Global Economy October 27, 2014

Oil prices are going down because;

  1. World-wide Demand for oil is below a year ago. China is using less oil. For the first time in ten years China has imported less oil this year than they did last year. Europe is using less oil because weak economy and heavy regulation. US is using less oil because more efficient vehicles and alternative energy sources.
  2. Supply is up. The US, Saudi Arabia, Iraq, and Libya are producing more oil this year that did last year. Saudi Arabia may intentionally increasing production in the face of declining oil prices to force marginal producers to stop expanding production.

The world economy is weak. China growth is down from 7% to 5%, but it is still growing. In contrast Europe is flat because they did not simulate as aggressively as US coming out of the 2009 recession. There are problems with the structure of the Euro Zone, and long standing issues like high taxation and excessive regulation. Current thinking is that the European economy will start to recover early next year.

Russia

The Russian economy is weak because of the decline in global oil prices, domestic capital is leaving and foreign capital is reluctant to enter. This capital is important because it need to build factories and drill oil wells. Capital is key to job growth and increasing the standard of living.

Oil prices may recover if the global economy recovers. A recover in oil prices will allow the ruble to regain lost ground, but this recovery is dependent not only on an economic recovery in Europe and Asia, but on a halt in the increase of production, so is not guaranteed. Russia has a great deal potential shale rock oil and gas reserves, but is doing nothing at present to develop that potential. It takes a great deal of capital and expertise that is currently only available in the United States.

United States

The US recovery has been the product of aggressive monetary policy on the part of the Federal Reserve Board, but now is becoming more the result of oil and gas produced from shale rock. Shale oil has already lifted the US from number seven to number two in the rank Global oil production and has dropped gas prices below $3.00 per gallon for the first time since the "Great Recession".

Looking forward the greatest economic impact and the best investment opportunities in the US may come from cheap natural gas and its impact on the petro chemical industry. natural gas prices in the United States are one third what they are in Europe and Asia. Currently under construction on the US gulf coast are several huge multibillion dollar petrochemical facilities to convert natural gas byproducts to the raw materials used by the plastics industry. These facilities will be able to supply plastic feed stock to processors in Europe at prices well below local product. International energy companies in Europe are already constructing import faculties to receive this American feedstock. This is the only way their petrochemical businesses will be able to remain competitive.

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