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What’s driving the global glut of oil

August 25, 2015 at 6:45 PM EDT
A year ago, crude oil was trading at more than $100 a barrel. Now, the price of oil is down more than 60 percent from its peak. Gwen Ifill speaks to The Wall Street Journal’s Russell Gold to understand the drop and how it affects the U.S. economy.
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GWEN IFILL: Only a year ago, crude oil was trading at more than $100 a barrel. But prices have plunged, down more than 60 percent from its peak. Much of that drop has occurred in just the past few weeks.

Increased supply and declining demand for oil, plus the ongoing slowdown in China’s economy are part of what’s been fueling turmoil in the financial markets, and for some of the major oil-producing countries as well.

Russell Gold covers this as the senior energy reporter for The Wall Street Journal.

Thank you, Russell, for joining us.

The price of crude oil, as we just said, is down so much since 2014. What’s the basic reason?

RUSSELL GOLD, The Wall Street Journal: Well, the basic reason is that the supply continues to grow.

The United States, which has sort of been the big story over the last few years, has been pumping more and more oil. It’s barely flattening off, even as prices come down. Everyone thought the U.S. production would fall off a cliff and that hasn’t happened. Meanwhile, Saudi Arabia has been increasing production, something you wouldn’t expect from them at these oil prices.

And everyone thought, well, what will save the day is Chinese demand, growing Chinese demand will sop up all that extra oil. That hasn’t happened. And then over the last week, as we have seen, there are a lot of questions about whether there is going to be any Chinese demand over the next year or so.

GWEN IFILL: Why hasn’t there been any incentive to cut back in production as a way of driving the price back up?

RUSSELL GOLD: Well, there’s been a lot of incentive if you sort of look at the big macro level across the entire industry. But if you’re a producing country, there is no incentive to cut back, because what you’re doing is, you’re waiting to hope that somebody else cuts back first.

If you are the one who cuts back, well, that’s going to dry up your revenue. And if you’re a company, then you’re not going to be able to pay your workers. And if you’re a country, you’re not going to be able to fund social programs.

GWEN IFILL: Where is all this oil coming from, especially in the U.S.?

RUSSELL GOLD: Well, in the U.S., there has been an incredible boom brought about by fracking. It’s mostly coming from Texas and North Dakota.

We’re producing more oil than we have since the early 1970s. It’s been a really just remarkable turnaround.

GWEN IFILL: And as a result of this — these low prices, what’s happened to consumption? Are Americans saying, well, prices are low, I will just keep going as I go? Or are they doing what Americans do, which is buying more?

RUSSELL GOLD: Well, that’s a great question.

Back in 2007, there was what some analysts call peak gasoline consumption in the United States, we’d hit the maximum that we were going to hit because the cars were getting more fuel-efficient. Well, that’s starting to actually turn around. People are buying less fuel-efficient cars and they’re driving further.

So, you know, you’re out there, you’re seeing the $2.50 gasoline prices in a lot of places in the country and people are beginning to drive more. So, demand in the U.S. is going up. Globally, it’s flat.

GWEN IFILL: And so the USA, they’re buying big trucks, for instance?

(CROSSTALK)

RUSSELL GOLD: We’re starting to see that coming back, yes, absolutely.

GWEN IFILL: So, let’s talk about those other countries. You mentioned Saudi Arabia. But what about oil production in places like Iraq, or Venezuela, Nigeria, Russia?

RUSSELL GOLD: Well, Iraq is also — like Saudi Arabia, has really ramped up its oil exports.

They’re sort of part of the reason behind this glut. But if you look at a place like Venezuela, they have got triple-digit inflation rate now. The IMF sees the economy contracting by 7 percent. They’re sort of right now at the leading edge of oil-producing countries that are in a lot of trouble economically. Russia also is having trouble. They’re believed to be in a recession right now because of low oil prices.

When you’re a producing nation and that’s your primary economic output in a place like Venezuela or Nigeria, this is just a really bad scenario for them.

GWEN IFILL: OK. Well, let’s go back to China. We have watched this incredible turmoil in the Chinese markets. Which is the chicken and which is the egg, or does oil play a role in this at all? Is oil driving any of this, or are the markets driving the oil prices?

RUSSELL GOLD: Well, I think right now it seems to me like the markets are driving the oil prices.

When you see the Chinese economy begin to really slow down or at least the signals are very clear now that it’s slowing down, then, all of a sudden, you don’t have the big growth in demand that, up until a couple of weeks ago, everyone was expecting. The International Energy Agency earlier this month put out their big monthly report saying, we’re going to see a lot of growth in demand at the end of this year.

Well, that’s really a question mark now. And if you’re a producing company now, just a couple — let’s say two months ago, the Kansas City board of — Kansas City Federal Reserve Bank put out a survey and asked producers, well, what do you think the oil price is going to be at the end of the year? And the answer was $63. I think they are going to be ecstatic if they get to $63 by the end of the year.

GWEN IFILL: And, finally, let’s talk about little bit. We talk a great deal on this program about the Iran nuclear deal. And of course there is oil involved and there are questions about oil production involved in that as well. Does that change the nervousness about that deal at all? Does this have an effect?

RUSSELL GOLD: Well, I think what the impact it could have is that, if the deal goes through, that’s just one more weight on oil prices, because Iran wants to come back and double their production, add another million barrels a day of export on to the market.

So if you’re sort of looking long-term and thinking to yourself, well, when do oil prices rebound, if the Iran deal goes through, then that’s just one more bearish sign really for oil prices.

GWEN IFILL: OK. Well, we will be watching all of these. There’s so many factors which will drive the outcome.

Russell Gold of The Wall Street Journal, thank you very much.

RUSSELL GOLD: Thank you.

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