Speculators Misunderstood the Oil Wars and Market Meltdown
Journalist Steve LeVine says most investors thought high-priced US shale would cause a boom and that the economy would benefit from low oil prices – so far they are wrong on both counts
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to the Real News Network. I’m Sharmini Peries coming to you from Baltimore.
The price of oil is tanking, as it has for the last 19 months, at just over $30 a barrel. This is, of course, disrupting international financial markets, and destabilizing the economies of the world’s petrostates, which include now Canada, Nigeria, Russia, Venezuela, and even right here the United States. On Tuesday, February 2, BP is expected to announce almost a 70 percent profit loss due to low oil prices. Meanwhile the International Monetary Fund, worried about some countries, is looking at a $3 billion bailout package for oil-rich Azerbaijan. Soup kitchens are now opening up in Moscow as the ruble continues a downward spiral. In the U.S. thousands of jobs are being lost as the energy sector contracts, and all the pronouncements of the United States’ energy independence and the great shale gas revolution are now fading.
With us to understand all of this is Steve LeVine. Steve is a Washington correspondent for Quartz. He’s the author of the piece we’re going to be discussing today, titled The U.S. Bet Big on American Oil, and Now the Whole Global Economy is Paying the Price. Steve, thank you so much for joining us today.
STEVE LEVINE: Sure, sure, Sharmini.
PERIES: So Steve, give us a sense of how this big dive in oil prices took place, and why is it happening?
LEVINE: Well, the biggest thing to know about what’s going on is that it surprised everybody. Suddenly, about four years ago in about 2011-2012, people started noticing that there was a huge volume of unexpected American oil on the market. This is from shale, shale oil, from this new method of drilling, hydraulic fracturing or fracking. And the amount of oil was 4 million barrels. That’s 5 percent of the whole global market, a lot. So what this did was, was make the market understand, make traders who buy and sell oil understand that there was a big new player onto the market.
And fast forward through the years, through 2014, someone who really started to understand that they were at risk was Saudi Arabia, and in the, in the middle of 2014, about 19 months ago, Saudi Arabia felt at risk. They felt threatened that their hold on the market was being challenged by the United States, and decided to, to get into a war with U.S. shale. And so a war of prices. So –.
PERIES: So dumping more oil into the market, lowering the price, and, and so this is a contention with the oil industry. Is it also reflected in terms of what’s happening at OPEC?
LEVINE: Yeah. So, Saudi Arabia started it. It started by lowering prices. And then six months later it had a grand meeting with its fellow members of OPEC in November 2014, and basically informed everyone, we are all going to war with American shale. And all of them together, and Russia too, by the way, started flooding the market. And that’s when you saw oil go from $110 a barrel, nosedive, and the most recent low was $27.
PERIES: And is this a solution for these countries, you know, a place like Venezuela, highly dependent on their oil. Azerbaijan, as I mentioned in the intro, as well as places like Russia, the ruble taking a dive. Is it in their best interest to pour more oil into the market?
LEVINE: No, it–well, it’s in their, they think it’s in their longer-term interest, because they will then, again, have the market to themselves. Their idea is to drive American shale out, leave the market again to OPEC and Russia. They thought they were going to be able to do this in a matter of months, but it looks like it’s going to be at least two years. And now they’re really suffering there, Saudi Arabia, Russia, too. They’re spending tens of billions of dollars. Their budgets are a threat. Venezuela could default. They’ve got people in the, in the streets. There’s blood on the floor, in other words.
PERIES: And is American oil companies, especially those producing shale oil, are they getting out of business?
LEVINE: There are a lot of bankruptcies, it’s true. So, there were 41 bankruptcies last year. More–these were of smaller oil companies. But what you’re seeing is that even though prices have gone so low, and you’ve had these bankruptcies, the volume of oil being drilled is almost the same. They keep doubling and increasing their productivity. So the war looks like it’s going, it’s going to go on for a long time. All of them are suffering at, at the same time, and there, and it’s brinksmanship, who’s going to give up first.
PERIES: And one very interesting thing about all of this is, as you mentioned in your article, the unpredictability of all of this by economists and financial analysts. And why do you think that happened?
LEVINE: They got too excited. It, it is so–well, it’s humorous. It’s a little bit amusing. First they didn’t–they missed the onset of shale oil, then they forecast this enormous, these enormous volumes that were going to come on, which have, and they forecast American manufacturing renaissance, millions of jobs, trillions of dollars of investment. The reversal of American decline. Did not anticipate that OPEC, Saudi Arabia, wouldn’t go along with this. That if prices did go down as low as, as they have, because of the volumes onto the market, that oil companies would have to lay people off. They fired 250,000 people, and this has had a boomerang impact on industries that rely on oil. So you’ve had the whole, global economy have a, a big hit. You have stock markets diving, people losing jobs in all kinds of industries. And China, too, is having quite an impact on its growth trajectory.
PERIES: Now, one thing that you mention in your article, again, is that some people did benefit from this. Some people made $1.5 billion betting short. And explain to us how that happened, and who benefited.
LEVINE: Sure. So as in all these sorts of financial plays where a lot of people lose, there are winners. And we declare these people, when we do have winners, oracles. And our oracle this time is a man named John Armitage, as it happens to be. And he, he bet that oil prices, he bet in 2014 that oil prices, against the consensus, were going to dive, and he earned $1.5 billion. And then there’s, on the other side of the bet, there’s a fellow named Andrew John Hall who’s been betting the other way. He’s been betting that oil prices are going to go up even further than they were before. And he’s, we don’t know how much he’s lost. But hundreds of millions of dollars have pulled out of his hedge fund since the beginning of 2015.
And this is just–it’s, you know, it’s the market. You short the market, you long the market. Some people make money, some people don’t. But it’s, it’s–in that respect it’s very, very similar to the mortgage crisis that we had in 2008-2009.
PERIES: And one final thing, now. This is good for the consumer, of course, it has really helped us at a period when the economy wasn’t doing so well, and it certainly means less at the gas pump. How long will this continue?
LEVINE: Of course–you know, sticking with the theme of the story, it’s really a mistake to try to forecast too closely what’s going to happen to prices. But let me just say that what it looks like, it looks like we’re going to have–I’m paying $2.05 for gasoline here. I think that’s going to go for most of this year. It could even go the whole year, into the next year. One other thing you should know is that, the thing that economists are saying, is that we’ve seen the whole global economy take a hit from low oil prices. The consensus was that the, the benefit to consumers was going to outweigh that. And so we were, we were actually going to see growth in GDP.
What they’re saying is that that’s still coming. It’s a delay that, over the next six months, we could have in the United States, we could have a surge in our economy, when people start to feel their pockets bulging, they want to spend the money. So we could have, you know, a very, very nice situation in the second half of the year.
PERIES: All right, Steve. It’s so good to have you with us, and I hope to have you back so we can continue this discussion as the prices fluctuate.
LEVINE: Thank you.
PERIES: And thank you for joining us on the Real News Network.
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