WHERE IS THE MARKET’S INVISIBLE HAND GONE?

An article in French by Ramdane Mohand Achour and published on March 25^th, 2017 by LibreAlgerie is proposed. It is about Algeria that in the course of the persistently decline of its hydrocarbon exports related revenues is currently undergoing soul searching questioning of what is best for making its economy work. Many are wondering where is the market’s invisible hand gone? Like many countries, Algeria which is struggling with falling revenue from lower oil prices is presently looking for ways to upgrade its energy systems to fully support current and future requirements of its economic growth.

Proponents of liberalism argue that the market naturally produced a self-regulating mechanism that corrects imbalances born out of the multitude of society shaping special interests. This mechanism, called “the invisible hand of the market”, would satisfy the public interest. The law of supply and demand would naturally harmonize economic situation marked by the selfish will of each individual. In this scheme, the State doesn’t have to intervene if it is to guarantee the exercise of free and undistorted competition intended to benefit at all.

The current state of the oil international market turns wrong this angelic vision of a self-regulated inclusive market. Left to itself, the market has experienced a bullish cycle during ten years (1999 – 2008). The price of the barrel thus reached 140 dollars in June 2008 before tumbling within the 2008 crisis, but he soon to rise in 2009 again to be slightly above 120 dollars in April 2011. In 2014, it exceeded even the 110 dollars.

Such a situation was undoubtedly beneficial to the producing countries and companies in the sector as well as those rich countries whose States taxed petroleum products so as to keep their economy afloat. It was not the same for the non-producers, and all poor and middle-income countries who were struggling to feed themselves because of their limited financial resources. The market did not benefit to all, far from it.

The second disadvantage of this situation of relatively expensive oil lay in the fact that it boosted search for more hydrocarbon and production and allowed shale oils to make a big splash, in a full sense of the word, on the world market. With a production of 11 million barrels a day, the United States will see their rate of dependence on foreign oil drop to 30% in 2016 down from 60 percent in 2005.

Such a dynamic did fail to cause a state of overproduction; the purpose of the market is not, contrary to the image that its promoters sell us, to satisfy human needs, but rather to garner, first and above all for not only, profits, but for maximum profits.

Proponents of the “the invisible hand of the market” were right about one thing: in an economy obedient to the laws of the market, the engine of the “economic agents” is selfishness, the individual profit, at the expense of the lives of the producers (workers), consumer and research of nature which we see what mess it is today.

Overproduction intervening in a situation of de facto global stagnation, in the first place, the downturn in the economy of emerging countries (China, Brazil…) dropped slowly but inexorably the price of the barrel. Out of $110, it fell to $35 in February 2016. Decided to reduce the share of the North American Shale oil producers, Saudi Arabia will trigger a price war which played a vital role in this descent into hell.

If the drop in prices could theoretically help poor and middle-income countries producers, it on the other hand hit with full force the producing countries, primarily those of OPEC. For the first time in its history, the rich Saudi Arabia could no more balance its budget and had to resort to austerity. Its involvement in Yemen who turned into a quagmire for Riyadh, financial support of ‘takfirist’ groups in Syria and Iraq and a fierce will to challenge Iran contributed to accentuate its financial crisis. In this sequence of fall in the price of oil, as in the previous bullish sequence, no sign of self-regulation by the market. The invisible hand had other things to look after.

Last November and to everybody’s surprise, the 14 member countries of OPEC, under the impetus of Algeria but due to the will of Saudi Arabia, decided to reduce their production to the tune of 1.2 million barrels a day. Eleven countries non-members of the cartel, including Russia, committed as well to reduce their 560000 barrels per day. In the month of December, stocks of the OECD countries dropped to 1.2 MBD.

Number of non-conventional oil producers will be forced to close their wells that became no more profitable below a price floor of around $50 a barrel. The agreement of the producing countries, OPEC and non-OPEC, which was not an action of “the invisible hand of the market”, but of the conscious and active action of 25 States, will result in stopping the fall in prices on the world market and could even allow the beginnings of a rebound in prices which will pass from between 45-50 dollars to 50-55 dollars.

Number of non-conventional oil producers will be forced to close their wells that were most profitable below a price floor of turning around 50 dollars per barrel. The agreement of the producing countries, OPEC and non-OPEC, which was not the action of “the invisible hand of the market”, but the conscious and active in 25 States, will result will stop the fall in prices on the world market and will allow even the beginnings of a rebound in prices which will pass a fork understood between 45-50 dollars to 50-55 dollars.

There is however, that this new ‘virtuous cycle’ for producing countries is not shared by the importing poor and middle-income countries. It also translates into a revival of the production of Shales. In the United States, the number of wells increased each week. Mid-March 2017, it stood at 617 and the U.S. production has reached the historical peak of 9.1 MBD that recalls the production rate of the 1970s. Stocks of oil and oil products are at the highest historical level at 2 billion barrels. The commercial reserves of the country reached 528,4 million barrels with an increase of 8.2 million barrels, the largest weekly increase since 1982.

This new overproduction mechanically caused a new fall in the price of oil, which threatens the stability of many countries. We think first of countries such as the Venezuela struck by an economic and social crisis. But it does not spare the rich monarchies of the Gulf as well. Thus, below a certain price, producers of Shale disappear from the market while exporters suffer a severe income crisis whereas if prices were back on the rise, Shale producers will return to the market. But in the absence of a significant global economic recovery, they contribute quickly to only flooding the market.

The bullish and bearish cycles seem to alternate way more and faster, impeding the process of renewal of the facilities and the discovery of new deposits that require significant investment that the big oil companies do not realize by altruism, but through their search for profits.

One could therefore ascertain that the market does not regulate anything and that without the intervention of the State that plays a major role but not always effective, the market being not self-regulated, would verge onto anarchy causing economic, social, and humanitarian crises as the deterioration of the environment.

The reality of the international oil market confirms that the role of “the invisible hand of the market” is just a myth. The Liberals, who are constantly putting their realism and their pragmatism forward but who do not have enough teeth against their opponents, in ideology, swim themselves in full ideology. Behind a friendly speech sold according to the lastest in marketing theories, formidable doctrinaires could be hiding.

Source : Libre-Algérie