Why We Need To Rethink The Financial Future Of Oil

By Andreas Goldthau, Central European University and Benjamin Sovacool, University of Sussex

The price of oil keeps moving in one direction - down. Even political tension between Iran and Saudi Arabia (historically a cause of price rises) has not stopped the drop. It may come as a surprise to some, but it drives home the point that it is not politics but market fundamentals that set prices.

The global marketplace is awash with crude, thanks in part to US shale, Russia pumping at its limits, OPEC countries incapable of agreeing to a cap on production, Saudi Arabia remaining in a fierce price war with US shale producers, and Iranian stocks entering the market. Industry stocks are as high as almost ever before.

Demand also remains sluggish in emerging regions such as Asia. Wall Street augurs even see additional downward potential, suggesting US$20 as a likely floor price - which is remarkable given that from 2010-14 US$100 oil was the "new normal". In short, the market environment is soft, which is why oil futures traders are not paying heed to the hostilities between Iran and Saudi Arabia.

Oil giant BP reacted by shedding 4,000 jobs, while globally some US$1.5 trillion of energy investment has been put into question. Clearly, oil assets are on the losing side and the future does not bode well for global oil. This, however, is for reasons related to climate change, not because of tumbling prices. Two actors are key: the US government and financial investors.

Oil prices 2011-2015.

Shale squeeze

In the US, it is particularly the "independents" that have become squeezed. These are small to mid-sized companies which form the backbone of the recent shale gas revolution. So far, they have shown a remarkable ability to cope with an oil price spiraling downward, thanks to their innovative nature and their ability to cut costs and streamline production processes. Now, they have hit their limits. While some unconventional oil wells on the Barnett, Eagle Ford or Bakken formations still break even at US$30 a barrel, many no longer do, leaving the independents in the red.

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Disclosure: This article was originally published on The ...

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Gary Anderson 1 year ago Contributor's comment

Abandoning oil is a bad idea for peace. The west may abandon oil, but Asia and Russia will not. There could be serious conflict if oil is used to beat down the Russians. And really, that is what this article is about, isn't it?

Gary Anderson 1 year ago Contributor's comment

Clearly, the oil futures market can be cornered from time to time. An example is in 2007, when oil hit $147 per barrel. Even the Saudis complained to the US government about investment bank interference in the price of oil back then. Hopefully the free market is at work in the downside that we see now. One would hope politics is not involved.