"Oil, Recessions and the Hummer Comeback" --Business View of Saudi's Lowering Oil Price
by Barry Ritholtz - October 15th, 2014, 9:45am
Are Falling Oil Prices Driven by Rising Supply or Falling Demand? (Yes)
It’s been impossible to miss the headlines screaming about oil: Prices Plunge! Multiyear lows! Supply glut! Dollar rally!
My concern is less about a supply glut and more about falling demand. Despite a dearth of signals that a recession may be on its way, falling oil prices can be a sign that consumers are getting tired or are running out of discretionary income. In a post-credit-crisis recovery, where households have been deleveraging, this could have far-reaching ramifications.
We know that Europe’s economy has slowed as austerity bites. Reduced spending by both households and governments is cutting energy consumption. Add to that slowing growth in China, which also is causing ripples through the rest of Asia, and you have the conditions for falling crude prices.
Declining demand puts pressure on prices, but what about supply — how much is that driving prices lower?
Consider Saudi Arabia’s recent actions. Rather than defend prices by lowering production, it chose instead to cut prices last month. The Saudis appear to want to avoid repeating the mistakes of the 1980s. The strategy now seems to be to let prices fall to a level that might spark more consumption.
There’s the rub: Oil prices have remained stubbornly high the past decade, causing a massive search for more oil, as well as its possible alternatives. The net result is a world awash in energy products: Shale oil and tar sands have added to the supplies of crude. Let’s also add that the U.S. automobile fleet is much more efficient. Fracking has created a huge supply of natural gas in North America, a cheap and cleaner alternative to oil, especially for home heating and electricity production. Add coal-based liquefied natural gas to the mix, and suddenly OPEC looks more vulnerable than it has in decades.
http://www.bloombergview.com/articles/2014-10-15/oil-recessions-and-the-hummer-comeback
---------------
Facing New Oil Glut, Saudis Avoid 1980s Mistakes to Halt Price Slide
By Rania El Gamal
DUBAI Tue Oct 14, 2014 1:40pm EDT
Reuters) - Still haunted by its failed attempt to prevent a steep drop in oil prices by slashing production by almost three quarters in the 1980s, the world's top oil exporter Saudi Arabia is determined not to make the same mistake again.
The oil glut of the 1980s, the early days of the modern crude market and a distant memory for most traders, has resurfaced recently in conversations with Saudi officials and veteran analysts who see it as the defining moment behind the kingdom's new strategy to protect medium-term market share.
While the latest 25 percent slide in oil prices to below $90 a barrel is so far modest compared with the 1980s slump that took crude from $35 to below $10, many observers see similarities in a global market that is on the brink of a pivotal turn from an era of scarcity to one of abundance.
Three decades ago, the spike in prices caused by the 1973 Arab oil embargo and Iran's 1979 revolution sapped global oil demand, while the discovery of oil offshore in the North Sea spurred a new influx of non-OPEC crude.
With world markets awash in oil, Saudi Arabia embarked on a strategy of defending prices, which at the time were largely set by exporters rather than the nascent futures market. The kingdom slashed its own output from more than 10 million barrels per day in 1980 to less than 2.5 million bpd in 1985-86.
Other producers failed to follow suit, however, both within the Organization of the Petroleum Exporting Countries and among new petroleum powers such as Britain and Norway. Prices fell into a years-long slump, leading to 16 years of Saudi budget deficits that left the country deeply in debt.
Finally, in 1985, Riyadh shifted gears, revving up output and cutting prices in a move that triggered a final slump in markets but ultimately paved the way for a gradual recovery.
"The big mistake was that they continued to cut production to try to prop the prices and the price fell anyway," said analyst Yasser Elguindi of Medley Global Advisors.
Instead they should have fought for market share, allowing "higher cost producers to shut in as the price fell - which is what they are doing now.”
Last week, Saudi officials briefed oil market participants in New York on the kingdom's shift in policy, making clear for the first time that Saudi is prepared to tolerate a period of lower prices - perhaps as low as $80 a barrel - in order to retain market share, Reuters reported on Monday.
http://www.reuters.com/article/2014/10/14/us-saudi-oil-policy-analysis-idUSKCN0I229320141014