written 27
May, 2018
published 2 Jun 2018
The price of gasoline is going
up. My standard of reference is Chevron
regular, at $3.59/gallon last time I looked.
The increase is caused by global pressures on oil prices, due to
physical, economic, and political forces.
Last week the price for benchmark Brent crude oil hit $80/barrel, the
first time since 2014.
The global economic recession after
the 2008 crash lowered the demand for oil, but production remained the same,
creating a worldwide glut, which depressed prices. This was good for the consumer, but oil
producers were hard hit. For decades, discovery
of new oil has not kept pace with depletion of existing oil fields. The search for new oil is expensive, and it
can take years to develop a new field. This
costs more energy and money because easily accessible oil has been found and,
in many cases, already depleted. The new
operations lose money when market prices are low, but loans borrowed to finance
the development must still be paid, so production continues.
Fracking
is a tertiary extraction method to get the last drops of oil out of the
ground. It is expensive to drill the wells
and pump sand to fracture the rock so oil can be retrieved. Individual deposits are relatively small and
well production drops off within a few years, so new wells must be constantly drilled. The oil industry claims this can go on for
decades, but sceptics point out that current output comes from drilling the productive
"sweet" spots, which are now mostly developed. Heavy investment in fracking generated a boom
in US oil production, but at a loss of $250B to date. Higher oil prices are required to make
fracking profitable.
Few global oil producers make a
profit with low oil prices. Saudi Arabia
organized an OPEC production slowdown in 2016, to reduce global oil supply. This slowdown and growing oil consumption due
to increased global economics, depleted the oversupply and oil prices rose. While higher prices are good for oil producing
countries and corporations, they are not good for the global economy. Oil is a fundamental part of the economy and
if it is too expensive, the economy can't function. Sudden changes in oil pricing can be
economically disruptive.
By June 2008, the price of oil had doubled
to $160/barrel over the previous 18 months.
The US economy was fragile, over extended with massive debt in the
subprime housing market, and the rapid increase in oil prices popped the
bubble.
There are similar global conditions
today. A recent column in the UDJ
pointed out the precarious condition of the Argentine economy. The global economy is connected, so a collapse
in one place affects the whole world. Real
estate prices in the US are approaching pre-crash levels, almost doubling in
the last 6 years, while wages are stagnant, and there is increasing debt in
sub-prime auto loans. The Chinese
economy was booming in 2008, which helped the global economy recover, but China
is growing more slowly today. In 2008,
the Fed lowered interest rates and threw trillions of dollars into the economy
to prevent a depression. Interest rates
today are already low, and the national debt is more than twice as large, so the
options are reduced.
2018 global oil consumption is 99
million barrels/day. With little stored
supply, the market is tight, and reduction in production due to geopolitics, can
cause abrupt increases in prices. The
decline of the Venezuelan economy has reduced their oil production by half, with
risk of a compete production collapse.
The US withdrawal from the Iran nuclear treaty and re-imposition of
economic sanctions, will reduce Iranian production. Moving the US embassy to Jerusalem further
inflamed tension in the area. The threat
of an Israeli/Iranian war is a real concern, which would likely reduce
production in the entire region. Any of
these situations could cause a sudden reduction in oil supply, causing a sharp rise
in prices, and renewed economic upheaval.
We are stuck with the fact that oil
prices the consumers can afford are too low for oil producers to make a profit,
and prices that profit the oil industry are too high for our debt-ridden
economy to carry.
