Fibs and glut

  

We all know that a glut has lowered oil prices.  We know this because the media has repeated it ad infinitum for six months.  The only problem with the assertion is that it's wrong.

As the Bank for International Settlements politely puts it, assertions of an oversupply “seem to fall short of a fully satisfactory explanation of the abrupt collapse in oil prices.”  The deviation from trend in demand and supply – that is, unexpected oversupply -- is only about an eighth as large as occurred in 1996 to 1998, when the world oil market really was awash; the annual Brent spot price -- the usual benchmark price for the global market -- fell below $13 in 1998.  The yo-yo nature of oil prices since summer is reminiscent of a financial asset, suggesting that speculation – not demand and supply – may be the real problem.  The BIS did not specify the oil price that it had examined. 

Other financial factors may affect the price, notes the Bank.  The energy industry has borrowed steadily, and heavily, since 2007.  Low oil prices reduce the value of its collateral, so oil firms wind up selling crude at basement prices in order to raise cash.  This may be particularly true of oilers in emerging market economies (Kazakhstan, anyone?) who borrowed in dollars.  Since the buck has been strengthening for months, the interest payment in terms of the local currency has risen.  Finally, oil firms are finding it harder to hedge their financial bets, since no one wants to buy from them an asset with a falling price.  “The build-up of debt in the oil sector is a reminder that high debt levels can induce significant macro-financial interactions,” writes the BIS, which is effectively the central bank for central banks.  The full report is to appear in the BIS Quarterly Review next month.

The supposed glut was mainly a media event, I think.  Such newspapers as the New York Times, the Financial Times, and the Wall Street Journal intone relentlessly that the oil market is oversupplied by two or three million barrels per day.  They fail to note that this amounts to only about 2-3% of the global market and may well be in the range of a typical fluctuation (see the Notes below).  It wouldn’t kill a reporter to learn how to calculate a percentage change.

The problem is not that energy reporters ask the wrong questions.  The problem is that they don’t ask questions, period.  They are shills for their sources.  One example is the story in the Financial Times on the BIS report.  You would think that as a leading proponent of the glut theory, the newspaper would at least ask an analyst who believes in oversupply to comment on the report.  No such luck.  The Financial Times rewrote the first paragraph of the BIS report, and that was about it.  It should have just published the link and let it go at that. 

The economic reporting in Kazakhstani business weeklies, and in blogs that cover Central Asia, notably eurasianet.org, is even worse.  Skepticism is out of fashion among these journalists, and they are rarely worth reading.  --Leon Taylor tayloralmaty@gmail.com

Notes

Consider supply fluctuations given the Great Recession and its lingering effects.  From 2008 through 2013, the annual mean of world crude oil production was about 88 million barrels per day, according to data from the United States Energy Information Administration.  The standard deviation was about 2 million barrels per day, or 2.2% of mean output -- roughly equal to the excess supply reported for the past several months.  Or one could consider the periods of 2009 through 2013 (2.3%) and 2010 through 2013 (1.5%).  

References

Bank for International Settlements.  Box: Oil and debt (February 2015).  www.bis.org/statistics/gli/glibox_feb15.htm

Neil Hume.  BIS says financial flows partly to blame for oil collapse.  Financial Times.  February 7, 2015.  

United States Energy Information Administration.  International energy statistics.  www.eia.gov