OPEC- The End of an Era?

The recent decline in the NYMEX oil price over the last six months, from $107 to less than $63 a barrel, has been covered extensively by the world’s media and even though many are already trying to call a “bottom”, I personally believe it has a very high probability of being a global, long-term (if not permanent) game changer, with such massive implications that I consider it worth briefly discussing again.

Talks are abound regarding restricting the supply of oil, to push the price up, but will (or should) this really happen? For decades now the world has been held to ransom, in a sense, by accepting a manipulated oil price, as it essentially is/was run by a cartel. Now that there is stronger competition, in the form of the US supply, it seems that a much lower oil price is actually viable and there is no reason that the current price, as determined by market forces, is not sustainable. OPEC’s bargaining power has decreased significantly, as essentially they are now attempting to tell some members to produce less, so that the others can make more. Nobody wants to willingly “draw the short straw”.

Also, for some time, the entire world has been concerned with the environmental and sustainability implications of using a finite resource, like fossil fuel, as a primary source of energy. The race to find the best alternative solution has been running for many years, resulting in many potentially viable options, which until recently just lacked the required levels of efficiency. That issue has been addressed over time, making it completely reasonable that the world’s reliance on oil may be reduced sooner than anticipated. The chart shows the price to produce one unit of energy through various methods. Note the grey line denoting Solar energy, which is a technology not a fuel and thus not finite. Efficiency increases and prices fall over time. Fossil fuels go the other direction.

Even though this has different consequences for different economies, with net oil importers benefitting and net oil exporters being worse off, the overall effect should be positive for global growth and put downside pressure on inflation. Never mind the economic and asset market implications, I think this is an exciting change in the world as a whole, one that we will be living through much sooner than most expected.