A barrel of oil, 42gallons of crude now costs about 57. Just a couple of months ago, that same 42gallons cost 106. If you drive a lot, it was like getting a raise. If you are corporate or National Income is based on how much you can get for that barrel, you just got a cut in pay. Close to 50 . What the tumbling price of crude does in an inter naturally connected World Economy where Christmas Shopping americans iranian generals, venezuelan bureaucrats and chinese factory owners all are feeling the effects of cheap oil. Oil prices have been falling at record speeds this year. To the delight of Many American drivers. I am glad it keeps going down, like we got enough bills and insurance and Everything Else to take care of. Gas should be the least of our worries. In the last six months, oil prices have dropped 45 . In october, when the price of oil was down to around 80 a barrel, we asked our guest, professor of International Business how low oil could go before we should start to worry . Are there best cases or worst cases that we should be looking at over the next year and two . Goldman sachs says 70 a barrel all year. We were talking earlier before the show and i said one of the thing you never do on a show is name a price for oil its the hardest thing to predict. I would say lower. Lower than 70. Yes. On friday oil prices sank to 65 a barrel. The lowest since 2009. Its about the law of supply and demands. There is too much supply, and prices have continued to fall since saudi arabia convinced opec to keep pumping at current levels rather than cutting back production. We have a very decent price, no price decline, that does not mean that we should really, you know, rush and do something. We have to wait and see how the market will settle. Dropping prices undercut iran and russia, both rely on Higher Oil Prices to fund government. Russian president Vladimir Putin is playing down the opec decision as no big deal. Translator for us, from the very beginning, it was clear that once opec did not announce a reduction in production, the prices would react to it. That they would be slightly lower. But its estimated russia needs the price of oil to hover around 100 a barrel to pay its bills. Add the bite of sanctions, and russians are hurting. Translator this is all hit our pockets, of course. Because everyone has some sort of debt. Mortgage and all that. I think it will have a strong impact on the ordinary citizens. Iran needs prices at 100 a barrel too. Its currency has dropped by nearly 6 against the dollar since opec announced it wont be cutting production. Irans president called the move treacherous. Translator the Islamic Republic of iran and people of the region will not forget such conspiracies. Or, in other words, stretch are yous against the interests of the muslim world. It will remain in the minds of the people and they will react to it. Opecs decision could be seen as a geopolitical jab at two nations supporting syrias president , bashar alassad. Saudi arabia, along with other gulf nations like qatar, are supporters of Syrian Opposition in the countrys civil war. And, remember, its not just middle east wells creating a world market a wash in oil, north american shale is also feeding the glove. U. S. Production is the highest in three decades as the World Economy slows, demand falls, and downward price pressure continues. For now, the worlds pain is your gain at the pump. Are you falling in love with cheap oil . Over the next 12 months it could pump a thousand bucks in to your family budget. And give Vladimir Putins russia a haircut. What could possibly go wrong . Well take a look at the joys and threats of really cheap oil moving forward. Joining me for that conversation professor of International Finance and business at the George Washington university. International oil consultant. And amy myersjaffe, executive director of energy and sustainability at the University California davis. Since you guessed below 70, you got to come back professor. Here we are, today the price in the New York Mercantile Exchange bounced at 55. 87 a barrel. What is driving it further if people are entering the marketplace, and trying to guess at a marketclearing price, what forces it lower and lower . Well, in the short run its the saudis. They have sim meal had enough of u. S. Expansion and its their venue to curtail it. There are many different Financial Markets for Oil Exporters and those that have taken out loans that have to be paid back sooner or later are panicking and driving the price even further down, thats parts of it. Is that why no one could bear it turn down the taps . Why they have to keep pumping even when the commodity itself is getting cheaper and cheaper . Well, lets first agree that opec has taken the wrong decision by not cutting its production by at least 2 millionbarrel a day, to absorb the glut in the market. Had they taken that decision, russia would have joined them by cutting half a million barrel a day and mexico would have joined them by cutting 300,000barrels a day. They would have been able, with the total of 2. 8 millionbarrels a day cut, to absorb the glut in the market. However, this has not been taken. It is not too late for opec to reverse its decision and to take a decision to cut the their production by a minimum and i say a minimum 2 millionbarrels because they have been over producing by that amount. If they take that decision i think that will stabilize the oil price, otherwise, i am afraid the oil price could even reach 50 a barrel. Although that might be good enough for drivers and for transport for a short while, it will be of dire consequences to the Global Economy as a whole. Amy myersgeoff jaffe you jut heard him talk about how it would be in the interest of the country to his cut production, but it harder than we sometimes realize for them to do it. Ecuador is in not great financial shape. Nigeria constantly battling physician calling problems inside the country. Venezuela, also in very perilous economic state s a hard decision to a country to make to say we are just going to defer this income for now and hopefully make it back down the road . Well, i sort of disagree with him, i think that what is not well understood throughout opec is just how resilient the u. S. Production surge really is. So in my opinion, had opec made some production cuts overtime all of that would have done is encourage more and more drilling in the United States and other parts of north america. The shale boom is becoming more and more productive, companies are able to produce more oil from the same well, using new and better processes. More sand, different kind of fracking fluids and so it will be very hard for opec to really compete against and shut in the u. S. Production. And the market, you know, the experts and traders in the market understand that. And that is why prices keep falling. Because people keep revising their ideas for how low a price would cause the low down in the u. S. Boom. People are expecting the increase for january to be the same as december in the United States. And i think it would be pretty hard for opec to knockout that production and since everybody in opec has financial pressures, you know, what is the points of cutting production if it means that you are just going to have prices stay low and the United States is going to get more of the market share. I think that opec is really painted itself in a corner by Holding Prices so high for so long and creating this drag on the Global Economy that its going to be very hard for the organization to dig itself out. But conversely, and you heard a model where if the price had gone up it would have encouraged more american production. Is it discouraging more american production when the price comes down . Absolutely right. Its changed the financial equation for oil extraction. And in this business of oil, its very simple, when oil prices go this low, right, it drives the weakest out of the market. And then the middle group, puts everything on hold. What we call mothball the production. And saudi arabia really is the only country out there that can withstand this. They have 7 billion in reserves. They can handle 55 a barrel for quite sometime. Well, why the gloom . And i am not sure who i should best turn this one to, because everybody is agreeing to a degree on why its happening and whats happening. But why the gloom from economists who see bad portents in these market trends. Amy myers jaffe. Well, you know, you do have this risk in the markets. Back to the Global Banking sector, i think that people are pretty much assuming that venezuela might be one of the first shoes to drop in terms of having difficulty of paying back its debt. Of course they owe a lot of the debt to china and maybe the chinese can afford to write off that debt. But, you know, you have a lot of other small oilproducing countries that have similar financial pressures. But, you know, in balance, i guess i have to sort of disagree when you look around the world i mean, there are a lot of poorer countries in Southeast Asia and africa that are helped when the fuel costses comes down, the pressure on their budgets ar isa leave 80eaalleviate so its a m. And the interesting thing that we havent discussed is one of the things that really threw the market in nba to a tailspin was the thought that the Chinese Market would slow down, china traditionally their construction boom and Economic Activity has been a big driver to commodity price as cross the board but especially to oil. So the question is let me go to the question is do Lower Oil Prices still lay more growth or not. Go ahead, sir. May i comment on this . Please. The Global Economy cannot reconcile itself with such low prices. Although contemporary to common wisdom that very low oil price is good for the Global Economy, i dont believe for one minute that is the case. Because low oil prices damage a Global Investment in many fields, including oil and energy. Second, it also undermines the u. S. Shale oil production. And third, it damages very much the Global Oil Industry itself. We have seen that the top seven oil majors are already selling many of their production assets and reducing their investment. This in two years time will translate in to lower share of their production visavis the global production, oil production. This means that such a reduction on their share will put a very solid floor under the oil prices and eventually will push the oil prices up. And, of course, we have also the damage to the gulf, arab gulf economies and iran and russia when you put all of this combination together, it is damaging for the Global Economy and believe me, low oil prices plant the seeds for future crisis in the next two years with prices hitting more than 100 to 150 a barrel. Well be back with more inside story after a short break. When we return, the knock on effects of cheap oil. When oil fell below 70 bucks a barrel, stock markets and currencies began to sag, why did that happen . Arent there plenty of winners in industry too . Stay with us. Only on al jazeera america. Consider this. The news of the day, plus so much more. We begin with the growing controversy. Answers to the questions no one else will ask. Real perspective. Consider this. Monday through thursday, 10 00 eastern. Only on al jazeera america. You are watching inside story on al jazerra america. I am ray suarez. The Plastic Packaging for a new piece of consumer electronics, a chemical used to make phosphates for agricultural fertilizer being coke for cement production, commercial printing inks, truck tires, crude oil byproducts end up in obvious and not so obvious places. How come world stack markets took recent price signals from the oil markets as much bad news. And we just had am i myer amy me talk about not under estimating the winners. And you talking about how there are a lot of losers too. Where did you come down . I think we have been fed for a long time that we need High Oil Prices for the Global Economy to be stable. And i dont believe that. We have to understand one thing, which is mentioned earlier, is that oil is driven in the longterm by growth. Plain and simple, the price will reconcile with the growth rate and we have seen slow downs, the chinese have overstocked on raw material and oil. Europe is flat in its growth. We are crawling out of this Global Economy. I think over the next four or five years youll see oil drop further probably 55 ebber and will be sustained probably for sometime. There is nothing wrong with it. Its actually quite good for economies. Amy myers jaffe, i think a lot of people at home dont realize how much oil is embedded in the prices of the things that they buy. Whether its fuel that gets a tanker across an ocean to bring them things for their Big Box Store or drives the cost of running Farm Equipment that eventually gets them wheatdid he strived and soybeanderived products in their grocery store. Oil is sort of a cornerstone commodity, isnt it . It very much is a cornerstone commodity. And i think that well have a Ripple Effect across the consumer economy. Having your gifts sent to you for christmas over the end net cheaper this year. Price of food and shipping it around the United States, cheap they are year. Price of plastics, the that go in to your goods, cheer this year. All of these things, airline fuel costs will be way down, unclear whether they will pass that onto us the consumers, i hope so, but i mean, basically the sort of basic business of going about the economy, heating your home, heating a large Apartment Building or a hotel, all of these things are going to allow costs to come down across sectors. And, again, i think that is going to be like a stimulus package. You know, you might say thank you for saudi arabia for a great Christmas Present here in the United States as average americans will have more money to spends on consumer goods and the costs of those consumer goods will come down. You were expressing doubt before the break about the damage that too cheap oil for too long could cause, when the markets, Securities Markets reacted the way they i was a little puzzledded for every b. P. And exxon and shell, there are company that his fuel their processes with oil, use oil as a feed stock, and they just got a break. And they are able to put that mon right on the bottom line, arent they . Well, Companies Like exxon mobile and the other oil majors need a price of 125 to 135dollar a barrel to balance their books. When they dont get that they start cutting their future investment and, of course, they are already selling some of their assets. As i said that will translate in two years of time to a cut in their share of the global oil production. And that will impact very adversely on the oil price. The world needs a Sustainable Oil price. One that is acceptable to the producers to continue producing and expand Production Capacity and one which is acceptable to the consumers. If there is no Sustainable Oil price like that. I am not calling for very high prices, i think a price of 100 to 110 is very reasonable and Sustainable Oil price and good for the Global Economy and Global Investment and for everyone else otherwise all of them are losers. Professor i myers jaffe that model that he just spelled out doesnt that contribute to the boom and bust of oil. Price that his go up and down across great swings in price . Well, there is no question that oil is a boom and bust cycle. And there is no question about uncertainty about your feed stock cost can slow economic growth. If do youness know whether to buy a new piece of equipment or whether you can afford to hire new people the volatility can be damaging. One of the things that is happening that a lot of commentators dont understand is that new players are emerging, evening if exxon mobile or shell stock doesnt look as good to investors as it has in the past. You have new players, independent Oil Companies here in the United States, Companies Like pioneer natural resources, eog, but also internationally, in brazil, in the middle east, you are having these emerging independents in africa and they will be much more important investors in oil in the future. Well have more inside story after this short break, when we return, time horizons, are there points when the transitory swoon in crude prices become something much more serious. Three months, six months, a year down the road . Stay with us. We are back with inside story on al jazerra america. I am ray suarez. We are looking at the plunging price of crude oil this time on the program. You have already seen the effects when gassing up your car. Other effects on, for instance, the price of a plane ticket may take longer to see. We are told russia has reserves that keep the worst pain at arms length there. How long until president putin can no longer mask revenue shortfalls . How do time horizon extends the party for the winter and deepen the gloom of the losers . Still with us professor of International Finance and business at the George Washington university. International oil consultant. And amy myers jaffe, executive director of energy and sustainability at uc davis. There are buyers now heading in to the marketplace to sign up for contracts that have time on his them. 30 days, 60 days, 90 days. What would you advice them as they start to make their picks for futures . Could you please repeat the question. It was not very clear . There are very active oil futures markets and a lot of players in those markets, if they called you for advice what would you tell them about three, six, nine months down the road . I will tell them go and buy shares in the Oil Companies and in the oil business because the prices will rebound and the price of oil will recoup most if not all of its losses bite first or Second Quarter of next year. I am very convinced as i said that the Global Oil Market cannot tolerate such low oil prices and thats why my advice will be go ahead. The future is for oil and oil will be with us all through the 21st century. And it will have some big. [ inaudible ] in come is years, my ahead is go ahead and invest in oil at least in oil shares because the prices will go up. Amy myers jaffe, what if you are making tires or petroleumbased consumer goods or plastics, what should you be doing . Should you be locking up supply now against to hedge against rises in crude oil in the coming months . Well, i think its too early for consuming parties, cooperations, airlines, i think its too early for them to try to lock in this price. I think we could see the price go a lot lower. I think we need to see a little bit more geopolitical blinking before we assume that the price is going to go ba back up. We need to see what will happen in the economy of china. I think its really too soon for consumers to step in. I think we should all sit back and relax and hope for continued falling price because i think that could easily happen. And it really maybe is going to be a year or so unless something really changes joe owe politically before we start to see a reversal in the trend, the downward trend in prices. The last time you were here your crystal ball was well focused. How should people who do business, one way or the other, either selling, buying, using oil be regarding the next six months, a year . I will give you the next four, five years, low. Really . Yes. That long . How why saw that . Because the supply sphrao eu in the market. I dont think people understand that fracking prices are still high. They are unknown, Technology Changes daytoday, but they are relatively higher than whats happening in saudi arabia. Its easy to take oil out of the ground there. In some areas its 10 a barrel whereas fracking its anywhere from 50 to 80 a barrel that has to come down substantially for it not to knack a difference, people do understand understand the supply is out there now. Will that spur more growth in the u. S. Economy . You were telling me we didnt get such a big push on the gas pedestrian from the that . We do. Lower oil prices eventually feed in to other industries as was previously mentioned the people who are going to get hurt are Oil Companies and oil producers. But i think a little bit sustained Renewable Energies will get hurt. But other than that, this is a good thing to have oil prices this low any stage of the game. He Global Economy is not recovering as fast as we want it to do. As long as the Global Economy is greening out of its growth oil prices will stay low. Great to talk to you all, thank a lot. That brings us to the end of this edition of inside story. Thanks for being with us. The program may be over but the conversation continues we want to hear what you think about the issues raised on todays show. Log onto our facebook page, sends us your thoughts on twitter. The handle ajinsidestoryam or follow me at raysuareznews, well see you next time in washington. I actual ray suarez. August 25, 2014. Michael brown is laid to rest by his family and friends
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