By JOHN KIMELMAN
With the sharp drop in global oil prices emerging as perhaps the most significant economic event impacting markets this year, I thought I’d assemble a round-up of recent stories and perspectives on the topic.
Though prices on Monday recovered a bit from their lows, the price of oil is off by close to 40% since June, a surprising development that led one blogger to argue that the price decline meets the definition of a “black-swan” event.
In a column over the weekend for The Wall Street Journal, Daniel Yergin, one of the world’s most influential energy consultants, hints at the possibility that oil could start heading up in price as supplies tighten up in the wake of low prices and demand for energy picks up a bit.
Indeed, the price of oil rebounded a bit Monday on news that U.S. drilling could decline in the wake of oil prices hovering around $70 a barrel.
Though oil prices fell last week on news that the OPEC member nations voted not to cut oil production, Yergin writes that “OPEC members will likely come together again to reassess the market, especially as the stronger winter demand fades with the approach of spring.”
He adds that a “pickup in world economic growth, or new disruptions or geopolitical crises in the Middle East or North Africa or elsewhere, could send prices up again.”
Yergin’s piece also points out that the “biggest impact of lower oil prices on future output may well be not in North America, where many people are looking for it, but in the rest of the world.”
He writes that “even before the collapse in prices, major oil and natural-gas companies had become preoccupied with the continually rising costs of developing new supply and were heeding the call from investors for capital discipline,” he adds. “ This price decline will turn this preoccupation into an obsession. The result will be a slowdown and reduction in major new investments around the world. “
In his column for Bloomberg, Mohamed El-Erian, chief economic adviser for German financial- services giant Allianz, doesn’t predict where the price of oil is heading.
Instead, he focuses on the risks to the global economy, and of Russia in particular, of continued low prices.
For one thing, he writes, low oil prices “lead to immediate cuts in energy companies’ investment budgets, both in the traditional sector and among promising alternative technologies. As a result, longer-term energy potential will be undermined, both overall and in its more environmentally friendly components”
He also argues that weak oil prices could be disruptive for the commodities markets as a whole, and for securities issued by energy companies and oil-exporting countries.
“Given the weight of investments in these securities in certain emerging-market and high-yield indexes, the result could mean generalized pressure to sell in these asset classes,” he adds.
But the truly “ugly” outcome could be the impact on Russia, he writes. “Roiled by sanctions, a collapsing currency and large capital flight, Russia now faces the effects of a sharp fall in oil revenue,” El-Erian writes. “Companies pushed to the brink may be looking for government support at a time when the authorities’ ability to respond is curtailed by the decrease in their own revenues. The effect will be to strengthen the winds of recession, inflation and financial instability in Russia.”
“How this affects the global economy depends in great part on Russian President Vladimir Putin,” writes El-Erian. “Up to now, Putin has been able to resort to regional geopolitical adventures, most notably in Ukraine, to counter and divert popular dissatisfaction in Russia over the domestic economy. And he has done so notwithstanding the resulting imposition of Western sanctions on his country.”
El-Erian asks two interesting questions: Will the additional domestic downturn lead Putin to change course on Ukraine as a way of lifting Western sanctions and alleviating overall pressures on the economy? Or will the internal pressure push him to extend his regional adventures?
“Should Putin take the second course, the West may impose more economic sanctions, including on the energy and financial sectors, and Russia would probably follow with counter-sanctions on energy supplies to Europe,” he concludes. “This could push Europe into recession — which would negate much of the good impact that lower oil prices have had on the global economy.”
For readers who’d like a simple primer on why the price of oil has collapsed, I offer up a weekend piece in the Washington Post by writer Chris Mooney.
The piece might offer up a bit of context to better understand what pundits like Yergin and El-Erian are getting at.