The writer, vice-chairman of IHS, is author of ‘The Quest: Energy, Security, and the Remaking of the Modern World’
The recent collapse in oil prices is part of a larger drama — the last act in the commodity “supercycle” that began more than a decade ago. That is why the 50 per cent fall in oil prices means not only hard times for the petroleum industry but also portends distress for commodity-exporting nations and the world economy.
The commodity boom took off in late 2003 and 2004 with the transformation of China’s role in the world economy. Following its accession to the World Trade Organisation in 2001, China was no longer just the traditional source of cheap goods, tough competition and a lid on inflation. It also became a huge market in itself.
Its voracious appetite for commodities supported the build-out of an entire country. Between 2003 and 2013, China accounted for 45 per cent of the total growth in world oil demand. Commodity producers were caught unprepared and, as they scrambled to add capacity, prices rose from $20-$25 a barrel in the early 2000s to $100 or so in 2011-2013. The conviction grew that this would go on forever.
Then Chinese demand tapered, and new capacity came on stream. China heat became China chill. The IHS non-oil Material Price commodity index peaked in April 2011, and began declining. Over the past year, the decline has turned into a rout. Since July 2014 it is down 45 per cent.
Oil was the holdout. High prices stimulated the development of new supplies, such as shale. US oil output, which was said in 2008 to have peaked, has instead almost doubled in the years since.
But, unlike other commodities, oil prices did not decline. The reason was that the new barrels were offset by the loss of barrels elsewhere: disruptions in key producing countries (most notably Libya) and the sanctions on Iran. In fact, oil prices reached their post-2008 peak of $115 not that long ago, in June 2014, when it appeared that the Islamic State of Iraq and the Levant (Isis) might capture Baghdad and move on to the huge oilfields of southern Iraq.
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