Nightmare Of OPEC. Could Oil Prices Be Heading Further Down?

It has been a while since we wrote on this page. Maybe its because, the script hasn't changed, since the great recession that shocked the world in the years of 2007/2008. As you may or may not know, the developed worlds response to the crisis was to attack deflation by never seen weapons before. You maybe thinking of ballistic missiles, or some type of new nuclear war head. This is a different kind of battle, instead of Generals giving soldiers orders, its economist firing formulas, and suggesting central banks, do the experiment.

First the central banks of the developed world began their fight, by using traditional tools, such as cutting interest rates, when the general economy was not doing well. And, later they noticed, that wasn't working, so they kept cutting, until, interest rates went to zero or close to zero. Yes, we said zero, nada! All of a sudden, money didn't cost anything. Forget, the idea of saving money. Money, generally heads to places, where it generally, earns more money, relative to where it could have been, such as savings account. Could it be, why stocks are doing well, despite, where the economy is? We aren't sure, but maybe. We will never for sure know anything, that's for sure. When what they always knew wasn't working, central banks deployed, money printing schemes, and gave it different names, such as operation twist, and, quantitative easing. Sorry, if we digressed a little, here is our argument, as to why oil prices, could further drop in prices.

Lets start with, what the world revolves around with everyday, Money. So, what are the interest rates central banks of the developed world, have been charging, and is currently charging?

As, the above charts show us, key lending rates by the major economies of the world, is nill. What this tells us is that, the quantity demanded for money is basically non-existent. Our apologies, if nothing we have said so far isn't making any sense. We ourselves aren't sure, if what we have said so far makes any sense. We are just trying our best to connect the dots of this complex world. When we thought, just the fact, that there was no demand for money, could be one of the sole reasons, why oil prices have come down dramatically, and probably continue to do so, we saw the following charts.

From the late 80's, we see that consumption of oil per day rising, that's until it peaked in the middle of the 2000's.

Oil reserves are the amount of technically and economically recoverable oil. What the above chart tell us, in simple terms, is that basically there is more oil available, than the demanded amount.

As consumption peaked, something else emerged. Total production of oil by the United States per day began rising at a fast pace. What we recall, that is if our memory is sharp, the last decade, we witnessed, prices at the pump reaching $5 per gallon. If we could refer, to the chart above, that was also when the United States, biggest consumer of oil, was producing less and less of the stuff.

Today, the story is different, even the experts are saying, the United States is producing more oil, than the sheik kingdom. The script has changed, by the invisible hand of the mighty market. By now, its most likely, you have forgotten, what we said about interest rates. Remember, the cost of money, the thing one has to pay to borrow money? We knew, you would recall. If you truly remember, interest rates in the developed world have been on a downward spiral, since the great recession, or depression, depending on your perception of the world around you. In short, there isn't much demand for money, neither. What we are trying to understand is, if there is no demand for money, how could there be demand for oil? Does it not take money to buy oil?

Regards,

Eskinder Haile