Update: The World Bank’s forecasts are also now out, summarized here. Russia is forecasted to hurtle into a deep recession.
Two chapters from the World Bank’s Global Economic Prospects are out.
Chapter 3 is “Fiscal Policy Challenges in Developing Economies”.
Over the past three decades, fiscal policy in developing countries has become increasingly countercyclical. The wide fiscal space accumulated prior to the global financial crisis not only made it possible for developing countries to implement fiscal stimulus during the crisis, but also made the stimulus more effective in supporting growth as fiscal multipliers tend to be higher in countries with greater fiscal space. …
Chapter 4 covers three topics. The first is “Understanding the Plunge in Oil Prices”:
… There are a number of drivers behind the recent plunge in oil prices: several years of upward surprises in oil supply and downward surprises in demand, unwinding of some geopolitical risks that had threatened production, changing OPEC policy objectives, and appreciation of the U.S. dollar. …
The second is “What Lies Behind the Global Trade Slowdown?”:
Since the financial crisis, activity in many developing countries has been adversely affected by weak global trade. In 2012 and 2013, global trade grew less than 3.5 percent, well below the pre-crisis average of 7 percent. Part of this slowdown can be attributed to cyclical forces—especially, the slowdown in import demand that reflects weak growth in advanced economies. However, structural forces were also at work. In particular, the sensitivity of trade flows to changes in global activity between the pre-crisis 2000s and the post-crisis period halved.
The third section addresses the question “Can Remittances Help Promote Consumption Stability?”.
My assumption is that rising US production was sufficient to keep us in a $110 equilibrium price range for Brent for 2011 to 2013 inclusive, as rising US production reduced the US demand for net imports enough to keep annual oil prices from materially exceeding the $110 range, as China and India increased their net imports from 7.6 mbd in 2010 to 8.5 mbpd in 2013, and as ANE* fell from 37 mbpd in 2010 to 34 mbpd in 2013.
Note that US net oil imports (total liquids basis) fell from 9.4 mbpd in 2010 to 6.2 mbpd in 2013. Basically, from 2010 to 2013, the fall in US net imports matched the decline in ANE, about 3 mbpd in round numbers for both declines.
And note that US net imports fell to 4.7 mbpd in June, 2014, a decline of 1.5 mbpd from the 2013 average value, which would certainly contribute to reduced demand for ANE:
http://www.eia.gov/totalenergy/data/monthly/pdf/sec3_3.pdf
However, recently, starting in late 2014, US net imports have increased back to 5.9 mbpd, based on most recent four week running average data, which is only a little below the 2013 average value:
http://www.eia.gov/dnav/pet/pet_sum_sndw_dcus_nus_4.htm
Also, China’s crude oil imports were up about 10% year over year, although some of the oil could of course be going into storage, and hit yet another all time record high last year:
http://www.ft.com/intl/cms/s/0/78f88222-9aff-11e4-882d-00144feabdc0.html#axzz3Oj35ztmh
If we assume some modest short term decline in demand in Asia in the second half of 2014, and if we assume some modest increases in second half global production in the second half of 2014, plus the seasonal fourth quarter and first quarter decline in Persian Gulf domestic oil consumption, combined with the Saudi refusal to cut production, with some unilateral price cuts by the Saudis, would all of that go a long way toward explaining the oil price decline? But it seems likely that all of these factors, except for the Saudi decision to maintain production, may be very transient factors. And of course an additional factor would be flat, or possibly falling, US oil and global production, in response to the price decline.
Note that it is very likely that 2014 was the ninth year in a row that the Saudis have been unable or unwilling (take your pick, but more likely the former in my opinion) to exceed their 2005 annual net export rate of 9.1 mbpd (total petroleum liquids + other liquids, EIA). This is in marked contrast to the pattern that they showed from 2002 to 2005, as their annual net exports increased from 7.1 mbpd in 2002 to 9.1 mbpd in 2005, as annual Brent prices rose from $25 in 2002 to $55 in in 2005.
*ANE = Available Net Exports, i.e., the supply of Global Net Exports of oil (GNE) available to importers other than China & India. ANE fell from 41 mbpd in 2005 to 34 mbpd in 2013.
Jeffery,
So, where will the price of Brent be by June? Will it be at $50, $70 or back to $100 per barrel? From 2010 to now, I can’t see any relationship between the price and the excess supply or deficit compared to world demand using EIA statistics. I had hoped that Professor Hamilton, would shed some light on this observation to explain what I am missing.
I’m just an amateur part time supply side analyst, with a focus on what I call “Net Export Math.” Demand side analysis is much more difficult, and Steven Kopits and Professor Hamilton are much better at demand side analysis than I am.
But in looking back at 2008/2009, monthly Brent prices hit their low point in December, 2008, when Brent hit $40, after falling by about $90, and monthly Brent prices then rose at an annual rate of about 33%/year from December, 2008 to December, 2011.
However, in December, 2008 the Saudis had already cut a significant amount of production, which does not seem to be a pattern that they are currently emulating.
On the other hand, in late 2008, US net oil imports were falling, while they were rising in late 2014. Global vehicle sales fell from 2007 to 2008, and declined further in 2009, while global vehicle sales reportedly hit a record in 2014, and one estimate I saw is that the net increase in global vehicles (net being gross sales less vehicles scrapped) is running at about one million vehicles per week.
And in my opinion, what almost no one understands, or wants to understand, about “Net Export Math,” is the ferocious rate of depletion in remaining CNE (Cumulative Net Exports), with Saudi Arabia being a prime case history. Note that by definition it is not whether Saudi Arabia has depleted their supply of post-2005 CNE; the question is by what percentage?
My estimate for remaining Saudi post-2005 CNE follows, based on the 8 year 2005 to 2013 rate of decline in their ECI Ratio (Ratio of production to consumption, which fell from 5.7 in 2005 to 4.0 in 2013, EIA data).
At the 2005 to 2013 rate of decline in their ECI Ratio, they would approach 1.0 (production = consumption) and thus zero net exports, around the year 2045 (Gb = Billion barrels).
Estimated post-2005 CNE = Annual net exports at peak (3.3 Gb/year in 2005) X 40 years (estimated number of years to zero net exports) X 0.5 (area under a triangle) less 3.3 Gb = 63 Gb (total petroleum liquids + other liquids).
Saudi CNE for the 2006 to 2013 time period inclusive: 25 Gb.
Estimated remaining Saudi post-2005 CNE: 38 Gb, putting their estimated post-2005 CNE at about 40% depleted.
It is a good thing that economists and monetary theorists are recognizing the appreciation in the value of the dollar in the decline of the price of oil. But they do not recognize the depreciation of the value of the dollar in the meteoric rise in oil price in early 2000. In 2015 the price of gold has been increasing. When the price of oil begins to increase will economists be as honest in attributing the increase monetary conditions?
Sadly, attributing an increase in the value of the monetary unit fits the deflation bad/inflation good mantra of modern economics. That means when the price of oil begins to increase the monetary impact will be forgotten. Inflationism is the magic elixir of our time.
A 2.9% contraction is hurtling into deep recession? What, did Russia become a stable advanced economy? Nobody serious is talking less than five.
Tom: Did you think the 2009 drop in US GDP serious? Year-on-year, that decline was 2.8%…
The link for Chapter 4, Understanding the Plunge in Oil Prices
http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2015a/pdfs/GEP2015a_chapter4_report_oil.pdf
GG: Thanks – have corrected link in the post.
Snicker. 🙂
It seems to me that the global oil industry is between a rock and a hard place. Excluding the US and Canada, global crude + condensate (C+C) production fell from 2005 to 2013, as annual Brent crude oil prices averaged $110 for 2011 to 2013 inclusive.
If the global industry was only able to show an aggregate increase in production because of tight/shale plays and tar sands plays in the US and Canada, and if those plays now have severe viability issues at current oil prices, and since non-US and non-Canadian production fell even as oil prices doubled from $55 in 2005 to the $110 range for 2011 to 2013, how is the industry going to be able to even maintain current global production?
“At the 2005 to 2013 rate of decline in their ECI Ratio, they would approach 1.0 (production = consumption) and thus zero net exports, around the year 2045 (Gb = Billion barrels).” -Jeffrey Brown
Interesting extrapolation.
I would guess that there must be at least a few voices within the Kingdom calling for the elimination of subsidies and even the addition of steep excise taxes on gasoline and diesel fuel. A few voices in addition to the government ministers who have already called for fuel subsidy reductions.
Wish I could read Arabic. Saudi politics must be a fascinating study.