Does history repeat itself? The recent oil price collapse is uncannily reminiscent of the last shipping super-cycle. A 1960s trade boom stimulated by a superstar economy (then it was Japan, now China), led to a 1970s shipbuilding bubble and an oil price hike. The result was the 1980s freight meltdown and an oil price collapse which helped the recovery. Today’s plot is similar, but will it have the same ending?
History: Repetitive But Not Dull
In the early 1970s oil was dirt cheap, costing $11/bbl in today’s dollars, but after the 1973 oil crisis it jumped to $58/bbl. This shocked a generation brought up on cheap oil and it triggered a recession in the world economy. Then in 1979 the Iranian revolution pushed the price to $109/bbl (blue line in chart). By this time oil saving technology was widely available and between 1979 and 1983 world oil demand slumped by 6m bpd as power stations switched to coal and drivers bought “compact” cars. It took 18 years to get demand back to the 1979 level. As oil demand collapsed, Saudi Arabia cut production from 10m bpd to 3.6m bpd in 1985, keeping the price above $60/bbl. But in 1986 they lost patience and turned on the tap. The oil price halved.
Now The Comparison
Now the oil price cycle seems to be repeating itself – the red line overlays 1970s prices with the oil price in 2000-15. In 2000, oil cost $40/bbl and by 2008 it had reached $109/bbl. After a dip in 2009, it bounced back to around $105/bbl until June 2014. Then the decline set in and by early 2015 prices were $49/bbl.
So far world oil demand has not repeated the 1980s collapse, but the growth rate is sluggish. In 2014 it only grew by around 0.7m bpd, half the IEA’s forecast and currently the IEA forecasts a 0.9m bpd increase in 2015. The problem has been supply, which is creeping ahead of demand. US output jumped by 3.5m bpd since 2011. In 2014, its strongest year yet, production surged by 1.4m bpd, twice the growth of world demand.
Oil Producers Getting Fractious
Since these are small changes in the oil supply-demand balance, why not just reduce the supply? That’s what may happen, especially in the US. US oil production is price driven and some experts put the breakeven price of tight oil at $50-60/bbl. Investment plans of US companies suggest a cut of c.25% since prices slumped. But the slowdown in other oil producing regions is much smaller, and non-OPEC output is now expected to rise 0.9m bpd in 2015, down from 2.0m bpd in 2014. Offshore projects are being deferred, but have a long lead time. So in the short-term it’s up to the swing producers, Saudi and OPEC, and they are not keen (and probably can’t afford) to replay the 1980s. Meanwhile, energy saving technology developed in the last decade is likely to keep undermining demand.
Good Or Bad For Shipping?
So there you have it. A low and volatile oil price could help shipping in three ways. Firstly it puts cash in consumers’ pockets, stimulating economic growth. Secondly cheap oil boosts oil demand and hence sea trade. And thirdly it gives oil traders lots of opportunities to take a punt on future price increases by holding oil in tankers. Have a nice day.