December 2014 Macro Pulse -- When Oil Runs Red

Among the developments this past month, one that dominated economic news headlines involved the precipitous drop in crude oil prices. As of December 12, the spot price for West Texas Intermediate crude had fallen to around $59 -- the lowest since 1H2009 and well below many producers’ cost of production. OPEC’s decision to maintain output levels seems to be having the desired effect of knocking out weak shale oil competitors: Permits for new U.S. wells dropped by nearly 40% in November, and numerous bankruptcies are inevitable in the highly leveraged shale oil sector. Oil producing countries are not necessarily “sitting pretty,” however. Many of them have high fiscal break-even costs (e.g., Saudi Arabia: $98/barrel; Venezuela: $161) because of prodigious welfare spending, and thus falling prices are “playing havoc” with their budgets.

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The Macro Pulse blog is a commentary about recent economic developments affecting the forest products industry. The monthly Macro Pulse newsletter summarizes the previous 30 days of commentary available on this website.