The price of oil has dictated the dollars recent resurgence, but it has not been favorable to the pound. The United Kingdom is a net oil exporter; through North Sea oil fields that produce around 1.7 million barrels a day. A drop in the price of oil would hurt profit margins at some of Britain’s largest oil producers namely BP. On top of this North Sea oil production has stagnated in the past couple of years. Peak oil is a term used to describe how oil production retreats rapidly after achieving peak output extraction. Most of the U.K.’s oil fields are over fifteen years old and output is in significant decline. The North Sea fields are past peak oil and oil output has decreased over 38% from its late nineties peak.
The current oil production contraction would augment the current supply side shock from commodity prices. This has happened because new fields have not come on line and current fields have been over utilized. The reason for the decline is debatable but knowing the effect of the British change from oil exporter to importer is crucial. When the U.K. becomes a net importer then income will be allocated away from the service sector and into the energy sector. The service sector is a large part of the British economy and its contraction could hurt GDP. How the British economy will contract is not as important as the fact that oil output’s decline will hurt the British economy. If the British economy contracts then, the GBP will decline against all of the majors. This fundamental factor can lead to an informed long term trade short on the GBPUSD.
Oil for the most part is excavated in undemocratic volatile regions. Hence the volatility that underlines the daily price of oil. The North Sea fields were Britain’s answer to the 70’s oil crises. The production of these fields not only diversified the British economy but insulated Britain from supply side shocks. Their depletion will be difficult for the U.K. economy and the European economy. The U.K. will be forced to import crude oil from Russia or the Middle East, and Europe will lose a reliable energy supplier. However the biggest loser along side the British consumer will be the GBP.
The current oil production contraction would augment the current supply side shock from commodity prices. This has happened because new fields have not come on line and current fields have been over utilized. The reason for the decline is debatable but knowing the effect of the British change from oil exporter to importer is crucial. When the U.K. becomes a net importer then income will be allocated away from the service sector and into the energy sector. The service sector is a large part of the British economy and its contraction could hurt GDP. How the British economy will contract is not as important as the fact that oil output’s decline will hurt the British economy. If the British economy contracts then, the GBP will decline against all of the majors. This fundamental factor can lead to an informed long term trade short on the GBPUSD.
Oil for the most part is excavated in undemocratic volatile regions. Hence the volatility that underlines the daily price of oil. The North Sea fields were Britain’s answer to the 70’s oil crises. The production of these fields not only diversified the British economy but insulated Britain from supply side shocks. Their depletion will be difficult for the U.K. economy and the European economy. The U.K. will be forced to import crude oil from Russia or the Middle East, and Europe will lose a reliable energy supplier. However the biggest loser along side the British consumer will be the GBP.
No comments:
Post a Comment