Former Federal Reserve Chairman Alan Greenspan spoke with Bloomberg Television’s Betty Liu about the outlook for oil, the U.S. economy and the dollar.
Greenspan told Betty Liu that oil hasn’t hit bottom yet: “We are at the point now where, at the current rate of fill, we’re going to run out of room [at our domestic facility in Cushing, Oklahoma] by next month. And then the question is — where does the crude go? Because everyone’s forecast as to what was going to happen when prices collapsed was a sharp curtailment in shale oil production. That has not happened. The weekly figures, which are produced by the Energy Information Agency through March the 6, show a continued rise in domestic crude production and it has got no place to go, because we can’t legally export the way we would for most products. We can do a little exporting and Canada, but essentially, we’re bottling up a huge amount of crude oil in the United States.”
On the stronger U.S. dollar, Greenspan said: “A stronger dollar tends to suppress general domestic price level. But the problem here is that we are not quite certain where the problem on the exchange rate comes from, whether it is a strong U.S. economy, which is a questionable issue, or a weak rest of the world, which is a little more credible.”
Alan Greenspan: Oil Hasn’t Hit Bottom Yet
LIU: America has a massive surplus of oil and there may soon be nowhere to store all of it. That’s according to the International Energy Agency. And inventories are at a record 485 million barrels, skyrocketing in the last few months as demand has fallen. At the same time, the volume of oil at America’s largest storage facility in Cushing, Oklahoma, has a most tripled since October. What does this mean? Possibly lower prices yet still.
Still with me is former Fed chairman Alan Greenspan. And Chairman, I know that oil is something that you have been watching very closely. You say it’s extremely important for us to be watching what happens to oil. You believe we still haven’t hit rock bottom here, right?
Alan Greenspan: That’s correct, Betty. If you look at the data, as you just pointed out, our major domestic facility is in Cushing, Oklahoma, which is delivery point for West Texas Intermediate crude contracts. We are at the point now where, at the current rate of fill, we’re going to run out of room in Cushing by next month.
And then the question is — where does the crude go? Because everyone’s forecast as to what was going to happen when prices collapsed was a sharp curtailment in shale oil production. That has not happened. The weekly figures, which are produced by the Energy Inter-Nation (sic) Agency through March the 6, show a continued rise in domestic crude production and it has got no place to go, because we can’t legally export the way we would for most products. We can do a little exporting and Canada, but essentially, we’re bottling up a huge amount of crude oil in the United States.
So that the West Texas Intermediate price is running $10 a barrel on the Brent crude, which is the global price. And that basically means that we are creating great abnormalities in the system. And unless and until we find a way to get out of this dilemma, prices will continue to ease because there’s no place for that oil to go except for into the markets. And spot crudes are especially vulnerable because of so-called contango is a very high level, and that implies that there’s a very, very significant set of pressures on the spot price.
Alan Greenspan: But, Dr. Greenspan, what about this theory though? When it seems inevitable that we’re going to see this huge oversupply and oil prices come down even more, isn’t that eventually going to hit U.S. production? It might be a very sharp crash in the number of rigs that get closed down but eventually the market will adjust?
Alan Greenspan: Well, remember, the rigs that have been closing down have not been affecting the capacity to produce crude yet. And the reason is that most of them — the ones which are not multiple well related, you’re getting the inefficient ranks shutting down but the capacity to basically build an oil expansion remains there. And frankly, I had expected it to turn down or ease a number of weeks ago and these numbers keep rising.
Now, it is perfectly credible that, because the cost of crude, especially I should say for shale crude which is more expensive than standard old-fashioned crude, those numbers are high – $55 or $65 a barrel. There is some, Eagle Ford Motor Company (NYSE:F) shale, which going under $50 a barrel. But there’s not much room under there before cash flow turns negative. At that point, they shut down and it could be quite abrupt, as you point out.
LIU: Right, that’s right. It could be very abrupt. Then, Chairman Greenspan, if nothing is done here short of, let’s say, a lift of our export ban on crude, what could we expect from OPEC?
Alan Greenspan: Well, I think that OPEC is no longer the price leader. I wrote a long editorial — op-ed piece last week or so in which I pointed out that essentially what is happening is that, because of the advent of shale, which is a very much more flexible type of facility to expand and contract crude, that the marginal global price-making mechanism has moved to the United States away from OPEC. And I think that that’s going to continue unless and until prices fall below the cost of crude production from shale, which is very significantly above where, for example, the Saudi crudes. There’s some Saudi crudes which can be lifted at less than $1a barrel in the Ghawar fields, the huge Ghawar field in Saudi Arabia. We’re lucky if we can get $40.
LIU: That’s incredible. That is a great point; it’s incredible and it sort of brings to light just how complicated the situation is. Dr. Greenspan, thank you so much for joining us this morning. The former Federal Reserve chairman, Alan Greenspan.