A meeting of oil producers takes place next week and the outcome will have a profound impact on the global economy, writes Kyran FitzGerald
It is the gift that keeps on giving as far as the global economy is concerned.
Oil prices have declined by 30% on peak levels reached in June. Last Friday, Brent oil traded at a four-year low at just below $80 a barrel.
According to the International Energy Agency, “barring any further supply disruption downward price pressures could build further in the first half of 2015.”
Traders and commentators are awaiting the upcoming meeting of OPEC producer representatives which is scheduled to take place in Vienna in 10 days. It is being described as perhaps the most critical gathering of the producer cartel to take place in a decade.
Saudi Arabia is under pressure from fellow oil producers to rein in production. However, the kingdom has the financial resources to wait out a prolonged energy price crunch during which rival producers including Iran and Russia will really feel the pain. A sustained drop in the oil price will also put added pressure on US shale oil production, hitting a rapidly emerging rival hard. The Saudis may well be happy to watch on as events unfold.
When the crisis in the Ukraine broke out early in the year, the picture seemed quite different. There were real concerns that disruption to supplies into energy import dependent Europe could push prices up into the stratosphere and Ireland, in particular, was looking vulnerable. In 2010, then Energy Minister, Eamon Ryan, estimated that the country’s energy import bill stood at €6bn a year. It has, if anything, risen since.
Whereas, the 27 countries of the European Union meet around one half of their energy needs through imports, largely from Norway and Russia, the corresponding figure for Ireland is over 80%. Between 1990 and 2007, Irish energy imports more than doubled.
Measures are being taken to reduce our vulnerability ranging from wind farms to the construction of inter-connectors. However, Ireland remains a vulnerable price taker, located at the far end of international supply chains, with a question hanging over the future of the country’s oil refinery at Whitegate.
According to the AA, in May last, Irish petrol prices are the fourth most expensive in the world. It costs €155 to fill up an Irish petrol tank, compared with an equivalent bill of €55 on average in the US (where consumers nevertheless give out about price levels ). Irish diesel prices are the fifth highest in the world, adds the AA. Others have contested these figures claiming Ireland actually ranks in the middle of the price range.
What is clear is that the Government takes a big share in the form of excise duty , with taxes accounting for almost 60% of the cost of filling up a tank. The AA has produced figures suggesting that a typical Irish driver pays over €2,750 a year in fuel, around €1,650 of it in tax. The Government tax haul has jumped considerably since 2007 as the Minister of Finance has sought to plug those yawning revenue gaps. Excise duty on petrol increased by 12%, with diesel up by 10%.
In the recent Green Paper on energy policy it was acknowledged that household energy prices jumped by 27% between 2007 and the first quarter of 2013 while the costs faced by businesses have risen by 31%.
Between July and November, while the global oil price has been falling out of bed, Irish petrol prices have remained remarkably stable, according to the website, globalpetrolprice.com. Its price graph has remained remarkably steady over the period, with a slight dip coming from early November. On November 10, the price stood at $1.91 per litre compared with an average of $1.95 for the period as a whole.
Such price stickiness has caused raised eyebrows with some commentators suggesting that a failure by the petrol retailers to pass on cuts amounts to a form of price gouging. Energy providers such as Bord Gais have come under similar assault when they were slow to pass on cuts in wholesale prices. Some retailers may argue that they need to rebuild their margins after a difficult period.
According to the IEA, no quick rebound in oil prices is envisaged.
“The supply/ demand balance suggests that the rout has yet to run its course.” It is cautious about suggestions that the high cost of unconventional oil production might set a new equilibrium for Brent prices at between $80 and $90 (a little above current levels )
“It is increasingly clear that we have begun a new chapter in the history of the oil market,” says the IEA.
In late October, Goldman Sachs slashed its oil price forecast for 2015 by $15 a barrel — it expected Brent crude to fetch $85 a barrel in the first quarter of 2015. The price has already fallen below this level since the forecast was made.
What must not be forgotten is the sheer scale of the volatility in the price of oil over time. In 2008, prices surged, spiking at almost $150 in July, that year, helping in no small way to spark the Great Recession that followed, not least because European central bankers were panicked into raising interest rates at exactly the wrong time. By the end of 2008, oil prices had fallen back to $40 a barrel.
The big game changer in recent times has been US shale, which emerged as a major factor around 2008, with production continuing to surpass expectations since, pushing the US towards the top of the global production table.
The Republican victory in the mid-term elections may increase the pressure on the Obama administration to open up wildernesses to oil pipelines, further boosting output prospects. What has been great news for places like South and North Dakota, where shale production is booming, has been terrible news for Venezuela which now faces drastic, potentially destabilising cuts in its budget and its social programmes.
Expect the collateral damage to spread to Cuba as the Chavista dream implodes and perhaps dissolves. Russia, too, is feeling the pinch, with the Russian currency, the rouble, plummeting in value.
The Iranians appear also under pressure and perhaps more willing to reach a nuclear deal with the West.
Petrol has been a key part of the great global game since the first discoveries of oil on the Arabian peninsula and the advent of the Seven Sisters. Ireland, at least, should benefit from this period of oil price softness, though naturally concerns will be raised about any longer-term impact on oil and gas exploration off our coast, or on the continued development of alternative energy sources.
In life, after all, there is no such thing as an entirely free lunch.
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