Oil Is So Much More Than A Commodity

Oil is so much more than a commodity. It’s a force bigger than the $1 trillion market. It’s a weapon, it’s a strategic asset and it’s a curse. Oil can make or break a country, a company, a person. Oil builds fortunes and it makes you poor. And it sets the stage for one of the largest transfers of wealth in human history.

All of this influences the price of oil.

After four years when the highest average oil prices in history seemed to defy economic gravity, petroleum began to plummet in mid-2014. Prices dropped as much as 75% over the next 18 months, throwing oil producers into turmoil and roiling global markets.

OPEC is only a cartel on paper. Saudi Arabia is leading other OPEC members that want to maintain production, but countries like Venezuela and Nigeria are bleeding to death. U.S. producers say the shale revolution — which made the country the world’s biggest producer of oil and gas — has freed it from fears that Middle East conflicts will cut off its supply.

Supply had expanded as the sustained higher prices made techniques such as deep water drilling and fracking pay off. Then China’s economy slowed and its imports sagged. The price collapse has forced high-cost drillers to idle rigs while international giants like Chevron (CVX), Shell (SHLX) and Halliburton (HAL) cut thousands of workers and billions of dollars in spending.

Oil represents a systemic threat to the global economy. Just as housing created a cascade of trouble, through the global financial system, then through countries, the oil price crash can do the same. But remember, when China stepped in, bought up and hoarded dirt cheap commodities in 2009, oil went from $32 to above $100 again.

It’s never a played game. We’ve had plenty of events over the past seven years that have shaken confidence and have given markets a shakeup – European sovereign debt, Greece potentially leaving the euro, among them. Oil prices are creating every bit as big a threat as Europe was, it’s reasonable to expect intervention will be the solution this time as well.

Wealth Transfer

The fall in the price of crude is having a positive impact on demand, and say that it could accelerate even further if prices don’t pick up. Not many analysts are expecting to see a large increase any time soon. This could be the new normal of energy abundance.

This means wealth is being transferred from producing oil to consuming oil. If prices were to average just $40 over the next five years, demand would grow by 1.5 million barrels per day. Demand will pick up in emerging markets and developed markets.

Combine these trends with the decline in OPEC foreign exchange reserves, or the stock price/dividend of any oil company, and you can see the dramatic wealth shifts now taking place in the world.

So, oil is so much more than a fuel. It’s a force even bigger than its trillion-dollar market. It’s a weapon, a strategic asset, a curse. It’s a maker and spoiler of fortunes, a leading indicator and an echo chamber.