Energy analysts are confidently
predicting that oil prices will rebound by 2017, as global supply and
demand come back into balance. "Buy for the long run" is once again Wall
Street's over-used mantra.
Economists John Maynard Keynes once notably remarked, "in the long run, we are all dead."
This long-run thinking defies the logic of the oil markets. Not only
has oil been among the most volatile commodities in modern economic
history, it also has a tendency to spike, crash and then remain
depressed for years on end.
Analysts have focused on the 18-month decline that has seen crude-oil prices
drop from $107 in June 2013 to below $37 on Tuesday — a 65-percent
decline. But crude oil is actually down a whopping 74 percent from its
2008 high of $147 per barrel. That decline has been in force for seven
long years, since the dawn of the fracking age.
History tells us that, while price spikes tend to be sharp and somewhat short-lived, bear markets in oil, at least since the 1980s, tend to be quite long, drawn-out affairs.
When prices crashed in 1985, they went from $35 a barrel to $10 a barrel by the following year. And then they averaged just under $20 until 2003. The market flat-lined for 17 years, with an occasional bear-market rally.
With
OPEC failing to rein in excess production; with U.S. frackers becoming
more efficient, ringing more oil out of existing wells with fresh
technology; and with other non-OPEC countries like Russia, Norway and
the U.K. pumping flat out, the gap between supply and demand is yawning.
There are 3 billion barrels of excess crude sloshing around the world, according to the International Energy Agency, with crude-oil supplies outstripping demand by about 1.6 million barrels per day.
The International Energy Agency and other industry watchdogs expect supply and demand to come into greater balance next year, but that remains to be seen, with every producing nation in the world pumping as much oil as they can.
They may be losing money on lower prices, but apparently they plan to make it up on volume!
This is somewhat reminiscent of how commodity producers acted during
the Great Depression in the 1930s. Despite falling commodity prices,
particularly for rubber, which was in great demand during the 1920s auto
boom, Asian countries, stung by the plunge in demand for new cars,
continued to produce rubber at a break-neck pace, driving prices ever
lower and depleting their coffers at an equally fast pace.
We
are seeing that among oil producers, as well. Russia may run out of
surplus cash as early as next year. Saudi Arabia has tapped global bond
markets to extend their excess currency reserves, apparently hunkering
down for what could be a prolonged period of depressed energy prices.
The Federal Reserve
has suggested that the decline in energy prices should prove
transitory. If history is any guide, oil can easily go down and stay
down for many years to come.
Oil
briefly fell below its 2009 low of $37.75 a barrel. Below that level,
long-term support for oil prices is somewhere around $20 per barrel.
That would represent a nearly 50-percent additional decline in prices!
The impact on inflation would be far more long-lasting than is currently modeled by the Fed.
These are structural, not transitory, changes that have taken place in the energy markets that may have permanently altered how fossil fuels are produced and consumed. Certainly there will be bear-market rallies, but the path of least resistance still appears lower for longer.
The
impact on inflation may also be structural as well — good news for
consumers, but, once again, a confounding factor for the Fed. The Fed is
committed to lifting inflation while raising rates to ensure inflation
does not get out of control.
That is a dual mandate that may
be simply unattainable in a world awash in crude and other commodities,
all of which could mean the Fed is on course for a "one and done"
policy of interest rate hikes.Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.
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