Damaged OPEC has lost the power to influence a world broken by debt

Publicado originalmente em 14 de abril de 2016.

OPEC and non-OPEC oil producers meet in Doha this Sunday to decide on what to do about the still depressed oil price. On the agenda is a proposal to freeze production at January or February levels, with a view to possibly cutting it at the following meeting in June.

Time was when such machinations would be front page news. Journalists would hang on the every word of OPEC’s vainglorious overlords, and their pronouncements would be major market moving events, with sometimes profound repercussions for the global economy.

Not so today. OPEC has lost its power to shock, or indeed to influence global production of oil, and its price, much at all. As Daniel Yergen, author of The Prize, a seminal history of oil and power, put it in a recent interview with the Financial Times: “The era of OPEC as a decisive force in the world economy is over.”

Yet it is not just divisions on strategy, or inability to act in a unified way, that has caused OPEC to lose influence. The over-riding problem for OPEC is that oil — or rather the oil produced by OPEC — is just not as important in setting the pace of the world economy as it used to be.

Oil is just not as important in setting the pace of the world economy as it used to be

There are all kinds of reasons for this – from improvements in efficiency to advanced economy deindustrialization, and from the growth of renewables to the advent of American shale and other new sources of non-OPEC supply. The upshot is that OPEC has lost its grip both on the quantities of oil produced and on the dynamics of world energy markets.

Oil steadied at around US$44 per barrel on Thursday after the International Energy Agency (IEA) trimmed its forecast for demand growth but said a fall in oil output in the United States was speeding up.

Brent crude futures were up 12 cents from their last close at US$44.30 a barrel by 1138 GMT. U.S. crude was up 4 cents at US$41.80 a barrel.

Global oil markets will “move close to balance” in the second half of the year as lower prices take their toll on production outside OPEC, the IEA said.

The world surplus will diminish to 200,000 barrels a day in the last six months of the year from 1.5 million in the first half, the agency said in a report on Thursday. Production outside the Organization of Petroleum Exporting Countries will decline by the most since 1992 as the U.S. shale oil boom falters.

Meanwhile in Doha, a meaningful agreement might give oil producers some short-term respite, but any continued rebound in the price might also further delay the ongoing supply adjustment, and could therefore be counterproductive further out. If the purpose of let rip supply was to drive more marginal sources of energy production out of business — including American shale – it will have failed if the price recovers too quickly.

Rewind to the oil price shocks of the 1970s, and oil stood centre stage in determining the ups and downs of the global economy, as important if not more so in aggregate demand as the level of interest rates. Yet today, economic activity is roughly half as oil intensive as it was back then, reducing the impact of movements in oil prices accordingly. Both on the way up and down, oil prices have less impact.

All of which brings us to one of the big puzzles at the heart of the contemporary world economy. An oil price fall of the scale seen over the past two years — peak to trough was an astonishing 70 per cent — would historically have provided a major stimulus to the world economy, such that today it should be enjoying near boom conditions. Yet so far, it hasn’t had that effect.

Indeed, in its latest World Economic Outlook – Too Slow for Too Long – the International Monetary Fund has further revised down its forecasts of global output, and warned of heightened risks of a permanent cycle of low growth, low inflation and low interest rates. Rarely has the IMF been so gloomy. Now, it is perhaps wise never to take IMF forecasts too seriously. Despite employing a veritable army of nearly 1,000 economists, the Fund is almost invariably well behind the curve. For some time now, the IMF has been too optimistic about prospects for growth; it may be that in yielding to pessimism, the Fund is again getting it wrong.

In any case, the IMF’s latest analysis suggests a number of reasons why the low oil price has so far failed to provide the “shot in the arm” anticipated.

The most obvious is that these things are simply on a long fuse. There is already considerable evidence of a positive boost to domestic consumption, particularly in the US and the UK. Unfortunately, the rest of the economy – investment and trade – is failing to build on this greater propensity to spend.

And while low oil prices are obviously positive for big consumer nations, they are profoundly negative for the producers. These negative impacts seem to have been rather greater in this cycle than past ones. Many producer nations grown used to high commodity prices have been forced into swingeing fiscal and business retrenchment. At the same time, continued deleveraging in advanced economies may have caused private consumption to pick up less strongly than in previous periods of weak prices.

The commodities bust has also had a major impact on investment in energy and mining, capital intensive activities previously undergoing a once in a generation boom. Even big consumer nations such as the U.S. have struggled to remain immune to the subsequent bust. Investment in shale was high during the boom, but has declined sharply with the fall in oil prices. The weakness in investment has transmogrified into weakness in global manufacturing activity and trade more generally.

Finally, our supposedly new best friend – very low interest rates – may in addition to its many other negative consequences be dampening the stimulus normally caused by a decline in oil prices. As the IMF’s chief economist, Maurice Obstfeld, puts it: “when central banks cannot lower the policy interest rate, even a decline in inflation owing to a positive supply shock [such as much lower oil prices] raises the real rate of interest, with negative effects on demand”. A less complicated way of saying the same thing is simply that once in a deflationary trap, it is extremely difficult to get out again. Normal cyclical phenomena won’t do the trick.

As it happens, depressed demand is not actually the main reason for low oil prices. Global demand for oil has never been higher. Rather, the problem is over-supply. This doesn’t necessarily mean the IMF is wrong to be so gloomy, but I suspect the key reason why the low oil price is failing to deliver the stimulus expected is the dampening effect of still massive over indebtedness, not just in advanced economies, but now following the emerging markets boom more or less everywhere. At the last count, debt amounted to nearly 300 per cent of global GDP and rising, far more than can ever be repaid given present, depressed levels of growth.

Eventually, much of it will have to be written off, or otherwise monetized and inflated away. It’s going to be a long, painful and divisive process, against which the disruptions of Brexit, much highlighted by the IMF this week, will look like a stroll in the park by comparison.

With files from Reuters


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