EKIP– Expert Club for Economics and Politics A Different Opinion
One factor that could increase oil supply is Mitt Romney's energy plan.
Oil is important for the well-being of people. What makes this finding objective is the fact that the raw material is the subject of demand by individuals who want to use it in a certain way. The trade in oil takes place in a global market, which represents the exchange interaction between buyers and sellers. They are the two transaction parties - demand and supply - with whose mutual consent units of the raw material change their owner.
Another objective fact is that the price of oil, like the price of any other commodity, is determined by the demand of buyers - how many units of their available money they are willing to part with in order to acquire a given quantity of what they want. With this in mind, the price is established at a level at which the quantity supplied of the two goods being exchanged is equal to the quantity that the parties involved in the transaction are willing to purchase. This means that if we want to study the development of the price of oil, we must pay attention to the demand and supply of the raw material, and in particular to the factors that could cause a change in this ratio and the establishment of a new equilibrium price.
Mitt Romney's energy plan
One factor that could increase oil supply is the energy plan of Mitt Romney, the Republican presidential candidate. In a recent debate between him and Barack Obama, he stated that in 2011, oil production on federally owned lands fell by 13.77% compared to the previous year. [1] This is due to fewer concessions and fewer permits being issued for drilling on federal lands [2], which is part of the current US president's measures to switch to "green" energy sources. [3]
What is Mitt Romney's energy plan?
- Introducing a new five-year concession plan for offshore government territories that would allow exploration and drilling in places that would have been prohibited under Obama's five-year plan for the same territories;
- Approval of the Keystone XL oil pipeline;
- Allowing seismic surveys and oil exploration in offshore territories to obtain up-to-date information on possible oil drilling;
- Cooperation with individual states, promising to grant them decision-making rights to locate federal territory on which oil could be produced.
The measures that the Republican envisages - increasing concessions, permits and exploration and reducing bureaucracy - will lead to increased oil production. Even if this happens, the question arises whether the increased supply will have a significant impact on the price of oil, if at all? After all, the raw material is traded on the world market and the supply coming from the United States is only a part of the total supply.
This depends on the production prospects (additional production volume and marginal cost of production per barrel) that will arise and how they will be valued by the market. In view of this, we can expect that the implementation of the Romney energy plan will put downward pressure on the price of oil. [4]
The Congressional Research Service (CRS) reports that the increase in oil production in fiscal year 2011 was due to production on private and state lands, with this production accounting for 70% of the total in the United States. [5] The CRS also reports that 96% of the increase in oil production from 2007 to 2012 came from private and state lands, with production there increasing by 11% in 2011 compared to the previous year. Companies prefer to explore and drill for oil on territories with one of these two legal statuses because there are fewer administrative obstacles and delays, making production there more profitable than on federal lands.
The U.S. Energy Information Administration (EIA) reported that U.S. oil production rose 3.4 percent in 2011 from 2010 levels, the highest level since 2003. [6] This is due to the use of horizontal drilling and hydraulic fracturing technologies, which have reduced the otherwise increasing rate of marginal extraction costs. This means that at a given price level, production may now be profitable. All of this suggests that an increase in the supply of the commodity can be expected.
Although Mitt Romney's energy policies would lead to an increase in oil production, the presidential candidate's foreign policy would have the opposite effect. Romney's statements have suggested that he would be more aggressive towards Iran than Barack Obama, increasing the chances of a US military intervention if Romney wins the election.
Currently, ten months after the first sanctions imposed by the US and EU on Iran, the country is producing 220,000 barrels per day less, bringing Iran’s oil production to 2.63 million barrels per day. [7] The International Energy Agency (IEA) also reported that Iran’s oil exports for September fell to 860,000 barrels per day, down from 2.2 million barrels per day in the same month in 2011. This in itself puts upward pressure on the price of the commodity, and a potential military conflict would have an even more significant impact.
Other sources of geopolitical tension that could lead to disruptions in oil supplies and a decline in production include: the EU ban on oil imports from Syria, the escalation of the “aircraft” conflict between Syria and Turkey, and unrest in Yemen and Sudan.
As for oil demand, the IEA revised its expectations for the level of consumption of the raw material for the period 2011-2016, now predicting that it will be 500,000 barrels per day less than in the report in December 2011. In the same report, the agency predicted an 8% growth in world oil demand between 2010 and 2016, and now the figure is less than 7% for the period 2012-2017, putting oil demand in absolute terms at 95.6 million barrels per day. In addition, the agency reduced its expectations for global oil demand in 2013 by 100,000 barrels per day, highlighting the decline in consumption in Europe, the United States and China.
A decline in oil consumption is not surprising for an economy in crisis. Such an economy is characterized by a process of capital structure change, in which individual units of capital, in relation to the market valuation of their most important productive use, move from one production stage/sector to another. This process is driven by the pattern of demand for consumer goods and takes time, during which the use of the goods accompanying production is at lower levels.
What requires most of our attention is the relationship between oil and the currency in which it is traded. In other words, we need to examine the nominal change in the price of the commodity, that is, the change that is not caused by a change in the supply of oil, but by a change in the supply of monetary units.
For several years now, we have been witnessing a global “quantitative easing” program aimed at stimulating the global economy. The idea is that the production of money leads to an increase in the production of other goods that would not otherwise have occurred. The production of money beyond the demand for money, however, changes the relationship between the relative exchange quantities of goods and the currencies in which they are denominated.
The purchasing power of the dollar - the currency in which oil is mainly traded - is associated with depreciation, resulting from a series of manipulations carried out by the Federal Reserve. These manipulations lead to increased demand for oil, both by speculators who recognize the possibility of profiting from the increased volatility in the oil market, and by market agents who actually consume the raw material.
After all that has been said so far, it should be obvious that the oil market is extremely complex. There are many factors at work in it, the development and interaction of which cannot be predicted with perfect accuracy. Although we could quite accurately predict a change in the direction of the price of a commodity as a result of a change in one of the factors that affects the demand or supply of the commodity (i.e., under ceteris paribus conditions), we are not able to make the same prediction if we have to take into account a change in both demand and supply (i.e., if several factors are at work that exert opposing pressure on the price).
My personal opinion is that in the long term, the price of oil will rise, because if I had to name one factor whose duration and intensity of action I am relatively certain of, it is the use of monetary policy by politicians as a means of economic growth.
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*The article reflects the personal opinion of the author and should not be taken as investment advice.
[1] See Sales of Fossil Fuels Produced from Federal and Indian Lands. In 2010, 726 million barrels of oil were produced on federal lands. In 2011, 626 million barrels were produced.
[2] The number of new concessions fell by 42%, from 9,661 in 2006–2008 to 5,568 in 2009–2011. Under Barack Obama, the total number of acres granted under concession fell by 18%, from 47.2 million in 2008 to 38.5 million in 2011. Permits issued fell by more than a third, from 20,479 in 2006–2008 to 12,821 in 2009–2011. The time it takes to obtain a permit to drill on federal land has doubled since 2005. - from 154 days to 307 days in 2011.
[3] The bulk (about 80%) of federal oil production is located offshore. In 2011, this production decreased by 17% compared to 2010. The reason for the decline was the moratorium on drilling that the US government imposed after the Gulf of Mexico oil spill (production in the Gulf fell by one-third).
[4] The price of oil fell as much as $9 per barrel during George W. Bush's speech in the summer of 2008, in which he announced the end of the moratorium on offshore drilling.
