The Return of Boom-Bust Oil Price Cycles
Robert McNally
President, Rapidan Energy Group
January, 2018
Oil is, and for the foreseeable future will remain, the world’s dominant transportation fuel, and as such is nothing less than the lifeblood of modernization. Beyond personal transportation, oil powers our trade, agriculture, and security. Patterns and disruptions in the global oil market anywhere are therefore of the utmost importance to broad swaths of every country’s business, consumer, and government sectors. While countries vary widely in their oil production, demand, and imports (as well as their taxation and regulation of oil and oil products), they all face a price for crude oil which derives from a single, global market.
The global oil market, this paper shall contend, has undergone a seismic structural shift the likes of which have not been seen in at least 50 (and more appropriately 80) years. Today’s market is structurally unbalanced and lacking a swing producer. Given oil supply and demand’s extreme inelasticity (or unresponsiveness to price), this yields price swings of a magnitude best characterized as boom and bust. Multi-year episodes of relative calm, such as the last two years when prices ranged around $50, or between 2010 and 2013 when they hovered around $100, may spawn expectations of long-term price stability. But it is more likely that relatively calm periods will give way to new boom and bust phases as supply and demand imbalances persist, and are indeed intensified by prior booms and busts, while the absence of a capable, proactive supply manager or swing producer remains painfully evident.
Turkey has a stake in anticipating the factors that will drive oil price levels. Turkey, like all industrialized countries, depends on oil to fuel its vehicles and its economy. Only 25% of all energy demand is met by domestic production,1 making it a net energy importer by a large margin. Turkey imports more than 90% of its liquid fuels. Regarding crude and condensate, Turkish domestic production accounts for 11% while imports, mostly from Iraq (41%), Iran (20%), and Russia (11%) account for the rest.2 Depressed oil prices post-2014 have spurred the economies of oil importers such as Turkey, but OPEC’s diminished ability to stabilize prices will continue to pose a threat.