The International Monetary Fund last week called on G20 finance ministers to boost global demand through fiscal means amid concerns over further oil price declines, the dim outlook of emerging economies and volatile financial markets.
I think my readers are familiar with the last two issues, but many would be surprised seeing the oil price plunge by 70 percent from the peak level.
The causes are complicated. Last Saturday, NYMEX light sweet crude oil futures closed at US$32.78 per barrel. Although that’s higher that the price of below US$30 in earlier days, it’s far from the peak level of above US$100 recorded in mid-2014.
When will the downtrend end?
No businessman can endure a long-term loss. The US shale gas producers’ cost is about US$30 to US$60 per barrel.
If the target is to hit the booming shale gas business, that should have been achieved by now.
The closer the oil price approaches the “attackers’” production costs, the larger the possibility they would retreat.
Also, the development of renewable energy is a long-term theme. It is inevitable.
According to reports, the production cost of a barrel of crude oil varies from country to country: US$52.5 in Britain, US$36.2 in the United States, US$29.9 for China, US$17.2 for Russia, US$12.6 for Iran, US$12.3 in the United Arab Emirates, US$10.7 in Iraq, and only US$9.9 and US$8.5 in Saudi Arabia and Kuwait respectively.
If those numbers are true, some countries must be in a hurry to start output talks.
Iran is a major variable. Sanctions on the country’s oil exports were suspended just this January.
It has exported nearly 3 million barrels of crude oil every day after the lifting of sanctions, and is expected to ramp up its oil exports.
Although the major oil-producing countries have agreed not to increase output, Iran’s re-entry into the market will worsen the oversupply.
Moreover, given the low oil production costs of the Middle East producers, they should have the confidence to win the “protracted war”.
But their economies have been relying so much on income from oil exports and the governments have got used to being big spenders.
People in those countries would not make it easy for the authorities. Conflicts between the masses and the authorities are likely to increase.
I hope the oil-producing countries can get united within the year, allowing the oil price to bottom out.
This article appeared in the Hong Kong Economic Journal on Feb. 29.
Translation by Myssie You
[Chinese version 中文版]
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