February 18, 2019

Oil Bedevils An Already Complicated World Economy

“Oil is in a bear market. Put less melodramatically, prices have dropped more than 20 percent from their recent high early last month. Not only that, West Texas Intermediate crude futures have managed to fall for 10 straight, which is a historically impressive losing streak.

Why is this happening? The best explanation appears to be that producers ramped up supplies to fill an expected gap that would be left by the U.S. pending sanctions on Iranian crude exports. But what producers didn’t seem to anticipate was the U.S. granting a number of countries waivers to buy oil from Iran, meaning that the effect on global supplies won’t be as great as expected. So, there’s now a glut of crude sloshing around the world.

Stepping back a bit, there is a bigger picture theory that’s in vogue to fit what is happening. As oil prices spiked 10 years ago, the notion of “Peak Oil” got a lot of attention. This idea basically proposed that supply had peaked, reserves would steadily start to run out and oil prices would rise. Now, the notion is of Peak Demand. New services-oriented economies are not as dependent on oil as economies built on manufacturing. Demand may, indeed, have peaked.”

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