Quest for causes

In the West, plunging prices are sometimes attributed to Iran’s re-entry into the oil market. In reality, its sanctions were lifted months after the worst oil collapse and price stabilization at below $30. Moreover, it is Saudi production that dominates the world market.

Others claim that the collapse of oil stems from China’s deceleration. However, while China’s growth has slowed, its per capita incomes are increasing and oil imports continue to grow at close to 9% year-on-year.

Still others believe that the price plunge has more to do with geopolitics. Saudi Arabia does not want to give market share to U.S. shale producers but low prices are harming even more Iran (which Riyadh sees as its regional rival) and Russia (which is fighting the Syrian opposition and jihadists, which Riyadh supports). In fact, both Riyadh and Washington have geopolitical incentives to use low prices against Russia and Iran.

Still others argue that the oil market is subject to speculation and abrupt price movements are reminiscent of those in summer 2008. That’s when Goldman Sachs predicted that oil prices would exceed $200 by the year-end, even though they collapsed to $32 in December. Reportedly, the projection paid off handsomely to those that shorted the market with leveraged derivatives in oil futures.

Some two years ago, major oil producers (e.g., ExxonMobil, Chevron and Shell) began to let go of their shale leases some two years ago. Unlike big oil, shale is still dominated by expansive mid-size oil companies. As banks have predicted ultra-low prices at the $20 range, they have reportedly lent billions of dollars to shale players. Now, the more the prices decline, the more shale players will suffer defaults, which allow big banks to gain greater share of their ownership. Recently, the region has witnessed several potentially disruptive scenarios, including the Saudi Defense Minister’s decision to execute Shi’ite religious leader Sheikh Nimr al-Nirm; the escalation of the proxy war in Syria; and the fallout between Russia and Turkey, a NATO member; to mention a few.

In the U.S., Wall Street banks’ huge involvements with commodities, including oil and gas, as well as the associated moral hazards and market manipulation became public with the U.S. Senate Subcommittee bipartisan report of November 2014 in which Carl Levin and John McCain (Rep) concluded that “Wall Street banks have acquired staggeringly large positions and executed massive trades in oil, metal, and other physical commodities.”

Huge wealth transfers

As producers have scrambled to gain market share from competitors, prices remain more than 70% down from summer 2014. Even setting aside declines of foreign exchange reserves or oil exporters’ stock prices, this transfer could push back an estimated $3 trillion a year from oil producers to oil-importing nations.

Moreover, worse volatility may still be ahead. A while ago, Dr. Hossein Askari, former adviser to the Saudi Finance Ministry, noted that if a war breaks out between Iran and Saudi Arabia, “oil could overnight go to above $250, but decline back down to the $100 level. If they attack each other’s loading facilities, then we could see oil spike to over $500 and stay around there for some time depending on the extent of the damage.”

Perhaps the need for timely destabilization explains some abrupt fluctuations in the region. What is certain is that they are occurring at a historical moment when global growth prospects can least afford it.

Dr Dan Steinbock is a columnist with China.org.cn. For more information please visit: http://www.h5a3.com/opinion/DanSteinbock.htm

This post was first published at Chinausfocus.com. To see the original version please visit http://www.chinausfocus.com/finance-economy/oil-prices-us-multipolarity-and-speculation/