OPEC’s Continued Failure — A Note On The Price Of Oil

By Ed Hirs, Energy Economists

No one is fooled by the illusion of OPEC production cuts, but it is worse than most think.

The price of oil, which has fallen in nominal terms during 2017, has fallen even more in real terms, since oil trades in dollars and the trade-weighted value of the dollar has declined by nearly seven percent in 2017.

There is no indication that the price of oil will recover on a nominal dollar basis. Continued high inventories around the world signal that supply still outpaces demand, thwarting any balance that will support higher oil prices. Sluggish global demand growth is one factor. This global economic weakness contributes to the relatively weaker dollar that supports the U.S. economy overall.

A second factor is more efficient U.S. shale oil production. But in the end, OPEC’s discipline has fallen apart, and they cannot remove the necessary 2.0 million barrels per day of production from the market.

The data are easy to find. The Federal Reserve Economic Data, or FRED, at the Federal Reserve Bank of St. Louis is a good resource.

On January 4, 2017, the Trade Weighted Value U.S. Dollar Index Broad, stood at 128.5246. By July 26, the index stood at 119.7710. The value of the dollar had fallen by 6.81%. That is, U.S. residents would have to pay 6.81% more than they did in January to buy the same basket of goods and services from China, Europe, Mexico, Canada and South America.

Back on January 4, the price of West Texas Intermediate, or WTI, was $53.26 per barrel. By July 24, the price of WTI was $46.21 per barrel, or down 13.2%.

And for completeness, the FRED data report the price of Brent oil on January 4, was $54.57 a barrel. On July 24, the price of Brent was $47.81 a barrel, or down 12.4%. The price of Brent has ranged higher than WTI in recent years because of massive production declines in the North Sea oilfields.

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