Saturday, January 17, 2015

The oil is falling, the oil is falling!

Oil prices are dropping dramatically. Something that consumers have been waiting on: Lower prices at the pump in addition to lower energy costs.

But, the recent drop in oil prices has been met with fears and concerns by financial and economic pundits, crying that the end is near and the world is on the brink of another economic collapse as a result.

Some have argued that drops in oil prices causes economic collapse. There may be some merit in that to a certain extent, but only because of the matter that economic turbulence had already started, which prompted analysts to move into a position of sifting through historical clues and evidence to see where these problems first occurred.

To the average person on the street that just wants cheaper gas at the pumps, these concerns seems somewhat strange that persons would be scared to death over falling oil prices in addition to the average consumer not giving much of a care on how it started. But, under closer examinations, some fears may be warranted, and more importantly, who will lower oil prices negatively effect?

Let's take a look at historic oil prices, provided by the good people at As of today, oil is down to under $50 per barrel. This is a stark difference from it's peak of over $135 back in May, 2008.

What happened, you ask? Well, several things happened. Some may say unfortunately, some may say fortunately. But happened things did.

For starters, the Organization of the Petroleum Exporting Countries (OPEC) was knowingly over producing for quite some time. In fact, they have no intention of cutting production anytime soon either as the cartel said in a statement at the end of November, 2014 that members had agreed to roll over the ceiling of 30 million barrels per day, at least 1 million above OPEC's own estimates of demand for its oil next year, 2015.

Part of the reason for the over-production was because China's economy was red hot and needed more oil to fuel that economy. While it could be said that China needed a significant amount of oil to maintain growth, the effect was that other larger economies started to change their oil-security policies and practices; i.e., hoarding oil supplies, increasing domestic supplies and reserves and as an extension, financial markets capitalized by increasing the futures' margin month-on-month end.

Secondly, the futures market for oil, and the "irrational exuberance" around oil-spot-prices, made it problematic in predicting what the true price of oil would be. The market was trading oil at about 30% higher than what some analysts comfortably estimated it should have been at any given point and time in recent history prior to the sudden drops.

The reason why no one said anything with regard to the astronomical cost of fuel was because they had a plausible excuse in China, and also because it was profitable to keep oil prices artificially high and rising.

As a consequence, the financial markets, via investment banks, just kept adding additional trading fees and raising the futures' prices based on their own reasoning of what oil prices should be, while selling the public a distorted view of what oil prices were, which was not based on what the actual demand for global production truly called for.

This has caused a significant problem, because oil producing countries, particularly vulnerable oil producing countries like Trinidad, Venezuela, the Ukraine and to some extent Russia, had budget forecasts based on a $100 (USD) and higher oil price. That has obviously changed, as Venezuela has been selling oil way below their breakeven point and are now faced with serious decisions on what their fiscal year may look like.

Thirdly, and most importantly, US President Barack Obama has made tremendous strides in picking the US economy back up off of the ground from the 2008 recession, and has not only increased domestic jobs, but has also increased manufacturing by significant margins over the course of the last 2 years.

US manufacturing grew by over 4% in 2014, and is showing immediate no signs of slowing up in 2015. Thanks to president Obama and his policies on increasing manufacturing jobs in America by reducing tax-cuts to companies that offshore jobs, in addition to enhancing the enabling environments for manufacturing plants and entrepreneurs by first creating a steering committee in 2011 called the "Advanced Manufacturing Partnership 2.0", his administration has worked diligently with regard to boosting production in America and the fruits are telling.

Of course, these manufacturing increases may be blips on the radar screen if not seen in the global perspective. But as we have seen China cut back tremendously on manufacturing growth, and is projected to cut by another 1% in 2015, cut domestic spending in addition to reigning in some of their expansion projects inland, US manufacturing may possibly continue to rise in 2015 if things remain constant.

With respect to oil prices, what it additionally means is that as manufacturing shifts back to the USA from China, greater efficiencies in technological practices should be taken into consideration in the USA that the Chinese simply do not have.

Contextually, while US manufacturing had a modest rebound in 2014, it is no where near back to pre-2000 levels when since that time, up to now, over 1 million manufacturing jobs were lost. This lends to the notion that US manufacturing may be on a continual rise based on increased technological advances that China must now try to keep pace with, which may take 3 to 5 years to truly be on par, job for job.

All of this coinciding with an increase in domestic oil production in the USA, coupled with even a modest decline in US oil consumption, we are probably going to experience relatively low oil prices in the near to medium term at the very least in 2015 if all things remain constant.

So, here we have it: Oil prices at a considerable low, the average consumer is seeing cheaper gasoline at the pump, but with small and vulnerable oil producing countries in fear, coupled with market jitters as a result of the shift and modest decrease in oil demand which has significantly affected market valuations on the price of oil globally, we have what we have today and may be sustained well into the middle of 2015 barring some catastrophic event or human action.

Who's problem is it and should we all be worried? You tell me and you make the call!

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