Santa Claus may have delivered the greatestgift in years to the American oil industry with the recent announcement that the 1975 Nixon embargo against U.S. global oil exports has been totally lifted as part of a 2015 year-end bipartisan U.S. budget agreement.
The U.S. energy sector had been in “breakout mode” until Saudi Arabia and its associated allies, the United Arab Emirates, Kuwait and Qatar, combined to go for broke at the November 2014 OPEC Vienna conference to short-circuit America’s supercharged hydraulic fracturing (fracking) outburst that started in 2010. This was reconfirmed at the Dec. 4, 2015 OPEC meeting, which retained Saudi Arabia’s unrestrained production level.
By flooding the market in the last quarter of 2014 to maintain its global market position, this “Gulf Peninsula” group brought prices down from $75 (already a drop of 25% from mid-year) to a recent $35 a barrel level, which even they did not anticipate. The retention of less than a $50 price level has proven to be unacceptable over a lengthy time period.
While critics of quid pro quo for the embargo lift believe House Speaker Paul Ryan gave away too much of the Democrats’ demands, especially with benefits to America’s energy industry questionable due to the below-cost prices, it’s worth to the lagging energy sector’s future could prove beneficial. That’s because the bulk of American shales’ West Texas Intermediate (WTI) is the highly desirable light condensate variety, which is not readily available worldwide. Nigeria is the only other world-class mass producer and exporter of this variety available in substantial quantity. This makes a bet on higher U.S. export prices reasonable due to the potentially increased demand requirements now met with massively increased U.S. supply.
The reversal of production downsizing that the American nation’s WTI producers have had to undergo in the past year due to the marginal pricing disadvantage should begin to be available within the next 90 to 120 days. The further arguments that this U.S. oil international availability will lead to an even greater price war is negated by the fact the U.S. WTI predominance will find a substantial number of new customers throughout the world. These have shown preference for America’s “light oil” due to the less expensive and simpler refining process necessary for its ultimate conversion to derivatives.
The American Crude Oil Exports Association (PACE), a coalition of 16 independent exploration and production companies, rejoiced at the unexpected announcement of the embargo lifting. PACE commented, “This is a historic moment that will add a new dimension to America’s fast-growing energy sector.” PACE emphasized this “exciting development will prove to be a launching pad for converting the benefits of nationwide ‘fracking’ and new worldwide export opportunities into an American global energy superpower that will eventually put the U.S. oil industry at the ‘top of the heap’ throughout the world.”
America in 2016
After a mediocre fourth-quarter 2015 ending, there are some unexpected flickers of encouragement in the economic arena that may yet turn into a bonfire.
- Both the overall ownership housing market’s single-family and multifamily units were spread throughout most of the nation. The 1 million unit mark was achieved in 2015 for the first time since “pre-recession” 2007. Although still short — by a third — of record housing starts in the 1990s, this accomplishment was unexpected so soon after the great financial recession.
- Although record-low mortgage rates and a benign financial support base were provided by the government-supported loan arrangements from Fannie Mae and Freddie Mac, the switch in large numbers from renting and long-term leasing to home ownership was not expected.
- The alternative segment of the world’s largest consumer sector, both in numbers and percentage-wise, is the overall automotive arena, coming close to a new all-time annual record last year by a 325-million-strong population that seems to have recaptured the love affair with medium- and large-size vehicular transportation — reminiscent of the mid- and late 20th century. Not insubstantial in these decisions has been the lowest gasoline and diesel cost in years supported by easy terms from hundreds of thousands of dealerships.
- On the negative side of the economic equation has been the big hit taken by the previously surging fracking energy thrust and such indigenous below-the-surface reserves as coal, natural gas and oil. Together with copper, steel, lumber, agricultural diversity and rare metals a price depression developed, which the U.S. shared with most other countries.
- But in following the old adage, “In the world of the blind, the one-eyed man is king,” the U.S. dollar soared close to all-time record highs, surpassing such global competitors as the British pound, the euro, the Japanese yean and lately the Chinese yuan. While this impeded America’s amazing export growth of the past five years, the U.S. currency value provided it with record world purchasing power and the ability to easily finance a treasury debt that had surpassed the $18 trillion mark.
While the world-at-large today is involved in the greatest turmoil since World War II, primarily via widespread savage outbursts throughout the Middle East and North Africa, the world’s eyes will be transfixed on the U.S. presidential election and its outcome next November. Never before, with the exception of the World War II Dec. 7 Pearl Harbor opening shot, has so much of the nation and its worldwide influence depended on the Nov. 8 election outcome.
Such elected presidential leadership likely will be responsible not only for the endeavors of the U.S., but for the world-at-large for decades to come.
Global economic outlook
While final 2015 fourth-quarter results are being finalized, the world’s main development institution (World Bank) has downgraded anticipated 2015 final results. Although the 2.8% overall projection is only 0.2% off the original 3% expectations, it reflects a downward trend by both emerging markets and the U.S.
A sharp downturn in Brazil and Russia lead the 2015 gross domestic product second-half losers with oil price losses playing havoc with both these once-developing growth leaders now firmly in the 2015 loss column. Weaker growth also has typified the economies of Turkey and Indonesia, whose below-average performance has reduced their 2015 growth to under 3% per annum. Simultaneously, the Eurozone and Japan are showing slight improvement but not enough to offset the Brazil/Russia fiasco and the lowering of U.S. 2015 expectations.
A promising improvement to a global level of 3.3% in 2016 is dependent on China’s turbulent economic maelstrom holding up at a 6% growth level with world leader India maintaining the economic momentum that allowed it to leapfrog China with a sterling 7.5% GDP 2015 performance.
A major negative overhanging much of the emerging nations’ sector is their dependence on revenues from commodity exports. But with global commodity export transactions being savaged by a combination of a rising dollar and lower demand for commodities such as copper, iron ore, zinc, nickel, palladium, etc., not to mention agricultural product prices plummeting, further weakness is anticipated from that arena.
Supplementing these problems are U.S. Federal Reserve interest rate increases that will weigh on loans that many of the world’s emerging nations have undertaken to reach their current power status. According to the Institute of International Finance, this also has put a halt on further investment flow into these countries. This group forecasts flows into emerging markets, which have fallen to their lowest level since the financial crisis this year.
Even such a moderate 2016 projection is dependent on the “Big Four” of the U.S., China, Japan and Germany to hold their own at a slightly improved 2015 level. Any digression therefrom will project a gloomier scenario as 2016 gains its economic footing.