While much of oil’s price behavior in October and November was due to financial market dislocations, the price of oil now at 45.00 dollars is pulsing out a renewed warning about the global macro outlook. As I have written previously, because of oil’s price structure and overall flat supply over the past few years, oil enters a kind of price envelope at 50.00 that sets off alarms, and, were oil to make it back into the low 30.00’s, then I would say the world will be engulfed in something much worse than a standard recession.
The important concept here is there can be no return to the geological or structural price conditions of, say, 1998. There is no wall of oil supply, as the world has voraciously eaten through a great swath of the cheap oil since that time. The overall topography of the global oil market is radically different from ten years ago, especially with regard to non-OPEC oil supply. In 1998, for example, the world was growing strongly but did not need much supply from the Alberta tar sands. In that period, the UK and Mexico and Norway were still increasing production. As for Russia, much of her great growth in supply lay directly ahead.
Now all is changed. Much of that cheap conventional oil has peaked. (We used to think of North Sea oil as expensive. How interesting, as now in a world of tar sands and ultra-deepwater, it’s less costly by comparison). This means that at every price level starting at 90.00 and falling, oil is taken off the market. Mainly non-OPEC oil. We saw this almost immediately with Russian oil starting in late September. At 60.00, future production growth plans were shelved. At 40.00 we may see some tar sand production trimmed.
Oil at 70.00 was already good news for global consumers. But oil near 40.00 is very bad news for just about everyone. It would be much better for most people to have the global economy running slow, with petrol prices at 2.50/gallon, then to have the global economy in deep recession, with petrol prices at 1.50/gallon. We are approaching, unfortunately, the bad end of that equation right now.
-Gregor
