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Global Oil Glut Isn't All Bad News

Global Oil Glut Isn't All Bad News
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By    |   Thursday, 08 October 2015 07:22 AM

For reasons that baffle me, Russia is being perceived as a world power that rivals America.  Look beneath the veneer of Putin’s bluster and you will find a country in deep financial distress that is on the verge of economic collapse.

The culprit is oil.  The price of a barrel of oil has been cut roughly in half since June 2014, reaching levels last seen during the depths of the 2009 recession.

It’s having a profound effect on Saudi Arabia, which forecasts a deficit this year of about 19.5 percent of GDP (Gross Domestic Product), compared with a deficit of 3.4 percent of GDP in 2014. What a difference that just one year makes!

It’s worse in Russia. A Wall Street Journal piece took a look at Russia’s oil industry where oil and natural gas account for two-thirds of Russia’s export revenue.   But with oil prices falling worldwide, experts predict that they will diminish the Russian economy by almost 4 percent in 2015.

When there is an oil glut, historically production typically drops so that prices increase.  Not in Russia, where they continue to pump an average 11 million barrels a day. It’s the most since the 1990s.

Production needs to continue at current levels to prop up an economy that has seen the ruble steeply devalued, stock-market share prices tumble and the Central Bank’s reserves shrink. Capital is rapidly fleeing the country while export revenue drops, and foreign investment has practically dried up.

Reports indicate that Russia’s sovereign bonds have been downgraded to junk status by credit-rating agencies. The price of imported goods has increased, leading to an inflation rate of 9 percent. This has resulted in a fall in real wages, pensions and benefits that are not keeping up with rising cost of living. To stop the free fall, interest rates have been raised to 17 percent, impacting manufacturing and even large natural gas companies, which are forced to lay off workers.

When you factor in the drain to the economy as Russia sends troops and arms to fight in Crimea and now Syria, that financial malaise is sure to worsen.

We shouldn’t gloat about the mess in Russia because the U.S. oil industry also has been impacted.

On the positive side, United States domestic oil production has doubled over the last six years, which has helped the U.S. reduce its dependency on oil imports from Saudi Arabia, Nigeria, and Algeria.  It also has reduced energy costs for industry and for the average American consumer.

On the negative side, more than 200,000 U.S. oil workers have lost their jobs, and manufacturing of drilling and production equipment has fallen sharply. It also has impacted new oil exploration in the U.S, resulting in the slowdown of new drilling technologies and even the shutdown of a large oil platform in the Alaskan territory.

The solution, of course, is to allow the U.S. to export gas and oil so that we can reduce the current U.S. glut, revitalize the economy, accelerate new technologies, and increase hiring.

I’m intrigued by recent rumblings that some oil executives are putting forth an idea that the Saudis want to hurt Russia and Iran by continuing their oil production at current levels. Even the United States is cheering from the sidelines, recalling that depressed oil prices in the 1980s helped bring down the Soviet Union, and there is enough evidence that this could happen again.

The bottom line is that Americans have a tendency to fear the “big bad wolf.”   We continue to fear the growth of China, despite the fact that the curtain has been parted and we can see that the Chinese economy is in a downward spiral.

We’re wringing our hands over Russia, even as that economy and Putin’s hold are tenuous.

If we continue the big bad wolf metaphor, let’s recall Ronald Reagan, who saw through the Russian facade and called their bluff.  He wasn’t afraid of the big bad wolf, and neither should we.

Our next president must be able to stand up to those nations that seek to weaken our economy and resolve.  And it starts with supporting the American energy industry by encouraging domestic exploration, revitalizing fossil fuels, and actively exporting oil and gas.       

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NealAsbury
Our next president must be able to stand up to those nations that seek to weaken our economy and resolve. And it starts with supporting the American energy industry by encouraging domestic exploration, revitalizing fossil fuels, and actively exporting oil and gas.
oil, economy, president, crude
704
2015-22-08
Thursday, 08 October 2015 07:22 AM
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