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Page added on October 19, 2015
Daniel Yergin: Where’s all the stimulus from the 50% drop in oil prices?
The fall in oil prices heralds a momentous shift in world energy markets from the BRIC era of emerging markets (Brazil, Russia, India and China) to the Shale Era.
An oil tanker sits anchored off the Fos-Lavera oil hub near Marseille, France, Oct. 15. © Reuters
Yet there are two continuing puzzles about the price collapse. First, the 50% fall in prices has not been the global economic stimulus that might have been expected. So far, at least, it has not been a Fourth Arrow for the world economy. Is this telling us something about deeper troubles ahead for the world economy?
The second puzzle concerns geopolitics. The oil market is usually very sensitive to geopolitics. Geopolitical risk is high now: The Middle East is in crisis. The West’s relations with Russia are the worst they have been since the end of the Cold War; the stand-off in Syria makes things even more dangerous. Meanwhile, tensions are rising in the South China Sea. Yet none of this has caused oil prices to spike. The reason is that none of these factors have yet directly threatened the flow of oil. To put it simply, while there is a surplus of geopolitical risk, the surplus of oil is much greater, at least for now.
As we consider the forces of supply and demand that are keeping oil prices low, we need to remember that a geopolitical crisis or a more direct threat to the flow of oil could unexpectedly intervene in the market and send prices up again.
As it is, however, the collapse certainly marks a historic change in world oil markets — from strong demand and tight supplies to ample supplies and weaker demand growth. Put simply, the world is in a much better position in terms of oil than was the case just a few years ago.
For the decade that began in 2004, the dominant theme in the world economy was emerging markets. That’s where economic growth was happening. During those years, China’s gross domestic product increased two and a half times and India’s doubled. Compare that to the growth of the U.S. economy, 16%; the European Union, 10%; and Japan, 6%.
The rapid growth of emerging markets generated what became known as the commodities supercycle. It seemed that demand would only grow and prices would only increase, whether you were talking about iron ore, copper or oil.
Oil companies and other commodity producers hastened to increase capacity to meet the unexpected surge in demand that came with rapid urbanization and industrialization. Oil prices rose from $20 to $25 a barrel at the beginning of this century to around $100 a barrel from 2011 to 2013. More than anything else, it was China’s enormous appetite for commodities that drove up prices. Between 2003 and 2013, China accounted for 45% of all growth in global demand for oil. Over roughly the same period, China was responsible for 52% of the growth in demand for basic chemicals and plastics.
It seemed to some that this supercycle would run for many more years. But cycles, by definition, don’t go on forever. In fact, IHS’s nonenergy Materials Price Index reached its peak in April 2011, then began to decline. Since July 2014, that decline has turned into a rout, with the index falling 45%.
Oil was the exception. Oil prices actually reached a peak of $115 a barrel in June 2014, when it appeared the Islamic State group might lay siege to Baghdad. But the Islamic State was stopped, and thereafter the underlying weakness in oil prices started to become apparent.
The first reason for the dramatic price decline has been what has happened in the U.S. — the shale revolution and the dramatic increase in the country’s oil production. Little more than half a decade ago, the “peak oil” thesis was pervasive — that the world was going to run out of oil, as well as natural gas. How the world has changed! A few months from now, the U.S. will begin to export liquefied natural gas and may begin to export crude oil.
The breakthrough in shale — hydraulic fracturing and horizontal drilling — occurred more than a decade ago. It only became apparent with natural gas in 2008 and took a few more years with oil. But the impact proved enormous. Between 2008 and April 2015, U.S. oil output increased by 4.7 million barrels per day, which was almost a doubling. The increase was greater than the output of each of the OPEC countries except Saudi Arabia. The International Energy Agency made the startling prediction that within a few years the U.S. would overtake Saudi Arabia and Russia as the world’s No. 1 oil producer.
But this growth was, for a couple of years, offset by supply disruptions elsewhere, such as in Libya, and by the reduction in Iranian exports owing to sanctions. Yet by 2014, the relentless growth of U.S. supply was leading to a surplus in the world market.
At the same time, the basic dynamic of the world economy was changing. IMF Managing Director Christine Lagarde captured it when she spoke about the “new mediocre” — growth in the world economy was less than expected. In particular, China was slowing down, moving, as China’s premier put it, from “high growth” to “medium high growth.” That meant the accelerating growth in its demand for commodities was over.
In the face of the surge in supply and weakness in demand for oil, Saudi Arabia and the Gulf countries made a historic decision last November. OPEC members decided not to cut production to support prices, reasoning that if they did they would only have to cut production again. Why, they argued, should their “low cost” oil “subsidize” the “high cost” oil elsewhere? They would only cut, they said, if everyone else did as well. And by that, they meant Russia in particular. The discussion still continues.
It was expected that prices would fall, but the surprise was that prices fell much more than had been anticipated. The reason is that many analysts underestimated the resilience of U.S. shale production. This revolution, led by “independent” U.S. companies, is still unfolding with continuing innovation and productivity improvements.
The IHS’s Upstream Performance Evaluator allows us to examine the production characteristics of every oil well in the U.S. One key thing we have learned is the wide variability in shale oil wells. Some are big producers; some are marginal producers. In 2014, we discovered, just 30% of the new wells were responsible for 80% of the new production. In other words, there is great room to be more efficient. We expect that, by the end of this year, every dollar of spending on new wells will be 65% more efficient than was the case in 2014.
This ability to be more efficient, to focus on the more productive opportunities, is why U.S. oil production has continued to increase in 2015, after the price collapse. Many companies were saying they could now be as successful at $65 a barrel as they had been at $100 a barrel.
That is why oil prices have fallen further. U.S. oil prices in the $40 to $50 range are now putting a great deal of financial pressure on U.S. producers. As a result, we expect U.S. oil production to fall by about 10% from last April to next April. This will help to rebalance the market. The market will also be rebalanced over the next few years by the decisions oil companies are making to postpone and delay new projects — or cancel them altogether.
Yet, at the same time, if sanctions on Iran are lifted as a result of the nuclear deal, Iranian oil exports will probably begin increasing next spring. The 400,000 to 600,000 barrels a day that are expected would offset much of the anticipated decline in U.S. output and mean continued weakness for oil prices, at least in the first part of 2016.
But the question remains: Why is cheaper oil not providing the big stimulus to the world economy that would have been expected? Until recently, it was assumed that “the reasonably strong U.S. economy” (as the head of the Boston Federal Reserve recently described it) was the bulwark of global growth. And we are seeing higher growth in demand for oil this year. According to our IHS Automotive data bases, SUV sales are now 56% of new vehicle sales in the U.S., compared to under 50% in 2012, which points to higher gasoline consumption. Moreover, motorists in the country are driving more miles. Yet the global demand response is not as large as a 50% drop in price would suggest.
This gets to the basic question: Does the end of the commodities supercycle point to deeper problems in the world economy? Chinese economic growth has been a foundation for the world economy since 2004 and was the first source of rebound from the 2008 financial crisis. But China’s economy is now slowing. How much is subject to much debate.
It is not just a question of China’s economy, as large as it now is, its heavy debt load and the signs of turbulence there. Rather it is the nexus of a slowing China and emerging market countries that have been so tied to Chinese growth. The signs are evident not only in lower commodity prices and collapsing economic growth (Brazil!) but in the fall of currencies, capital flight and high levels of emerging market debt.
This specter caused a worried U.S. Federal Reserve to abruptly pull away from its expected course of action and not raise interest rates.
In these circumstances, lower oil prices reflect the extraordinary buildup of a major new source of supply from the U.S.; they are also sending a more troubling message about the possibility of further weakness in the global economy.
Daniel Yergin
Daniel Yergin is Vice Chairman of the research firm IHS. He is author of “The Quest: Energy, Security, and the Remaking of the World Economy.”
40 Comments on "Daniel Yergin: Where’s all the stimulus from the 50% drop in oil prices?"
Mike616 on Mon, 19th Oct 2015 7:31 am
Let’s not forget we went thru:
1) Enron
2) The East Coast home heating oil price spike.
Pointing out the vulnerability of families to Wall Street price manipulation.
Only a FOOL would not increase their home efficiency, buy a hybrid, and upgrade to Energy Start heating systems.
You don’t allow yourself to be EXTORTED by the energy industry.
Mark on Mon, 19th Oct 2015 7:46 am
Could it be that most people are getting too poor to afford oil & it’s downstream products even at depressed prices?
eugene on Mon, 19th Oct 2015 8:13 am
Mike616 comment is truly a “fool” displaying couple of things to me. Makes an extremely good salary. The vast majority of us cannot possibly afford increasing our home efficiency, a new car and upgrading home heating systems. Most, if not all comments, on these sites is by upper class people.
The article states fracturing and horizontal drilling developed in the last decade. Not true. They’ve been around for several decades. And the assumption that efficiency improvements can be made forever is simply ignorant.
Wells 65% more efficient than in 2014?
The article is just plain Yergin.
makati1 on Mon, 19th Oct 2015 8:18 am
Could it be that the average person is using the oil price break to try to get out of debt and save for the future? Or is unemployed and just unable to afford gas at any price?
Another worthless article for a paycheck.
Mike616 on Mon, 19th Oct 2015 8:21 am
Insulation isn’t expensive.
You can do it yourself.
You either pay yourself with the insulation buy or you pay Wall Street crooks and Exxon more.
Efficiency pays better than the Stock Market.
Everyone can afford to do something.
And you’re seeing it now.
paulo1 on Mon, 19th Oct 2015 8:36 am
As 616 beat me to it, insulation is cheap. Furthermore, clear plastic films over the windows in winter is also inexpensive. If you don’t want to buy the kits then buy a roll of 6mm poly….it is cheap like borscht. Plus turn down the heat and put on a sweater and I would guess heating costs could be cut in half.
Everyone can afford to do something including “just say no”. Say no to the new car bought on time, the new clothes, meals out including coffees and a donut, and the next thing you know you’ve got some money and breathing room.
Yergin wonders why the economy is poor? Simple, people don’t have any money to spend no matter what the cost of energy is. Welcome to Globilization, slave labour rate countries, and now robot factories.
ghung on Mon, 19th Oct 2015 8:37 am
eugene- “The vast majority of us cannot possibly afford increasing our home efficiency…”
Last fall I helped an old friend blow an extra 12″-16″ of borated cellulose insulation into their attic. The cost was about $250 (machine ‘rental’ is free at Lowes and Home Depot if you buy the bails of insulation there). Another $40 worth of caulk went a long way towards sealing leaks in the structure. The less-than-$300 payback took about 2 months. Their heat is all electric, and they noticed a rather large savings on their next bill. They also got a small credit on their taxes (they don’t pay much in taxes, so their credits will be used over several seasons).
That one efficiency job put more money back in their pockets almost immediately.
JuanP on Mon, 19th Oct 2015 8:42 am
This article is a load of Yergin. Yergin smells, sounds, and tastes like Yergin. I don’t read Yergin so I skipped it.
Davy on Mon, 19th Oct 2015 8:42 am
Mike, have you ever heard of diminishing returns to technology and development. Nothing wrong with things like insulation in a micro sense but in the big picture economics and cost benefit trump the idea of efficiency.
Many times today our quest for efficiency is not truly a net gain. Many times people are selling upgrades for reasons of profit and not what is beneficial and long term economic. Why don’t you market lifestyle changes like Jimmy Cater did in the 70’s. That was long ago before you were born but never more relevant.
Davy on Mon, 19th Oct 2015 8:47 am
G-man and Paulo, your simple and low tech ideas on insulation are the key. My negativity is referring to the glitzy and extravagant efforts we see so much today. Cost benefit is critical on both ends of doing and not doing.
rockman on Mon, 19th Oct 2015 9:21 am
“Yet there are two continuing puzzles about the price collapse. First, the 50% fall in prices has not been the global economic stimulus that might have been expected.” I wonder if Danny Boy is really just that ignorant of how slowly the global economy changes? Or maybe he just felt he needed a little exposure in order to justify his high consulting fees? LOL.
ghung on Mon, 19th Oct 2015 9:27 am
Understood, Davy. Efficiency-at-scale seems to invoke Jevons’ Paradox; those savings will generally be exploited by some other profit-seeking enterprise in our ultimate extractive economy. That’s one reason I focus on the local. The aim isn’t to in any way reduce our collective level of mass-scale energy overshoot, but to increase resilience, locally, and to get others to think in those terms. When folks see that it only takes a few cords of wood to heat our rather large home over a typical season, and that we also get our hot water (lots of it) from solar or the same wood stove that heats our home, they want the same kinds of things.
Just because most folks these days are slaves to hyper-complex processes for their every-day needs doesn’t mean everyone has to be. If more people re-learned that, maybe we wouldn’t be in such an awful place, collectively.
Personally, by applying a few simple concepts, many of which require few, if any, ongoing inputs (passive solar, great insulation, good structural design and orientation, etc.) our home costs almost nothing to live in. No reason millions of others can’t have the same thing, except that they’ve been spoiled into ignoring the obvious, or programmed into thinking that a high-energy lifestyle is preferable. Many will find out soon enough that they can’t afford what main stream society has to offer. Best to get ahead of the curve and make other arrangements.
It’s been near, or below, freezing at our place the last 5 nights and we haven’t even used the wood stove yet. It was 66 degrees F in our living room this morning, and will be in the upper 70s shortly after noon, with the slab and other thermal mass soaking up that heat. I can live with that.
BobInget on Mon, 19th Oct 2015 9:56 am
Soon a oil prices started to drop so did boom time employment. Blue-Collar workers who were making 75 to a 100 G’s a year were first laid off.
Most of the younger Men spent as fast as they made it. No longer. It was shale that sped the recovery, it’s shale’s demise bringing it down.
Dredd on Mon, 19th Oct 2015 10:48 am
CPR doesn’t always work.
Civilizations always die.
Historically, the conversation is not about whether this one will die too.
The conversation is about whether it will be murdered, or will commit suicide, the only other choice.
The vast majority of those civilizations that existed before the current one committed suicide (Toynbee).
Extinction, it’s not just for Polar Bears (The Extinction of Charleston).
penury on Mon, 19th Oct 2015 10:54 am
The economy of the world is in decline. Think about that, less energy, fewer goods manufactured, lower trade levels, an endless succession of wars, the greatest mass extinction since humans arrived on the planet. etcetera etcetera. Keep hoping for the happy times but, maybe there is no way back from this predicament.
Plantagenet on Mon, 19th Oct 2015 11:11 am
When you’ve got large portions of the population out of the labor force and subsisting comfortably on various government subsidies, as is the case in the EU and USA, there really isn’t much point in them going back into the labor force, even if the price of gasoline falls. During the Great Depression when people lost their jobs they were desperate to get new jobs. Now when people lose their jobs, they can rub along for quite awhile and do OK. There are currently lots of job openings in parts of the mid west, for instance, but people no longer are willing to move far from home just for a job.
BC on Mon, 19th Oct 2015 11:48 am
There’s no “stimulus” because the world economy is in recession, including the US, only we don’t yet collectively know it, as was the case in 2008 and 2001.
Below are data to imply that resumption of QEternity will occur sooner rather than later:
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2brV
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2bs2
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2boQ
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=29Kh
And the banks are getting the jump on the Fed’s next phase of QEternity:
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2bsA
marmico on Mon, 19th Oct 2015 11:50 am
It was shale that sped the recovery, it’s shale’s demise bringing it down.
Bullshit. Roustabouts are employment rounding errors.
GregT on Mon, 19th Oct 2015 12:05 pm
“Why is cheaper oil not providing the big stimulus to the world economy that would have been expected?”
Because “cheaper oil” still isn’t cheap enough.
dave thompson on Mon, 19th Oct 2015 12:35 pm
Plant, you say,”When you’ve got large portions of the population out of the labor force and subsisting comfortably on various government subsidies……” only exposes your prejudiced view of the working poor and unemployed, as the jackass that you.
marmico on Mon, 19th Oct 2015 12:37 pm
GreggieTee, How many times does it take for you to understand that the mean production and supervisory worker works less time to travel 100 miles in 2015 in superior comfort, safety and communication with less pollution than in 1965 when your parents moved to Vancouver?
GregT on Mon, 19th Oct 2015 1:05 pm
marmi-noo,
How long is it going to take before you figure out that driving a car 100 miles has zero bearing on the overall well being of the economy? That would be like a terminally ill cancer patient being obsessed with an ingrown toe nail. Irrelevant.
marmico on Mon, 19th Oct 2015 1:12 pm
No wonder you enjoy Davy-boy from Green Acres: a fucking demented innumerate word salad prattle flag waving goat sodomizing asshole. 🙂
GregT on Mon, 19th Oct 2015 1:27 pm
Crawl back into your hole loser.
Baptised on Mon, 19th Oct 2015 1:31 pm
“Where’s all the stimulus from the 50% drop in oil prices”. I am paying $2.29 per gallon reg. now, was paying $3.49 per gallon reg. @ $100+ per barrel. Plus a huge jump in engine and transmission oils. Yergin is con man. Also ” But now the China economy is slowing” it is not slowing. The RATE is slowing.
onlooker on Mon, 19th Oct 2015 1:41 pm
Because “cheaper oil” still isn’t cheap enough.” And because consumers around the world are relatively poor. Oh yeah Marmico crawl and creepeth back into your hole.
Apneaman on Mon, 19th Oct 2015 1:46 pm
Without fail, whenever there is a Yergin article, starry eyed Yergin super-fanboy nony-marm comes slithering out of it’s hole with renewed vigor. Danny Y, hero to all FF fanboys. Every time Danny is in town for a speaking engagement Marmy-noon gets all prettied up and heads down to the convention center. He always buys another copy of “The Prize” and stands in the autograph line, just so he can get close to the great man. He has 14 signed copies. My hero…swoon.
GregT on Mon, 19th Oct 2015 1:57 pm
When gasoline prices in Vancouver first crossed the $1.00/litre mark in July of 2005, it was a very big deal. People everywhere were absolutely freaking out. Here we are 11 short years later, and some people think that gasoline is cheap at $1.15/litre. It really is bizarre how short the average human being’s attention span is.
GregT on Mon, 19th Oct 2015 1:59 pm
Oops, 10 short years later.
onlooker on Mon, 19th Oct 2015 2:00 pm
Yes the same Yergin who said and I quote “People think of the Earth as having a certain amount of oil the way you might have a certain amount of money in your bank account,” “But in reality, the ultimate amount available to us is determined both by economics and technology.” Enough said.
shortonoil on Mon, 19th Oct 2015 2:11 pm
We think that it is probable that long term submergence in Econ 101 hypothesizes, in conjunction with habitual barrel counting is likely to result in the early onset of Alzheimer. Mr. Yergin does not remembered that even though petroleum prices have fallen by more than 50% that there are still no additional buyers for it. Obviously, he can’t remember that oil was $100 per barrel not that long ago.
The fact that depletion must eventually reduce the value of oil to the economy to the point that it is not worth buying has apparently completely slipped his failing mind. We would remind him of that inevitable outcome, but he would probably just immediately forget it.
http://www.thehillsgroup.org/
peakyeast on Mon, 19th Oct 2015 2:32 pm
@paulo1: Concerning insulation.
We have put up plastic foil on frames temporarily until I find time and energy to make real thermo windows. And since we made a frame we put plastic on both sides. Thus having 3 layer windows.
It works like a charm. I actually believe that the real deal thermo glass windows will be worse.
Also I just installed a heat pump on my own (SCOP=3.8).
The heated part of the house is 103m2 – while we do not have low temperatures yet it looks like its paying off big time.
Last year without heatpump we used an average of 6$ per day using petroleum. The problem here was that the small oven we had could not go below 0.3liter/hour – so we had +24C in the house when it was >5C outside.
With the heat pump we can choose our temperature more precisely – I set it at 20C during daytime and 18C at night.
Currently this is costing about 1$ a day to heat the house (temperatures outside being around 10C).
Before I insulated the house we could not even heat 10m2 with an electric panel (750W) at this time.
Insulation is a great investment. There can be no doubt about it. And its easy to install yourself.
John Orr on Mon, 19th Oct 2015 2:45 pm
It’s not the price of oil is the problem it’s the greedy UK rulers who add another 70% tax here…bastards!!!!….
Sissyfuss on Mon, 19th Oct 2015 6:38 pm
Looks like Yergin h.as arrived at peak hair
Boat on Mon, 19th Oct 2015 8:05 pm
Mak,
While there has been some rise in gasoline consumption fuel prices are just one smaller expense to living. My driving hasn’t changed any. If gasoline went to $4.00 it wouldn’t change.
makati1 on Mon, 19th Oct 2015 8:55 pm
Boat, you obviously have too much money and not enough … preps.
GregT on Mon, 19th Oct 2015 10:05 pm
People with too much money don’t generally have room-mates at 58 years of age Mak.
I’m going with little money and zero preps, unless one considers pool water as drinkable.
makati1 on Tue, 20th Oct 2015 6:39 am
GregT, no one likes to live alone except hermits with social problems. I’m 71 and tried the ‘alone’ thingy for 3 years in Philly before I moved to the Ps. Boring, and a good way to just wait to die. And I had enough female company for my 28 year marriage term. (Ex plus 3 daughters.)
I prefer my new lifestyle and company. He has his life and I have mine and we are collaborating on the farm and prepping for the future. I’m kinda the ‘hired hand’ of info and experience and he is the doer and owner.
Foreigners cannot own land in the Ps for a residence and only a percentage of any commercial adventure. It works out well and I have no property to worry about. No taxes except VAT if I buy something. You cannot imagine how free a life can be until you have no taxes, or loans or credit cards to worry about.
I file my 1040 every year, one simple page as every American slave has to until he/she dies, and one 4 question form every two years with SS, but that is no problem. The local ATM is my bank. Would I want to go back to live in the dying US? No way!
Texas Engineer on Wed, 21st Oct 2015 7:29 am
Once again Yergin repeats his mantra that the “peak oil hypothesis” is that we are about to run out of oil. Is he that ignorant of what peak oil means or is he deliberately lying?
Davy on Wed, 21st Oct 2015 8:06 am
TEX, I imagine both. He wants to believe po is dead but he is lying because po is playing out and he is denying it is.