Plunging Crude Prices: Overview

February 11, 2015

Featured speaker Mine Kuban Yücel, senior vice president and director of research at the Federal Reserve Bank of Dallas, presents an overview of global oil consumption and production, touching on recent declines in energy prices.

Presentation (PDF)



Julie Stackhouse: It is my pleasure to introduce Mine Yucel. Did I get that pretty close? Yep, OK, who is the senior vice president and the director of research at the Federal Reserve Bank of Dallas. She's an adviser to the Federal Reserve Bank of Dallas president on regional and energy issues. And of course as with a Ph. D economist in the Federal Reserve, has published numerous articles, and in this case, on the energy and regional growth. She is a member of the National Association for Business Economics, Board of Directors, and a past president of the International Association of Energy Economics, and the United States Association of Energy Economics. Prior to joining the Dallas Fed, she was an assistant professor of Economics at Louisiana State University, and she received a bachelor of science and masters of science in math. That's my daughter's major. Good. And a Ph.D. in Economics from Rice University in Houston. Would you please join me in welcoming Mine.


Mine Kuban Yucel: Thank you, Julie. Let me just turn this on.

Julie Stackhouse: OK.

Mine Kuban Yucel: OK, can everybody hear me? Yes? All right. Well, thanks. I'm very happy to be here. And energy is my passion, so I'm very happy to talk about energy with you.

So just six months ago, oil prices were above a hundred dollars, and we had every expectation that they were going to stay that way. Well, the picture changed quite a bit as you can see here, and as you know, oil prices plunged from above a hundred. It was a 107 in June to less than 50 by January. That's a more than 50 percent decline in how many months? Seven months? And that's brought about by ample supply and weak demand.

Now in the face of oil prices, it sort of started going down as I said in June. Everybody expected OPEC to step in and curb their production. Didn't happen. In fact, they said they were not going to do it. And the day after the OPEC meeting when they announced they weren't going to do it, prices fell by $7 just in one day. So that changed the expectation of how far prices could go. And so in the meantime you can see another, let's see if I can get this to move up there. I'm having problems with this. I did practice. Let's see. See that red thing? No. Where is it? Here it is. Here. Can everybody see this? This is the natural gas price, and natural gas prices fell also, about 40 percent in the same amount of time without much fanfare. Nobody really took much notice of that. But what I'm going to do today is just talk about oil and not gas.

OK, so I'm going to first talk about how we got to this low price environment, discuss the world oil supply and demand balance, then its impact on the U.S. economy, then discuss the impact on state economies, and then tell you what we think about where we go from here, OK?

So here you see quarterly world oil consumption. Every bar is a quarterly growth, and it's year over year growth. So what you see is in the second half of 2013. World oil consumption growth decelerated and did not pick back up until the second half of 2014. And the main reason behind this was slowing Europe and Asia.

So just sort of go a little bit deeper into where this was, so the bars are now different areas of the world, 2013 and 2014. And you can see that in 2014, the blue, which is the OECD, that consumption declined. And that was, the reason for that was Japan and Europe being quite weak. Then if you look at the green, that is the former Soviet Union and Eastern Europe, and you can see that their demand or consumption growth for oil also declined, and that's the Russian economy slowing after the Ukrainian crisis and the sanctions. So growth overall though did go up in 2014 about 900,000 barrels per day, so it wasn't very much, but still grew.

So now we're going to put here, add to the chart that you saw first, non-OPEC production growth, so those are the red bars. And the important thing to note here is the growing mismatch between the growth in consumption and the growth in output. You can see it sort of widening. And most of the increase in output came from North America, and the lion's share came from the U.S. The U.S. oil production went up about two million barrels year over year.

So then we add OPEC production to this, and those are the green bars. And as you know, it's been pretty unstable in the Middle East, and OPEC was not adding much to oil output growth. Not in 2013, nor in the first half of 2014. But I'm going to try it again. But it did add, you know, I'm just going to forget this. You can see the green bar there. That's positive, so OPEC did add to output growth in the fourth quarter of 2014. And what, that came from Libya and Iraq. So we look at that in a little bit more detail.

So this is cumulative production from Libya and Iraq starting in July of 2014. So this increase that came from Libya and Iraq was unexpected because Libya, again there was a lot of sectarian violence there. The oil production was very unstable. And in fact in March, almost zero production. Then started moving up and really started moving up in July. By October, they had moved up to 900,000 barrels per day. So that's quite a bit of output from Libya. But again sectarian violence, and it sort of started coming back down, and by December, it was half. So what happened, though, was Iraqi output came in to offset that decline. So again Iraqi output has been pretty unstable also, and sectarian violence, mostly ISIS. But what happened in December of last year was that the Kurdish government and the Central Iraqi government came to some agreement on the sharing of revenues. And once they did that, then Iraqi exports and Iraqi output really started going up. In December, Iraq produced 3.7 million barrels per day, so that's a lot of output. And the estimates for January are about four million barrels per day, so that's a lot of output coming from Iraq. So that has affected obviously prices, and so we superimpose the change in the WTI oil price, West Texas Intermediate, and you can see that what it does is what you would expect. WTI prices came down significantly.

One thing that you don't see here, in the first half of 2014, prices did not go down. WTI was relatively stable. And the reason for that, you can't see in this chart, was Chinese stocks going up. So the Chinese were buying oil and putting them into their inventories. So you can't see that in this picture because that consumption growth is final consumption, so it doesn't include stock builds, but that was what was going on in the first half of 2014, which kept prices relatively stable, and then once they stopped, that went down.

OK, so weak global demand was a factor in the price plunge, but we think it's mainly increase in supplies that caused that price plunge, and this slide is consistent with that story. What you see here are three commodity indexes. The blue one is energy. The green one is industrial metals, and non-energy is the red. And so what you see is that the energy index has fallen by far the most by far. The other ones have not come down as much, and in fact they're sort of relatively stable. So we think this is consistent with a supply story. And just to sort of compare that with what happened in 2008 where we had the great recession, and it was a demand, weak demand story, you can see all those three indexes coming down in pretty similar magnitudes. So I think this sort of bolsters our contention that it's more a supply story than a demand one.

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