The world is drowning in oil. Just in the U.S. reserves increased over nine million barrels to bring the total to 532.5 million. According to the U.S. Energy Information Administration, if we completely stopped domestic production and didn’t import a single drop, we could still go nearly a month just on what we have in storage right now. That’s a lot of oil, so much that we’re now running out of places to store it.
The glut is also driving down prices again, just when markets were starting to see some relief with a brief upward surge. In the topsy-turvy financial world we live in today, where a strong currency is bad, savers are punished by the Federal Reserve banking system and carrying debt raises your credit score, it’s ironic that the world finds itself on the brink of a financial crisis stemming from an oversupply of oil. Back in the 1970s and 1980s who could have seen this coming? Our entire military industrial complex and foreign policy strategy is built around the assumption that any war we might fight in the Middle East would be to ensure a steady supply of energy.
Why Low Prices Are Bad
The world stands on the brink of an energy crisis brought about, paradoxically, by steadily falling oil prices. The initial drop was triggered by a surge in the value of the U.S. dollar. Since commodity trades are valued in dollars, that means prices went into a tailspin. This price depression has rippled through dozens of small countries that depend on exports of their commodities for survival. Some countries, like Venezuela, are teetering on the edge of collapse. Other countries, like Brazil, are dealing with massive inflation, unemployment and a government corruption scandal. The IMF’s “net plus” theory that low oil prices would be good for the global economy now appears, by its own admission, to have been completely off-base. Low oil prices are leading to debt, shattered government budgets and global unrest.
Saudi Arabia and Iran
Low oil prices are even destabilizing a part of the world that takes the “fun” out of dysfunctional. When prices moved lower, instead of lowering output and propping up prices, Saudi Arabia flooded the market, driving down prices. That strategy crippled projects in the U.S. and Canada that were extracting oil from tar sands and shale. It also hit back at Saudi Arabia’s number one enemy in the region: Iran. The lifting of sanctions once again gave Iran access to world markets and lowered oil prices keep a lid on their earnings from oil revenues.
Oil Price Rally Fizzles
It looked for a while like prices were going to rally but that quickly died. That means the weakness in China’s growth and softness in world markets is likely to continue. The connection between oil prices and global markets is a bit complicated but think of it in terms of liquidity. When oil prices fall, that’s less money moving through the world economy.
No Good for Us Either
None of this is good news for the U.S., outside a temporary respite from high gasoline prices. It’s clear the Saudi plan to undermine domestic oil production is working. Oil imports are on the rise and tankers are waiting in line to offload their black cargo. Sometimes they’re forced to wait because there’s not enough room in storage facilities to accept it all. The only good in the situation is that it reminds being too dependent, even on supposed allies, exposes us to many dangers to our wallets, and our way of life.
It’s a crazy financial world we find ourselves in today. It’s a world where our friends are crippling our domestic oil industry, where a strong dollar is crippling our allies and the Fed is punishing the most responsible people in our economy. Where, and when, this madness will end is hard to tell, but one thing is for sure: it’s not going be pretty.