Plunge

Some people just need conspiracy theories to explain unfolding events — including the price of oil.

Over the weekend, the price of crude for January deliveries stood at just over $65 per barrel. Analysts are expecting prices could plunge further to under $50 a barrel after the Organization of Oil Exporting Countries (OPEC) failed to agree on a plan to curtail supplies and firm up prices.

The spectacular collapse in oil prices after decades of consistent increases spawned conspiracy theories of every sort, most touching on geopolitics.

One theory has it that the traditional oil exporters, those belonging to the OPEC cartel, are allowing prices to fall in order to head off the development of shale drilling technologies in North America. The extraction of fossil fuels from shale progressed admirably during the last decade because high oil prices made the more costly method of extraction economically feasible.

I heard a rather outspoken American oil magnate the other night speak bravely about bringing down US oil imports from the Arabs to zero in due time. He might be a bit too optimistic. Should oil prices fall below the cost of extracting crude from shale, the drillers would go bankrupt.

Another theory has it that the plunge in oil prices is a conspiracy of Western nations to weaken Russia and push the nation deeper into recession.

After the Soviet Union broke up, Russia inherited all the debt of the old confederation. She was saved from bankruptcy only by the discovery of immense oil and gas deposits. Today, Western Europe is dependent on the gas pipes from Russia. Russia, for its part, is nearly completely dependent on commodities exports for revenues.

Much as they might distrust each other, Russia and the Europeans are locked in an eternal economic embrace.

With her massive oil and gas deposits, Russia took the wind out of OPEC’s sails. Should OPEC decide to cut production, Russia would surely step up her exports. That possibility castrated the once-awesome power over oil prices of the old cartel.

Oil and gas revenues are the basis of Russia’s reinvigoration on the world stage, as well as the imperiousness of Vladimir Putin. Although Russia seems willing to sell commodities at any price to finance Putin’s power plays, a massive plunge in oil prices will throw her finances awry.

It turns out, Russia’s ambitious spending plan for this year rests on the assumption of oil selling at $100 a barrel. At $85 a barrel, Moscow will be running budget deficits. Today, at $65 a barrel, the mighty Russian economy will be mired in deep recession.

What the domestic situation in Russia could be at $40 per barrel is anybody’s guess. Recession has its way of making citizens very angry.

Yet another conspiracy theory has it that the oil price plunge is an Arab handiwork to weaken Iran.

Hampered by global sanctions meant to dissuade Iran from building a nuclear arms arsenal, Tehran depends almost entirely on oil exports to raise foreign exchange. As oil prices soften, Iran (like Russia) sinks deeper into recession.

Venezuela is generally in the same predicament. The odd “socialist experiment” in that country, beginning during the eccentric rule of Hugo Chavez, has been financed by robust oil revenues. For as long as oil revenues were hefty, the funny gang of socialists ruling Venezuela could get away with their games. With plunging oil prices, they will now be in deep trouble.

  All the conspiracy theories outlined above contain factual elements. None of them, however, singularly explain what is happening.

The basic flaw on any conspiracy theory is that it rests on single causality. Much of what happens, however, are caused by the interplay of multiple causes. Conspiracy theory is the weapon of weak minds.

There are other factors beyond geopolitical concerns helping drive the dynamic towards softer oil pricing.

While oil is indeed a finite resource, there is still much of it — either trapped in shale, hiding deep under water or underneath the polar caps. They are ready to be exploited when the price is right. Low prices will forestall exploration.

Present production capacity exceeds demand. This is the reason why political disruptions in Libya, Syria and Iraq no longer drive up prices as they did before. Those politically disrupted sources could be easily offset by new capacity in Russia or in Canada.

While millions of cars are added to the world’s roads each year, they have become more fuel-efficient. Technological progress will soon make electric cars more viable and accessible, removing a major consumer of oil.

Cities (excluding Metro Manila) are becoming smarter. More efficient mass transport systems and better-planned communities reduce the need for burning fossil fuel. More and more power is generated from renewable energies. The energy configuration is bound to change dramatically in the near term.

One of the more precipitate causes for the current plunge in oil prices is the moderation of China’s once searing growth rate. Although China will certainly become the world’s largest economy in a year or two, she will never likely return to the track of double-digit expansion that caused so much speculation in the commodities market.

Oil industry analysts anticipate declining prices to continue for 12 to 18 months — although they give no scenario on what could possibly cause prices to firm up. The only possible cause for reversal of the trend is a pick up in global growth across the board.

The present price plunge is a boon for consumers, especially as it dampens inflationary pressures. So sit back and enjoy the ride.