World capitalism enters 2015 still in the grip of uncertainty, more than seven years after the outbreak of the global economic crisis.
There are many reasons for this. There’s economic stagnation in the eurozone, the burden of debt weighing down a damaged financial system, slowdown in China and other “emerging market economies”. But the new joker in the pack is oil.
At the start of January the price of Brent crude, which is used as the main indicator of the state of the oil market, closed at $56.42 (£37) a barrel. In June last year it was over $110 (£72). There is great uncertainty about both the causes and the effects of this change.
Some factors are clear enough. The supply of oil has increased thanks to the shale revolution in the United States. Energy output has been boosted by fracking—using water at high pressure to crack open rock formations and extract the oil and gas inside.
At the same time, demand for energy is slowing. China’s boom pulled up the prices of oil, gas, and other raw materials to feed its rapidly growing industries and consumer markets.
But the boom was driven by massive over-investment, whose after-effects are increasingly burdening the Chinese economy and reducing its appetite for natural resources.
Much more mysterious is the role of Saudi Arabia. The US is now the top oil producer, but Saudi Arabia has 25 percent of the world’s oil reserves, 85 percent of global spare capacity, and very low production costs.
In November, the oil cartel Opec, which Saudi Arabia dominates, decided to keep output at 30 billion barrels a day. This suits states like Iran and Venezuela that need to produce as much oil as possible to keep their budgets balanced.
In the past Saudi Arabia forced cuts in output in order to counteract falls in the oil price.
With over £591 billion in foreign assets, they were in a strong enough financial position to play a waiting game that conserves their oil reserves. This time it didn’t happen.
There is speculation that fracking in the US means Saudi Arabia has lost control of the oil price. Others argue that the ruling family is happy to see the price fall and damage its great regional rival, the Islamic republican regime in Iran.
But just before Christmas, Saudi oil minister Ali al-Naimi gave interviews insisting that Saudi Arabia’s motive was economic. “Is it reasonable for a highly efficient producer to reduce output, while the producer of poor efficiency continues to produce?” he asked.
In other words, Saudi Arabia is targeting the US and other high-cost producers. It is the generally high real oil price since 2005 that made it profitable for companies to make costly investments in extracting oil via fracking, or from Canadian tar sands or the seas off west Africa or Brazil.
“High efficiency producing countries are the ones that deserve market share,” al-Naimi says. He wants, in other words, by forcing down the price, to squeeze these more expensive rivals and re-establish Saudi oil supremacy.
The effects of the falling oil price are also obscure. It is leading to layoffs in the hitherto booming US energy sector.
Russia, the third biggest oil producer, had already been hit by Western sanctions over Ukraine. But shrinking oil revenues helped to precipitate a severe banking crisis there just before Christmas.
Many mainstream economists argue these negative effects on those dependent on oil production will be more than counterbalanced by the extra income that both firms and households will enjoy thanks to lower energy costs.
But this ignores the larger context of a global economy that has yet to emerge from the crisis. The eurozone in particular faces the threat of deflation.
Falling prices can trap an economy in stagnation—Japan’s fate since the early 1990s. The plummeting oil price could tip the balance in favour of deflation.
Relatively fast growth in the US—itself partly an effect of the shale revolution that is now under threat—may not be enough to drive the world economy.
Real recovery remains as elusive as ever.