(photo credit: REUTERS)
There have been any number of important, even critical, developments around the world over the last 18 months; merely listing them would require half a page of the size of the one you are reading. But there is one event or development that towers over all of the others (indeed, it is directly or indirectly responsible for most of them), and that is the collapse in the price of oil (and natural gas).
The one thing that cannot be argued with is that in the summer of 2014, the price of a barrel of West Texas Intermediate, the main American crude benchmark, was between $100 and $110 a barrel, while that of Brent, its European counterpart, was in the $110-$120 range. Today, both of them are struggling to remain above $30.
In passing, let’s note that the collapse within a collapse of the premium that Brent had over WTI, and that has now turned into a slight discount, is an important issue in its own right, and it has major implications for Europe, especially the UK. But that can wait for another time.
Almost needless to say, fierce disagreement attends the vexed question of what caused this extraordinary decline.
The belief that someone or some group of someones – nations, perhaps even persons – is directly responsible is widespread and is indicative of the relentless rise of conspiracy theories that characterizes the current age.
Thus the list of suspects is long, encompassing Saudi Arabia (obviously), Iran (less plausibly, but more obviously), OPEC as a whole, Russia (back in its traditional bogeyman role), America and, in addition to others, combinations of these. For example, the Saudis and the Americans are in cahoots to gut Russia (each for their own reasons); Russia and Saudi Arabia, or Russia and Iran (which controls Iraq as well, don’t forget) are doing it to kill off the resurgent American energy sector; and so on… The common thread linking these suspects is that they are the main oil-producing nations; in other words, they supposedly control supply. You might think that the suppliers would work together to reduce supply and force prices UP – think OPEC in 1973. But no, now one or more of them are increasing supply to force prices DOWN and thereby inflict damage on rival producers.
This level of analysis, which clearly requires Einstein-like intellectual capabilities, is sufficient to blow a large whole in most or all of the conspiracy theories. The speed, scale and intensity of the price decline are overwhelming evidence that this is not something that was planned, let alone executed, by any single entity, least of all one that is a major producer and whose budget and, in many cases, national existence depends on oil being above $100, $80 or $60 .
That leaves the option that the primary cause of the collapse is demand-side deficiency, which is a convoluted way of saying China. The collapse of oil is merely – “merely”! – one major side effect of the mega-event of this decade (so far…) – namely, the end of the Chinese economic miracle and of the attempt to extend that miracle by artificial means.
The rise of China (and its spin-off positive effect on many other countries, from Brazil to Korea) was the driving force behind the rise in the price of oil – and of virtually every other commodity in the world – from the late 1990s onward. The demise of the Chinese growth story is now the driving force behind the decline, collapse and slump in the prices of oil, copper and everything else beginning in 2011-2012 and gradually gathering speed since then.
We are nowhere near the end of this process, although there are some grounds for hope that we are at or near the middle of it. It therefore behooves everyone, especially people with financial assets, who delude themselves that they and/or their brokers or asset managers are the geniuses who generated all those profits for them over the years – when in fact they were just passengers on the boats that the rising tide lifted – to try and change their way of thinking. The upheaval in the markets over the past two weeks, like the previous bout in August, are strong hints of the need to make that change before it’s too late.
One key element of the change required is to stop assuming that because something has been in existence and behaving in a certain way for a long time, it will continue to do so. A simple example is the Kingdom of Saudi Arabia – “Hatred’s Kingdom,” as Dore Gold called it in a book of that title a decade or so ago. This entity is simply a marriage of convenience between a desert tribe and an extreme Islamic sect, the Wahhabis, consecrated by huge amounts of black gold conveniently located under their parish.
But the Saudi royal family is now a busted flush, for both personal and financial reasons. Even if the Iranians don’t undermine and destroy them (that delightful regime may not last long enough to do so), the Ibn Saud family business, aka Saudi Arabia, is under greater stress than ever before. But before you raise a toast to its demise, spare a thought for Libya. The demise of the evil Gaddafi was a genuine (Western) conspiracy, and everyone thought it entirely justified – they just didn’t bother to think what might come next. You would have thought that lesson had been learned a few years earlier in Iraq… www.pinchaslandau.com