Times are tough for the world's major oil exporters. Prices have fallen from around $US100 a barrel this time last year to around $47, heaping misery on countries like Russia, Algeria and Mexico whose economies are already struggling, and triggering ructions within the Organisation of Petroleum Exporting Countries. Algerian oil minister Salah Khebri reportedly wrote to OPEC's secretariat this week complaining at the group's decision in June to keep present production ceilings in place, when prices were $62 a barrel. And Saudi Arabia, which is OPEC's largest producer and which is shipping 10.6 million barrels to market every day, is under increasing pressure to agree to an emergency meeting to try to arrest the price slide.
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Coal and mineral commodity producers are doing it tough too – also as a result of over-production, but partly because China's economy is slowing. This week, Swiss-based Glencore plc, operator of 16 mines in Queensland and NSW, announced a half-year underlying profit less than half its 2014 result. Underlying profits at Anglo-Australian miner Rio Tinto are down 43 per cent, and while BHP's results won't be known until next Tuesday, analysts are tipping a similar percentage decline in its underlying earnings per share. Needless to say, the share price of all three companies is in retreat.
Speaking at Glencore's annual general meeting, chief executive Ivan Glasenberg was critical of what he saw as a big factor in the company's declining earnings and share price: over-production of both iron ore and coal. "Unfortunately, our competitors … have produced more supply than demand and commodity prices are down for that reason. I'm doing my best to convince my competitors that we should understand supply and demand". Mr Kehbri will undoubtedly be doing the same if OPEC's secretariat accedes to calls for an unscheduled meeting.
Mr Glasenberg's slap at his competitors for their poor understanding of supply and demand makes eminent economic sense. Fortescue Mining Group chief executive Andrew Forrest did much the same in March, censuring his competitors, Rio and BHP, for "irresponsibly" expanding their output and "in the process slamming the Australian economy". Curiously, his comments attracted little support. Australian Competition and Consumer Commission chairman Rod Sims warned that Mr Forrest's comment could be construed as an attempt to fix prices, while Treasurer Joe Hockey said the Coalition was not "supportive of cartels at all".
As a regulatory watchdog, the ACCC could hardly condone suggestions of price-fixing, even if Mr Forrest would argue this was not what he had in mind. Mr Hockey's comments, however, were harder to fathom given the implications falling commodity prices have for government revenues. They are even harder to comprehend when one considers that free market forces (as embodied by Adam Smith's invisible hand) are the best determinant of the efficient use of scarce resources.
The reasons the Saudis and Rio Tinto (and to a lesser extent BHP) want to buck the laws of supply and demand are broadly similar, if with different strands. They're pushing prices lower in the hope of driving competitors such as US oil shale producers and FMG out of business. In Rio's case, fear of an adverse market reaction to broken promises of a lift in earnings may be an additional motivation.
Why the market cannot recognise the counterproductiveness of upping supply when demand is falling, is both a mystery and a misfortune. Even lay observers would conclude that when prices rise eventually (which is the exercise's whole point), higher-cost producers will simply resume production again. Consumers may be benefiting from lower oil prices, and commodity importers stockpiling supplies while they can, but the lower prices are hurting governments everywhere, including here. Australia's plans to pay down a significant budget deficit, to lower taxes to stimulate the economy, and accelerate the uptake of renewable energy sources are all being upset by artificially low commodity and oil prices.
It's possible Saudi Arabia and its close Gulf allies (who now account for more than 18 million barrels a day of OPEC supply) will be persuaded as to the illogicality of keeping production high in an oversupplied market. But what of the markets' obsession with continuous growth and ever-increasing profits and its willingness to mark down companies which fail to meet those expectations? Mr Glasenberg might well ponder their inability to appreciate supply and demand – and their apparent refusal to accept the reality that growth is neither infinite nor guaranteed.
