The 'oil weapon' loses some of its power as supplies increase, demand falls
World oil supplies have increased as demand has fallen in key Western markets, robbing petro-power Russia of some of its clout, and softening any potential disruption that Middle East turmoil could inflict on the world economy. We can thank fracking in the United States and elsewhere for the unexpectedly favorable situation, as US oil production has added 1.2 million barrels per day to its rate his year.
The demand side of equation reveals how grim is the world economy: Ambrose Evans-Pritchard of the UK Telegraph writes:
Oil demand fell by 440,000 b/d in Europe and the US over the period, a sign of how weak global recovery still is, consistent with a rare fall in the CPB’s index of world trade in May. The big surprise has been a “sharp contraction” in German demand for oil products, down 3.9pc over the past year. It is much the same picture in Italy and Japan.
The Saudis, who possess the ability to increase oil production or decrease it in order to maintain price stability, are increasing their supplies to the market. This is always a political decision on their part. Rest assured they will not let prices fall to the point it inconveniences themselves.
Falling prices will ratchet up the pressure on Russia, which needs a price near $110 to balance its budget. While it has a reserve fund to cover any shortfall, this would be depleted fast if oil falls anywhere near $80 and Russia goes into a deep recession. Most of Russia’s energy revenues come from oil, not gas.
Libyan oil production has also increased this year, despite the ongoing civil war there, and even Iraq, despite the ISIS surge, has maintained production . The bad guys want their oil revenues just as much as the good guys.
Fracking has changed geopolitics, even as the Obama administration has done nothing to encourage it and much to discourage it. Under an administration friendlier to energy production, the US could have enhanced power of in world affairs, helping it recover from the foreign policy disasters of the Obama administration.