Texas felt the effects of producing more oil than the market demanded. Places that once thrived from the boom have found it difficult to stop production, adding to the problem that intensifies the bust, costing over 100,000 jobs.
Khalid Al-Falih, Saudi Arabia’s new energy minister, gave hope and declared an end to the overabundant oil supply, saying, “Supply and demand have come together. The question now is how fast you will work off the global inventory overhang. We just have to wait for the second half of the year and next year to see how it works out.” Although now in sync, it will still take months to deplete the stockpiled supply.
Falih, who has replaced former policymaker Ali Al-Naimi, is confident that worldwide demand would intensify, noting China’s success over its economic doldrums and emerging economies in Southeast Asia. He also serves as chairman of Saudi Aramco, a company producing an eighth of the world’s oil consumption.
If his statement is accurate, the worst of the devastation since the 1980’s is over. Crude production in top producing countries has fallen and bridged the gap between supply and demand. This upcoming year could be the recovery period as countries and companies begin depletion of their surplus.
Although U.S. stockpiles have slowly fallen, they still have record levels. Depleting the supply is not as far-fetched as it seems, due to the demand for gas rising in the U.S and other parts of the world. However, prices cannot rise until this inventory is reduced.
Praveen Kumar, executive director of the University of Houston’s Gutierrez Energy Management Institute, says, “We could be done with this in eight months.” This revolution in the downturn is two of the main reasons Saudi Arabia and OPEC have changed their approach to supply management. For OPEC, it meant responding quickly to higher prices, what Falih calls “a game-changer.” This resulted in Saudi Arabia’s refusal to cut it’s production to stabilize prices.
Falih continues, “The tools that OPEC has used in the past – targeting specific prices – have not always worked in the long term. They create market dislocations that ultimately hurt producers and consumers. No matter what we do, ultimately markets win. ”
Article written by HEI contributor Marcela Abarca.