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The Energy Report for 12/09/2014
Price War Expands
This is becoming a word wide oil price war. Oil prices accelerated losses to a 5 year low after Iraq slashed prices for its oil. Iraq cut the price for Basra light at the lowest price in 11 years to a $4.00 a barrel to the Oman/Dubai benchmark local benchmark. This comes after the Saudi cut prices in an attempt to hang onto Asian oil market share that could be weaker as the Chinese stock market takes a hit overnight. China's government seems to want to let some air out of the bubble that has been building in the Shanghai stock market since they allowed in foreign investment into the market by not allowing lower rated bonds to be used as collateral. In a weird way oil is taking this as a positive initially because obviously the market was worried about the disconnect between the China's economic data and the Chinese stock market. Yet even as oil prices show some signs of revovery Kuwait says they are digging in for a long slog in the oil price war. The Saudis are saying they are trying to buy time as they adjust to the new normal, whatever that is.
Still the debate rages whether this price war is ultimately going to be good or bad for the global economy. A loyal reader of the "Energy Report" and Fox Business Network fan Emil Kaneti wrote in to say that "Lower oil prices are an unequivocal benefit for the global economy". Yes, sectors and entire states will suffer (as they did in 1986-88), but overall the impact is good for the global economy and not just consumers. Most analysis is the "tax cut" benefit to consumers. Some others will expand on the consumer benefit and state low energy prices are good for the industry as well. But low oil and commodity prices are good because they direct investment away from commodity industries towards knowledge based industries. It should be no surprise that productivity and growth slow during periods of high energy and rise during periods of low energy prices. Capital will be directed back to Silicon Valley and away from North Dakota. That is a positive for growth."
Emil seems to be sharing the view that many Central bankers around the globe have been pushing. The other side to the argument is that falling energy prices in 2008 really did not signal good things. In the U.S. permits for shale production have fallen dramatically. Reports that over 150 billion in global energy projects are put on hold does not really bode well for growth. Big oil is taking it hard as BP announced job cuts in response to the drop in prices. Reuters reported that ConocoPhillips would cut its 2015 capital budget by 20 percent, or about $3 billion, compared with this year, marking the biggest spending cut by a U.S. oil and gas company in dollar terms as global oil prices hit five-year lows.
The other concern is the deflationary aspects of falling oil. We know that Europe and Japan are trying to avoid deflation. Usually falling energy prices are a good thing for those economies yet the early returns seem to suggest that thus far they have not helped. Data out of Japan, with it recession despite the massive stimulus, suggests that there is more to an economy than lower prices for oil.
Jerry Deveney a loyal energy report reader and Fox Business Network junkie writes that he believes that this whole energy production boom and price collapses was orchestrated by the government. He writes that you have to wonder if the U.S. government knew about (the shale) oil reserve and potential and are now using glut to destabilize the regimes of Venezuela, Russia, and others. Hmmm, maybe they are that smart.
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Price War Expands
This is becoming a word wide oil price war. Oil prices accelerated losses to a 5 year low after Iraq slashed prices for its oil. Iraq cut the price for Basra light at the lowest price in 11 years to a $4.00 a barrel to the Oman/Dubai benchmark local benchmark. This comes after the Saudi cut prices in an attempt to hang onto Asian oil market share that could be weaker as the Chinese stock market takes a hit overnight. China's government seems to want to let some air out of the bubble that has been building in the Shanghai stock market since they allowed in foreign investment into the market by not allowing lower rated bonds to be used as collateral. In a weird way oil is taking this as a positive initially because obviously the market was worried about the disconnect between the China's economic data and the Chinese stock market. Yet even as oil prices show some signs of revovery Kuwait says they are digging in for a long slog in the oil price war. The Saudis are saying they are trying to buy time as they adjust to the new normal, whatever that is.
Still the debate rages whether this price war is ultimately going to be good or bad for the global economy. A loyal reader of the "Energy Report" and Fox Business Network fan Emil Kaneti wrote in to say that "Lower oil prices are an unequivocal benefit for the global economy". Yes, sectors and entire states will suffer (as they did in 1986-88), but overall the impact is good for the global economy and not just consumers. Most analysis is the "tax cut" benefit to consumers. Some others will expand on the consumer benefit and state low energy prices are good for the industry as well. But low oil and commodity prices are good because they direct investment away from commodity industries towards knowledge based industries. It should be no surprise that productivity and growth slow during periods of high energy and rise during periods of low energy prices. Capital will be directed back to Silicon Valley and away from North Dakota. That is a positive for growth."
Emil seems to be sharing the view that many Central bankers around the globe have been pushing. The other side to the argument is that falling energy prices in 2008 really did not signal good things. In the U.S. permits for shale production have fallen dramatically. Reports that over 150 billion in global energy projects are put on hold does not really bode well for growth. Big oil is taking it hard as BP announced job cuts in response to the drop in prices. Reuters reported that ConocoPhillips would cut its 2015 capital budget by 20 percent, or about $3 billion, compared with this year, marking the biggest spending cut by a U.S. oil and gas company in dollar terms as global oil prices hit five-year lows.
The other concern is the deflationary aspects of falling oil. We know that Europe and Japan are trying to avoid deflation. Usually falling energy prices are a good thing for those economies yet the early returns seem to suggest that thus far they have not helped. Data out of Japan, with it recession despite the massive stimulus, suggests that there is more to an economy than lower prices for oil.
Jerry Deveney a loyal energy report reader and Fox Business Network junkie writes that he believes that this whole energy production boom and price collapses was orchestrated by the government. He writes that you have to wonder if the U.S. government knew about (the shale) oil reserve and potential and are now using glut to destabilize the regimes of Venezuela, Russia, and others. Hmmm, maybe they are that smart.
[You must be registered and logged in to see this link.]
