Where will the oil price settle?

Oil on rig

You may have noticed (on the Today Prog's "Editors Mastermind" this morning) that my memory of my own scribblings is by no means impeccable. Which rather begs the question why you should bother to read on.

But - and please don't hesitate to correct me if I am wrong about this as well - I don't pretend to be delivering Mosaic tablets. I aspire to the composition of digital chip wrapping (pun intended).

So here we go, with a few hazy and random reflections about oil, based on assorted conversations with oil producers, traders and putative experts.

With the oil price rising very slightly this morning, there is growing confidence that the market may have hit bottom, at around $60 or $55 a barrel, depending on whether Brent or WTI is your preferred benchmark.

So a fall in the price of around half this year may be as bad as it gets.

Why?

Well it is because the motivation of the Saudis and their allies in driving the price down seems less opaque - and more commercial, than political (which implies that they want the price low only for as long as it takes to achieve a practical commercial objective - rather than being an instrument of long term warfare against a putative enemy).

They have made it clear that they want to choke off investment in oil production that is only viable at high prices, and which has been undermining their market power.

So by maintaining their production in the face of falling global demand, they have been driving down the price, with the aim of eliminating about a million barrels a day of what they perceive as surplus expensive production.

They would like to see most of that million barrels taken out of US shale production - because apparently there was a sharp intake of breath in the Kingdom when their exports to America fell below the symbolically important level of one million barrels in July (they have gone back over one million since).

There has been collateral damage to the viability of higher cost production all over the world, including the UK's North Sea - whose profitability has been hammered.

Gently rising trend

Image copyright Other

As some have pointed out, just possibly Alex Salmond is grateful to have not quite won the Scotland independence referendum - since if negotiations were taking place now on the new fiscal settlement for an autonomous Scotland, he would be struggling to fill a very substantial black hole in tax revenues stemming from sharply diminished expectations of both oil price and output.

Anyway, I am told that a million barrels of capacity should be removed from the market at these oil prices over just a few short months.

Which is why the price may now be back on a gently rising trend, to perhaps $70 to $75 a barrel.

Even so, the oil price shock has been the big economic and perhaps political event of 2014, and will continue to shape prosperity and power in the coming weeks and months.

In no particular order of importance, Russia has been transformed into a shrinking siege economy - seemingly becoming more dependent on financial support from China.

Second, Cuba has been nudged into a thawing of relations with the US, because of the risk that oil-dependent Venezuela will no longer be able to afford to provide subventions to it (which is what made Cuba's lock-out from the global economy just about bearable).

Third the tumbling price is putting cash into the pockets of oil users everywhere. But it is too early to judge whether the more powerful influence on the global economy will be this cash windfall for consumers, or the powerful blow to confidence of the inescapable financial difficulties of countries and businesses that are only viable at a higher oil price.

Where this struggle between the disruptive effects of the price collapse and the benign effects of a long-term lower price matters most is the sick region of the world, Europe.

Cheap oil that makes the earnings of eurozone businesses and households go further could - depending on their mood - persuade them to spend more or spend less.

Will people see the oil-price shock as giving them - in effect - more unencumbered cash, that burns a hole in their pockets? That would be positive for the eurozone and global economies.

Or will they see it as reinforcing a more general trend of falling prices, which deters them from making purchases because of hopes and expectations that waiting always delivers bigger bargains? That would be growth-destroying deflation.

In other words, the big debate for central bankers in the first weeks of the new year will be whether the oil fall is a stimulus or a deflationary depressive - whether it at last ushers out or actually prolongs the era of free money.

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