A time for nimbleness
Oil prices have fallen before. An ominous gloom descended upon the global economy following the Lehman Brothers crisis in 2008. Oil prices that hovered at $147 per barrel in July plummeted to $40 by year’s end. It was the fastest downward spiral ever. But oil prices stabilized within a year due to concerted efforts to revive individual economies and two output reductions by the Organization of the Petroleum Exporting Countries. That showed once again that the oil market was under the control of the major oil producers. The power of OPEC was as mighty as ever. OPEC producers and major companies were dominant.
It is an entirely different scene in the oil fields today. The pace of the fall in oil prices has been as dramatic as it was back in 2008. But OPEC no longer interferes. In fact, it condones low prices. The theories for why are running wild. Some are saying the United States and Saudi Arabia have collaborated to pressure Iran and Russia. Others assume Saudi Arabia is playing chicken with the U.S. shale gas industry for making inroads on its turf and pushing the new players out of the game. None of the theories have strong evidence behind them.
One thing is for sure: The market has changed. Oil producers no longer can make money by adjusting output. They may end up losing market control. All parties are busy trying to save their own skins. The shale revolution has entirely changed the landscape of energy. At the same time, it has brought an end to OPEC’s invulnerability. The global economy is going through hard times. Petroleum demand remains unchanged and supply is ever increasing. The phenomenon will likely last for some time. It was not intentional. The market just evolved. And it has just begun. We have not seen the end of the repercussions of the shale revolution.
Low oil prices have immediate impacts on markets. Investments on the supply end will slow down or be canceled. Demand will rise because prices are cheap. Then oil prices can rebound. That is how any market works. But a rebound in oil prices won’t be easy. Shale development can temporarily be stalled by reduced demand. But once prices pick up, so will investments in shale fields. Shale development does not take place in exotic places. It is done in already discovered mines and wells. The resources are therefore reliable. There has been fast development in technology that reduced the biggest stumbling block to shale exploitation - production cost. For the first time ever, OPEC has met a formidable rival that is turning more and more competitive with fast advances in technology. The oil cartel is breaking down. It is a dramatic revenge of technological advances and market power. In other words, this is not your grandfather’s oil market.
What direction will the oil markets take now that they no longer have a predominant player? Nobody can say. Global pundits and institutions are mixed in their outlooks. Oil producers can no longer come together to turn the markets in the directions they wish. Market volatility will get stronger. Since both supply and demand are less flexible than the price, prices could fall sharply from a little increase in supply or go in the opposite direction from a change in demand.
Countries that rely on energy imports most dread volatile oil prices. Price swings in either direction can deal a heavy blow to the Korean economy. The geopolitical and financial market factors that could affect oil prices have increased greatly from the past. We are in for a bumpy journey until the new order becomes stable. Cheap oil prices are a windfall for our economy, especially at a time of stagnation.
But if we look ahead, we cannot be entirely happy about such a situation. The global energy market is busy re-examining investment portfolios to start a race for mergers and acquisitions. Each country is redrawing its energy outline and strategy for long-term energy sustainability. A change in landscape is in the making from investment and production to trade and consumption. Investment in the wrong direction must be quickly scrapped. It is time to rationalize the system and sharpen competitiveness.
No time should be wasted. The local energy industry demands a full makeover. A rigid industry profile from the times of state-led industrialization cannot compete in the markets of the future. It is a good time to make a move. Import prices are low and local supply and demand conditions are stable. A country that relies entirely on energy imports must be more vigilant and prepared in its energy resourcing. That is the lesson of extreme volatility - which Korea has learned many times in the past.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Feb. 18, Page 21
*The author is economics professor at University of Incheon and former president of Korea Energy Economics Institute.
by Sonn Yang-hoon