Quick Bites | America, the oil superpower

Regular QB readers will know that we have often spoken about American exceptionalism. Since the early 1990s, America has grown faster than other big rich countries. It has also rebounded more strongly from bumps along the way, like the GFC and the pandemic. For all its faults, America’s growth and its strengths give grounds for optimism about the country’s economic power and potential, reflected in the superb performance of its share market, with the S&P 500 up 63% over the past 2 years. 

It’s noteworthy how America has outperformed its peers among the mature economies. In 1990 America accounted for about 40% of the overall GDP of the G7 group of advanced countries; today it is up to 50%. On a per-capita basis, American economic output is now about 40% higher than in western Europe and Canada, and 60% higher than in Japan. Average wages in America’s poorest state, Mississippi, are higher than the averages in Britain, Canada, and Germany.

And America’s outperformance has accelerated recently. Since the start of 2020, just before the Covid-19 pandemic, America’s real growth has been 10%, three times the average for the rest of the G7 countries. Among the G20 group, which includes large emerging markets, America is the only one whose output and employment are above pre-pandemic expectations, according to the International Monetary Fund (IMF).

The American economy has numerous strong points, one of which is its energy production, which is our focus in this note. The US has become the global leader in oil production which has climbed to around 13.5 million barrels per day in 2024. This is helping to support the global disinflationary trend: a big drop in the oil price has pushed energy costs lower, facilitating the reduction of interest rates by global central banks.

Source: FatProphets.com

Surging US production is one factor helping suppress oil prices, but the other supply factor is the cheating that occurs within the OPEC+ cartel where members are not adhering to production quotas.

Saudi Arabia has warned that it could “flood the market” with oil supply, which would slash prices and penalize OPEC members who have not cooperated in reducing oil flows including Russia. On this front, Saudi Arabia has reputedly signalled that crude could drop as low as $50 a barrel if OPEC does not commit to reducing oil output.   

If Saudi Arabia follows through on this threat, we could see WTI crude prices fall towards $60. Whilst not a great outcome for the overall energy sector, Russia and Iran would likely encounter problems financing their military. For the rest of the world, this could add to the disinflationary trend already underway and prompt deeper rate cuts by the central banks. The energy market therefore bears close monitoring in the month ahead.  

Crude Oil 10-Year Chart

Source: Trading Economics