Crude Oil: How To Avoid A 2015 Budget Disaster

Business, China, Company Strategy, Economics, India, Indonesia, Oil & Gas, US

By John Richardson

IF I knew the outcome of today’s crucial OPEC meeting in Vienna well, of course, I wouldn’t have to write this blog post to make a living.

But what I do know is that oil markets, now that the Fed stimulus is being withdrawn, are beginning to function far better than they have done since 2008. Supply and demand of crude itself are re-asserting themselves as the main price drivers rather than financial speculation.

Sadly, though, most people I speak to still don’t seem to get it.

As an example, when I was in Singapore two weeks ago for a series of ICIS conferences, I was disappointed at the number of people who thought that prices in the region of $100 crude were the real “New Normal”, thanks to the budget requirements of OPEC members and the strength of China’s economy.

This worries me as, of course, many of the delegates worked for chemicals companies and will have been involved in drawing up budgets for 2015. Anybody who has assumed average prices anywhere near $100 for next year has taken an enormous risk.

Sure, temporarily, prices might return to close to that level because of a decision to make major production cuts at the OPEC meeting today.

Equally, of course, geopolitics could cause a temporary spike in prices back to around their levels of the last six-and-a-half years.

But, as I have discussed before, but feel the urgent need to stress again: Be careful what you wish for.

A much longer term, and therefore more useful view of history, tells us this story:

BPoil

The above slide is from the BP World Energy Review 2013.

It shows that in inflation adjusted terms (the lighter green top line), recent crude oil prices were almost at their highest level since 1861.

You might, of course, contend that history has changed as the world is a much-richer place now than it was in 1861.

But how much richer?

Baseofthepyramid

The above chart shows that as of 2012, 4 billion of the world’s 7.3 billion people were earning a maximum of $5 a day.

Take away the illusory “wealth effect” of excessively easy credit in the West, and most importantly in China, and we are back to the price that most people on this planet can afford to pay for all the things made from crude oil.

One thing should at least have been accepted by now: The days of too-easy credit are over for good in China.

Governments across the developing world have long realised that the real affordability of oil for most of their populations is very low – hence, programmes to heavily subsidise the cost of fuel.

The great news is that the recent lower oil prices have given India and Indonesia the political leeway to wind back these hugely expensive, very economically damaging, subsidy schemes.

Provided that oil prices at least stay where they are today – and, hopefully, fall even further – the governments of both countries should be able to resist the political pressure to reinstate the subsidies. Much more money can then be spent on education, sanitation, healthcare and infrastructure.  This would enable hundreds more millions of people to escape from extreme poverty.

Morally as well as economically, therefore – and I don’t think that the use of “morally” is overstating the case at all – we should all be wishing that oil prices stay a great deal below $100 a barrel.

PREVIOUS POST

US Polyethylene's Weak Pricing Power

26/11/2014

By John Richardson IF I knew the outcome of today’s crucial OPEC meeting in Vi...

Learn more
NEXT POST

Too Late For Iron Ore, But Not For Petrochemicals

27/11/2014

By John Richardson IF I knew the outcome of today’s crucial OPEC meeting in Vi...

Learn more
More posts
Scenario 1 inevitable? Are you really, really, hand on heart, that sure?
14/12/2018

ICIS and the UK–based chemicals company International eChem had the privilege of making a pres...

Read
Share buyback boost to US stocks a major danger as recession risks grow
12/12/2018

Just to once again stress that what follows are as always my personal views, and are open to debate,...

Read
Deep understanding of inland China essential for tracking 2019 slowdown
10/12/2018

By John Richardson CHEMICALS companies are at great risk of getting Chinese demand very badly wrong ...

Read
Holding petchem CEOs to account: tackling societal needs the route to success
07/12/2018

By John Richardson IF WE all had a dollar for every time we’d heard the phrase, “the growth of t...

Read
Donald Trump’s “Tariff Man” Tweet exposes lack of G20 substance
05/12/2018

By John Richardson That didn’t last long, did it? But anyone paying attention to the detail, o...

Read
G20 trade deal is no deal unless a huge gap can be bridged
03/12/2018

By John Richardson I PREDICTED that there could well be warm smiles, handshakes and some kind of tra...

Read
Internal combustion engines, car ownership to quickly head the way of horses and carts
02/12/2018

By John Richardson THE PICTURE on the left shows the Easter Day Parade in New York in 1900. As you c...

Read
G20 meeting: stakes are high for US petchems, manufacturing in general
30/11/2018

By John Richardson YOU CAN  make an argument that President Trump’s trade policies are good for S...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more