We’re told the Federal Reserve has “ended easy money”. I’m not sure that’s true. Yes, the US Central Bank announced last Wednesday that its gargantuan money-printing habit is soon to be scaled back. Instead of creating $85bn per month ex nihilo, the Fed will from January conjure up just $75bn. That’s still a massive base money expansion of $900bn a year.
At the same time, in a move apparently meant to help cash-strapped US mortgage-payers, but actually aimed at global financial markets, Ben Bernanke bolstered his “forward guidance”. America’s benchmark interest rate is likely to stay near zero “well past the time when the jobless rate declines below 6.5pc”, the Fed Chairman told the world. So US monetary policy remains ultra-loose but is now slightly less ultra-loose than before. Maybe.
This “taper” was heavily trailed. In the run-up to Bernanke’s statement, there was much market gossip the Fed will soon print less. What really struck me, though, was the associated wave of speculation that “the beginning of the end of US quantitative easing” would bring down oil prices too. That struck me as an odd call – and still does.
If the Fed is creating less virtual money, the argument goes, the US currency should strengthen. Oil is priced in dollars, so a stronger greenback means lower crude. A related thought is that huge US money-printing, combined with the dollar’s reserve currency status, has seen many sophisticated investors use oil assets as a “store of value” in recent years, to protect themselves against “dollar debasement”. A bit less American QE should ease such fears, provoking flows out of oil spot- and futures-markets, again putting downward pressure on crude.
A firmer dollar, then, plus the recent rapprochement over Tehran’s nuclear ambitions, hopefully bringing more Iranian oil onto global markets, together with America’s “shale revolution”, has led to much talk that crude prices are set to fall next year.
While I have sympathy with some of this analysis, I’d suggest oil is unlikely to retreat much over the coming twelve months. In 2011, a barrel of Brent averaged $111. The year after it was $112. With just a week to go, we’re on for an average figure of $108 in 2013. I predict that 2014, too, will feature a triple-digit average price of Brent crude.
The main reason is demand. The Fed only dared to taper last week because the US economy – by far the world’s biggest oil user, sucking up almost 19m barrels daily, a fifth of global consumption – is getting stronger. Last week we learnt that in November a bellwether measure of leading American indicators – the Conference Board’s index, which aggregates forward-looking survey data – grew by an above-consensus 0.8pc. This is a promising sign the US recovery is gaining traction. The Census Bureau separately reported a buoyant 1.1m housing starts in November, up from 890,000 the month before.
All this points to rising energy demand and, indeed, towards the end of last week, the American Petroleum Institute, an industry group, reported a 4.9pc rise in November oil deliveries. Preliminary data from the US government’s Energy Information Agency then said crude use over the first week of December was 13pc up on the same period last year, reaching its highest level since April 2008. This helps explain why, since Fed tapering was confirmed, crude prices have actually ticked up 1-2pc.
Looking forward, the logic of demand-led oil price strength looks even more compelling. While US oil demand contracted during 2011 and 2012, as the economy slumped, global oil consumption kept rising anyway, driven by the energy-hungry emerging giants of the East. World crude use was 89.8m barrels daily in 2012, 1.2pc up on the year before despite sluggish global growth and a staggering 15pc higher than in 2002.
Now the US is getting back into gear, Western oil consumption is growing again, adding to the on-going rise from the population-heavy emerging markets. In a little-noticed recent report, the International Energy Agency, the West’s energy watchdog, sharply raised its forecast for 2013 global crude demand, not least due to “vigorous” growth in US energy consumption.
In September, American oil use rose no less than 900,000 barrels a day, the highest monthly increase in a decade. Stronger Western demand, in general, saw the IEA raise its forecast for 2013 oil consumption growth from 145,000 to 1.2m barrels – a stunning 8-fold increase. World oil use is now on course to hit around 91.2m this year, a 1.6pc annual rise, as global consumption accelerates even before the world economy stages a really convincing recovery from its sub-prime malaise. Little wonder the IEA concludes that the “upside risk to oil markets … is proving remarkably persistent”.
On the supply-side of global energy markets, also, the news-flow doesn’t support the idea of falling prices. Key OPEC members such as Kuwait, UAE, Nigeria and Venezuela have lately reduced their output, despite friendly rhetoric from the oil-exporters’ cartel. Libyan production, too, was just 220,000 barrels daily in November, its lowest level since the 2011 war.
Don’t hold your breath for an Iranian “oil bonanza” either. The recent Geneva deal was politically significant but won’t bring a gusher of Persian crude soon. Sanctions remain in place and unlocking them will take more than warm words. Over the next 2 years or so, Iranian exports could increase by 1.5m barrels. All that extra supply is more than absorbed by the global demand increase in 2013 alone.
It’s worth considering, as well, that as global energy consumption continues to balloon, it’s costing more and more, in terms of both cash and energy, to secure each extra barrel of supply. Over the last ten years, investments in both oil and gas exploration and extraction have risen sharply. Yet ever higher levels of capital expenditure have yielded ever smaller increases in available energy output.
During the decade to 2012, says the IEA, world oil supply rose by 11.9m barrels a day. Over two-thirds of that increase was “unconventional” – including tar sands, ultra-deepwater and shale. While conventional crude costs up to $60 per barrel to produce, unconventional production generally absorbs $80-$100 – and such crude often has a lower energy density. That’s why “upstream” oil industry capex has risen, in constant 2012 dollars, from $250bn in 2000 to $700bn last year – almost a three-fold increase. Over the same period, global oil supply rose just 14pc.
I remain skeptical that shale oil and gas production will “revolutionize” world energy markets, securing Western energy independence – not least because the technique is extremely expensive, requiring the drilling of many, many wells, each with a sharp depletion rate. More generally, it strikes me that much of the “easy oil” has already been pumped. So, as we rely increasingly on costly non-conventional methods, the energy supply side looks pretty weak over the coming years, in the face of an inevitable rise in demand, as the world population keeps spiraling and industrialization spreads.
Five years of QE has driven up the price of many assets – from equities to land, from food to oil. Despite the fanfare, ultra-loose Western money isn’t going away any time soon. Tapering is not the same as tightening and a heavily-indebted US government will do what it takes to keep the dollar weak.
Bernanke’s “well past” language, and hints the 6.5pc unemployment target could itself be lowered mean America’s monetary stance, if anything, just got looser. That’s another reason why, in the absence of a renewed Minsky moment on global markets, 2014 will be the fourth successive year of $100-plus crude.