The Russian Currency Crisis Just Got Even Worse DECEMBER 12, 2014 AT 3:56 AM Business Insider / Tomas Hirst

The Russian Currency Crisis Just Got Even Worse
DECEMBER 12, 2014 AT 3:56 AM
Business Insider / Tomas Hirst

The Russian rouble has fallen over 3% against the dollar in early trading, shrugging off the central bank’s attempt to halt the slide by raising interest rates.

The country’s central bank increased interest rates by 1% on Thursday to 10.5% in an effort to slow the pace of rouble falls. However, the currency has continued to track the oil price downwards as WTI crude dropped below $60 a barrel, down from $107 a barrel in June, and Brent slid to $63.12 on Friday.

At the time of writing $1 would buy you over 57 roubles, a new record level.

While the country still has around $416 billion in reserves and low government debt equal to only 9.2% of GDP, concerns have been focused on Russia’s corporate sector. In particular a number of Russian businesses borrowed heavily in dollars over the past few years, and repaying those loans is quickly becoming a much more expensive prospect.

Russia debt

Russian corporates are scheduled to pay around $35 billion on this debt in December and over $100 billion in 2015. These firms, and especially Russia’s banks, face major challenges funding this bill with Western sanctions freezing them out of global capital markets on the one hand and a weakening domestic economy putting pressure on profits on the other.

This problem is being compounded by concerns that the country’s financial sector may be running low on collateral that banks can use to access dollar reserves at the central bank. Usually it is the job of the central bank to provide emergency funding for a country’s financial institutions. In Russia this is typically done through what are known as “currency repo auctions,” in which banks offer collateral (like high-quality bonds) in exchange for access to currency, especially dollars, that they need to meet foreign-currency obligations.

Last week the Russian central bank cut the foreign exchange repo rate, the interest rate it charges on the currency it gives to banks. The rate fell from 1.5% above the London Interbank Offered Rate (Libor) — the benchmark interest rate at which banks lend to one another — to 0.5% above Libor. A lower interest rate should make it less expensive for banks to borrow from the central bank and therefore more appealing.

The rate cut illustrates that the central bank is growing concerned about the ability of Russian banks to meet their debt repayments. Underlining the point, in her statement following the interest rate hike on Thursday Elvira Nabiullina, head of the Russian central bank, announced that “the Bank of Russia plans to consider the introduction of foreign currency lending on the security of non-marketable assets”.

That suggests the central bank is considering expanding the types of assets that it will accept as collateral, by which it likely means accepting lower quality, less easily traded loans or financial securities. In other words, the state is having to take on more risk as the private sector struggles.

Currency Markets Jolted After Months of Calm

Currency Markets Jolted After Months of Calm

Volatility Rises as Investors Focus on Interest-Rate Divergence

By ANJANI TRIVEDI and IRA IOSEBASHVILI WSJ

After months of calm, currency markets have sprung back to life, as investors scramble to take advantage of the divergent paths taken by major central banks.

Bigger and more-frequent shifts in the foreign-exchange market are a welcome relief for investors, many of whom struggled to make profitable trades when currencies weren’t moving as dramatically.

Banks, whose currency desks execute trades on behalf of clients and companies, also see revenues grow when choppier markets drive up demand for their services.

“This definitely brightens my day,” said Chris Stanton, who oversees about $200 million at California-based Sunrise Capital Partners LLC. “It’s a welcome return to what feels like a freer market.”

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The size of daily trading swings across currencies has jumped 55% since hitting its lowest in at least a decade on July 31, according to Deutsche Bank AG. During that time, the dollar climbed to a six-year high against the yen, the euro fell below $1.30 for the first time since July 2013 and the pound tumbled to a 10-month low against the dollar. On Wednesday, the Swiss franc saw its biggest drop against the euro in six months.

Driving the price swings is a shift in policies at some of the world’s largest central banks. A burgeoning recovery in the U.S. has brought the Federal Reserve closer to raising rates, a move that would make the dollar more attractive to investors. At the same time, European and Japanese central banks are still trying to kickstart their economies and relying on policies such as bond buying that tend to drive down interest rates and reduce the value of a currency.

Implied volatility, which tracks the price of options used to protect against swings in exchange rates, has surged 45% in September to an eight-month high, according to Deutsche Bank. Higher implied volatility suggests money managers are buying options in anticipation of a more-active market.

Some money managers are buying the dollar ahead of next week’s Fed meeting, where policy makers could send firmer signals on their outlook for interest rates. Mr. Stanton’s fund is betting that the dollar will continue to strengthen against the yen and emerging-market currencies as the Fed gets closer to raising interest rates.

Citigroup Inc., C +1.11% the world’s largest currencies-dealing bank, on Monday said its markets revenue, which includes currency trading, is on track to be roughly flat in the third quarter compared with the same period in 2013, ending a decline that started a year ago.

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Until recently, unusually calm markets had left investors with fewer opportunities to trade and led to the demise of several large currency funds. FX Concepts LLC, founded in 1981 and considered a pioneer in currency investing, closed its doors last year after assets shriveled to $660 million from $14 billion before the financial crisis.

Currency volatility plummeted after the financial crisis, as the world’s biggest central banks cut interest rates to near zero. That gave traders little incentive to try and capture the difference in interest rates between various currencies, a key driver of activity in the foreign-exchange market.

That status quo has started to crack. Minutes from the Fed’s July meeting showed growing support for raising rates, spurring gains in the dollar when they were released in August. Earlier this month, the ECB surprised investors with a rate cut, bringing down the euro. Meantime, the pound tumbled on concerns over the repercussions from Scotland’s possible secession. On Wednesday, the Swiss National Bank said that it could introduce negative interest rates to halt the franc’s rise.

Trading bands of some major currencies have widened this summer, opening the door to bigger profits for investors. So far in September, the dollar is moving on average by 0.70 yen a day, the biggest range since February and up from 0.35 in July. Daily moves in the euro this month are averaging 0.79 U.S. cent, compared with 0.4 cent in July.

“Now, there are more opportunities to make money,” said Masafumi Takada, vice president of currency trading at BNP Paribas SA BNP.FR -0.39% in New York. Business volume at the bank’s New York currency-trading desk has quadrupled since July, Mr. Takada said.

Currency volatility can be a double-edged sword. Investors can profit by riding the dollar’s steady move higher against a variety of currencies. But a sudden reversal—such as a surge in the pound if Scotland votes against independence—could catch traders off guard. Goldman Sachs Group Inc. GS +1.39% took a loss on an options trade involving the dollar and yen about a year ago, people familiar with the matter said. Last summer, the yen’s months-long decline had stalled.

Federal Reserve Chairwoman Janet Yellen attends a Board of Governors meeting at the Federal Reserve in Washington last week. Associated Press

Some traders believe the current bout of volatility may die down. The large moves seen this week are unusual, analysts say.

On Wednesday, the euro fell 0.2% to $1.2917, while the dollar rose 0.6% against the yen to 106.85. The pound rebounded, with the dollar falling 0.64% against the British currency.

“The question is whether or not this much of a jump [in volatility] is sensible,” said Geoff Kendrick, head of foreign-exchange and rates strategy in Asia at Morgan Stanley MS +1.24% in Hong Kong.

Still, many find it hard to imagine that the magnitude of the Fed’s policy shift won’t continue sending waves across currency markets.

“The dollar’s on a tear, and there is more of this to come,” said Kit Juckes, a strategist at Société Générale SA.

—Justin Baer and Saabira Chaudhuri contributed to this article.

Write to Anjani Trivedi at anjani.trivedi@wsj.com and Ira Iosebashvili at ira.iosebashvili@wsj.com

U.S. Gas Exports Unlikely to Ease Tensions Over Ukraine

U.S. Gas Exports Unlikely to Ease Tensions Over Ukraine

Europe Will Still Rely on Russian Gas as First U.S. Shipments Are Two Years Away

By

SELINA WILLIAMS
March 18, 2014 12:50 p.m. ET
LONDON—Natural gas exports from the U.S. are unlikely to help ease the tensions between Europe and Russia over Ukraine as the first such shipments are about two years away, a senior executive from oil and gas company BG Group PLC said Tuesday.

The U.S. has vast supplies of cheap natural gas thanks to the fracking boom and could become one of the world’s top three exporters of liquefied natural gas by 2025, BG said. Over the past week, some U.S. politicians have urged the Obama administration to speed up oil and natural gas exports to weaken Russia’s hand over Ukraine.

Russia supplies about 30% of Europe’s gas requirements, half of which transit via Ukraine, a factor some believe has stifled European opposition to Russia’s annexation of Crimea.

Federal law places heavy restrictions on U.S. companies from exporting natural gas to countries, like those in Europe, that aren’t among its free-trade partners.

Applications have already been made to export a total of over 260 million metric tons a year of LNG from the U.S. Even so BG, one of the biggest participants in the global LNG market, said it expects only about 60 million tons to 70 million tons of annual export capacity to be developed by 2025.

Andrew Walker, BG’s vice president of global LNG, said the company didn’t expect much fast-tracking of export applications unless there was a significant change in external circumstances.

BG clinched the first contract to export U.S. natural gas from the Sabine Pass, La., terminal in 2011. It expects those exports to commence in late 2015 or early 2016.

Mr. Walker said that the situation for gas prices and supplies in Europe was “fairly relaxed,” despite political tensions. The region only imported a net 35 million tons of LNG last year, the lowest level in nine years, with demand subdued due to weak economic growth, he said.

Meanwhile, global LNG supplies leveled off for a second consecutive year as new production was offset by unplanned outages, declines in output from existing plants and new projects ramping up more slowly than anticipated. This trend will keep LNG markets tight until at least the end of the decade, BG said in its annual global LNG outlook.

“We’re an industry in hiatus. Developing new supply, rather than demand is the principal challenge the industry faces,” Mr Walker said. Last year, only one in 10 new LNG projects awaiting final investment decisions was sanctioned.

Write to Selina Williams at selina.williams@wsj.com

Shell Venture Starts Fracking Giant Russian Shale Oil Formation

Shell Venture Starts Fracking Giant Russian Shale Oil Formation
By Stephen Bierman
January 13, 2014 5:56 AM EST

Royal Dutch Shell Plc (RDSA) and OAO Gazprom Neft began a drilling campaign to assess the potential of Siberia’s Bazhenov formation, reckoned to be one of the world’s largest deposits of shale oil.
Salym Petroleum Development, the venture between Shell and Gazprom Neft, has started drilling the first of five horizontal wells over the next two years that will employ multi-fracturing technology, according to a statement today.
The Bazhenov layer, which underlies Siberia’s existing oil fields, has attracted Shell and Exxon Mobil Corp. (XOM) because it’s similar to the Bakken shale in the U.S., where advances in drilling technology started a production boom. Exxon will also start a $300 million pilot project drilling in a different part of the Bazhenov with OAO Rosneft (ROSN) this year.
“This is a big theme for Russia,” according to Ildar Davletshin, an oil and gas analyst at Renaissance Capital in Moscow. “Bazhenov holds as much resources as has been produced in Russia to date. The question is what portion of it can be recovered and at what cost.”
The first horizontal well follows three years of study on the prospect, which included three vertical wells, 3D seismic, coring and well logging in the Upper Salym area, according to the Salym statement.
“Bazhenov development is an important element of our growth strategy,” Oleg Karpushin, head of Salym Petroleum Development, said in the statement. “We hope that the pilot project will allow us and our shareholders to make a decision about moving to a large-scale development of the Bazhenov formation in the Salym fields.”
To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net
To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net
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A Tremor in the World Economic Force?


An Economic Problem in China Could Affect Everyone.
1) Oil could drop like a rock
2) US Bonds Could Fall Without China Buying Them
3) International Trade Could Slow Down impacting everyone
New York Times
December 27, 2013

Markets on Edge as China Moves to Curb Risky Lending

By NEIL GOUGH and 

HONG KONG — China’s financial system is in danger of becoming too big to bail out.

Official bank lending has more than doubled since the global financial crisis, growing nearly twice as fast as the overall economy. The even bigger problem, however, appears to come from the rise of a shadow banking system that has allowed a number of companies and individuals, often with political connections, to borrow from state-controlled banks at low interest rates and relend the money at much higher rates to private businesses desperate for credit at almost any price.

Now, in an effort to wean the banks and the economy off their addiction to such risky practices, Beijing has pledged to deliver what amounts to the country’s most sweeping financial overhaul in decades. Markets will play the “decisive” role in directing the economy, policy makers promised last month after a key plenum meeting of the Communist Party leadership. Interest rates are to be liberalized, cross-border investment will be welcomed and regional and bureaucratic protectionism will be curtailed, they declared.

But already, even relatively modest government moves are producing turbulence in money markets; just this week China’s central bank was forced to back off, at least temporarily, to avoid putting too much stress on the banking system and potentially drawing an angry reaction from powerful vested interests in China accustomed to paying very little for their loans.

“It’s been pretty clear since June, and especially clear since the plenum, that the new crowd is interested in tightening monetary policy and letting interest rates rise,” said Arthur R. Kroeber, the Beijing-based managing director of GK Dragonomics, an economic research firm. “The purpose is to reduce the rate at which credit is expanding, which has been a bit of a problem over the last couple of years.”

China has experimented twice this year with much higher, market-driven interest rates. As with a similar experiment in June, the central bank allowed rates late last week and early this week to soar to unsustainable levels. Instead of regularly scheduled open-market operations, the bank tried unconventional methods of guiding money markets.

That approach involved the central bank’s turning to posts on China’s Twitter-like social messaging service, Sina Weibo, to chasten banks to “make rational adjustments to the structure of their assets and liabilities, and improve their liquidity management using a scientific and long-term approach.”

But as in June, the experiment did not last long. On Tuesday, China’s central bank, the People’s Bank of China, provided a direct injection of fresh money after the market pushed seven-day interest rates to nearly 10 percent, double their earlier level. The central bank’s action eased pressure on the financial system and quelled fears of an immediate credit crisis. But rates remain elevated, and the bank may have only postponed the moment of reckoning for a few months.

“The key message from the current central bank-induced tightness is deleveraging,” said Stephen Green, the head of research for greater China at Standard Chartered. “We’ll see what happens when we see greater levels of corporate distress in 2014, whether Beijing buckles or not.”

A complex and loosely regulated network of financial go-betweens has sprung up to profit from repackaging and reselling China’s new mountains of debt, turning loans into investment products. Such products have become popular among ordinary investors in China because they pay much higher interest rates than deposits in savings accounts, where rates are capped by the government to protect the state-owned banking system from competition.

But loosely regulated financial businesses can make a dicey business model, as Wall Street learned in 2008. And they pose a particular threat in an economy where growth is slowing, as it has been in China for the last three years.

“The final users of the money will not be able to earn returns high enough to repay the money and promised interest,” said Yu Yongding, a senior fellow at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences and a former member of the monetary policy committee at China’s central bank. “The chains of lending and borrowing can be long, just like the securitized subprime mortgages. The result can be devastating.”

Indeed, the real-life stress tests the central bank has been experimenting with are not without casualties. As markets became jittery in the run-up to the June credit crunch, two branches of the state-owned China Everbright Bank technically defaulted on 6.5 billion renminbi, or $1.1 billion, worth of short-term payments.

In a regulatory disclosure that was part of its $3 billion Hong Kong share offering earlier this month, the Everbright Bank explained that while it had sufficient financing and liquidity at the corporate level, “the branches did not manage to fulfill their obligations to repay short-term interbank loans.” Instead, the payments were settled a day late.

The bank said that in response to the episode and to the greater volatility in China’s bank-to-bank lending market, it had increased reserve levels and “emphasized among our departments the overriding importance of sound liquidity.”

The big risk for China’s cosseted banks is not necessarily bank runs of the sort seen in the early 1930s in the United States, with depositors lining up to withdraw money before a bank can fail. The Chinese authorities have made clear that they will not tolerate disorderly closures of banks, and over the years have reportedly rushed cash to banks that faced sudden withdrawals.

Instead, the greater worry has been what some experts describe as “a walk on the banks” — depositors steadily removing their savings from banks after losing enthusiasm for deposit rates that have long been set by regulation at levels often below the inflation rate and only occasionally slightly above it. That slow drain could imperil the banks’ ability to continue pumping ever-larger loans to state-owned enterprises and politically connected individuals, even when many of those loans appear to be for helping borrowers repay previous loans.

Banks in China have been able to stay profitable while lending at low rates only because the government has required all of them to pay even lower rates for deposits. Savers have had few alternatives to banks until very recently: Real estate prices are already stratospheric relative to incomes, the weakly regulated and highly speculative domestic stock markets are widely distrusted and shadow banking businesses are periodically reined in by the government.

Total credit in China, although growing fast, remains slightly smaller relative to economic output than in the West. The worry is that the eventual proportion of nonperforming loans may prove even higher than other countries have had to manage, while China’s less developed financial system may make it hard to bail out less regulated entities, even as the central bank retains tighter links to the four main state-owned banks.

While policy makers say they are worried about upsetting the delicate mechanisms of the current banking system, public criticism continues to grow, even within China’s elite. That suggests further market-oriented experiments could be coming soon.

“Banking in China has become like a highway toll system,” Yao Jingyuan, the former chief economist at the state statistics agency, said late last week during a speech at Nanjing University, according to numerous Chinese news reports. “Banks charge every time money goes through them.”

“With this kind of operational model,” Mr. Yao added, “banks will continue making money even if all the bank presidents go home to sleep and you replaced them by putting a small dog in their seats.”

Why the Dollar Dominates, and Why That’s Not All Good

Why the Dollar Dominates, and Why That’s Not All Good

Lack of Rivals to Greenback Keeps It on Top—and Enables U.S. Government Dysfunction

By

DAVID WESSEL

 

Updated Dec. 4, 2013 2:42 p.m. ET

In an interview with WSJ’s David Wessel, Cornell’s Eswar Prasad, author of a forthcoming book, “The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance,” explains why the U.S. currency remains so dominant despite all the nation’s woes.

The U.S. was the epicenter of the worst financial crisis in 75 years. Its central bank is printing money at a rate of $1 trillion a year. Its government debt load is huge and its political system is visibly dysfunctional. It represents a shrinking share of the world economy as China and other emerging markets rise.

You’d think the U.S. dollar’s reign as the world’s supreme currency would be ending—or at least vulnerable.

So now comes economist Eswar Prasad with a surprising argument: “The global financial crisis has strengthened the dollar’s prominence in global finance.”

The dollar, he predicts, will remain the world’s reserve currency for a long time. “When the rest of the world wants safety,” he says, “there is no other place to go.”

Neither the euro nor the Japanese yen is a plausible rival. China’s yuan may be someday, but not soon. China still lacks the legal and other institutions and deep financial markets that make U.S. Treasury debt so attractive to so many.

Mr. Prasad is no flag-waving naif. He’s a University of Chicago Ph.D. who spent 15 years at the International Monetary Fund, where he did a stint as chief of its China desk. He now splits his time between Cornell University and the Brookings Institution.

In a lucid book to be published in February, “The Dollar Trap,” Mr. Prasad argues that the dollar’s persistent dominance is a “suboptimal” reality.

The professor isn’t predicting that the dollar’s value in euros or yen or pounds or yuan will rise inexorably. Like many a card-carrying Ph.D., he sees the size of the U.S. trade deficit and expects the greenback to fall over the long run and eschews predictions about the dollar’s near-term direction.

Mr. Prasad expects China and others to price more of their exports in their own currencies. The yuan recently overtook the euro as the second-most used currency in international trade finance, according to Swift, which runs a major electronic financial pipeline.

But as a safe, secure place to park money, the dollar is stronger than ever. The made-in-America global financial crisis strengthened the dollar’s hold.

Here’s why:

Banks around the world have been ordered by government to hold safe, easy-to-sell assets so they’ll be better equipped for future crises. That adds to demand for government bonds; the U.S. issues more of them than anyone else.

Emerging markets want more safe assets, too. There’s ever-more money sloshing around the globe, much of it moving in and out of emerging markets. That has led them to make two relevant calls:

One, inflows of capital tend to push up exchange rates and threaten exports. So governments are increasingly prone to intervene—that is, to restrain the rise in their currencies by selling them in exchange for foreign currencies. That adds to demand for dollars, which are then invested in U.S. Treasurys.

Two, those same governments have decided it is essential to have a lot of insurance in case foreign capital flees; that means building a big pile of foreign-currency reserves to scare off speculators and to demonstrate they’ve got the money to pay foreign creditors. That, too, adds to the demand for dollars and U.S. Treasurys.

This demand is occurring at a time when safe assets are in short supply: The Federal Reserve has taken $2.2 trillion of U.S. Treasurys off the market through its bond-buying program. The euro has its issues, and the sovereign debt of some euro-zone members is hardly ultrasafe. Japan and Switzerland have strong institutions and financial markets, but are actively pushing down the value of their currencies; that makes them unappealing as stores of value.

“The entire edifice of global financial stability seems to be built on this fragile foundation: If not the dollar, and if not U.S. Treasury debt, then what?” Mr. Prasad writes.

So what makes this “suboptimal”?

For the U.S., Mr. Prasad says, the global appetite for dollars keeps U.S. interest rates low and makes it easier for the U.S. to pursue foolish budget policies aimed at too much deficit reduction now and too little later.

For other countries, the world’s heavy reliance on dollars makes nearly every economy acutely sensitive to moves (or expectations of moves) by the Fed to increase or decrease the supply of dollars as it tries to steer the U.S. economy. And their stockpiles of dollars exposes them to losses if the dollar’s value declines, which gives them a reason not to do anything to harm the dollar.

The more angst in the world, the more investors and governments want to hold dollars. This makes the dollar’s dominance “stable and self-reinforcing,” Mr. Prasad concludes.

If the dollar’s role isn’t sturdy—if it is more like a sand pile just a few grains away from collapse—then the world is in trouble. Despite years of yammering, the world hasn’t built an alternative to the U.S. dollar.

Write to David Wessel at capital@wsj.com

Daniel Yergin: Why OPEC No Longer Calls the Shots

  • The Wall Street Journal
  • OPINION
  • October 14, 2013, 7:26 p.m. ET

Daniel Yergin: Why OPEC No Longer Calls the Shots

The oil embargo 40 years ago spurred an energy revolution. World production is 50% higher today than in 1973.

  • DANIEL YERGIN

Forty years ago, on Oct. 17, 1973, the world experienced its first “oil shock” as Arab exporters declared an embargo on shipments to Western countries. The OPEC embargo was prompted by America’s military support for Israel, which was repelling a coordinated surprise attack by Arab countries that had begun on Oct. 6, the sacred Jewish holiday of Yom Kippur.

With prices quadrupling in the next few months, the oil crisis set off an upheaval in global politics and the world economy. It also challenged America’s position in the world, polarized its politics at home and shook the country’s confidence.

Yet the crisis meant even more because it was the birth of the modern era of energy. Although the OPEC embargo seemed to provide proof that the world was running short of oil resources, the move by Arab exporters did the opposite: It provided massive incentive to develop new oil fields outside of the Middle East—what became known as “non-OPEC,” led by drilling in the North Sea and Alaska.

The Prudhoe Bay oil field was discovered in Alaska five years before the crisis. Yet opposition by environmentalists had prevented approval for a pipeline to bring the oil down from the North Slope—very much a “prequel” to the current battle over the Keystone XL pipeline. Only in the immediate aftermath of the embargo did a shaken Congress approve a pipeline that eventually added at its peak as much as two million barrels a day to the domestic supply.

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© Corbis

A Connecticut filling station in 1974 amid the oil embargo.

The push to find alternatives to oil boosted nuclear power and coal as secure domestic sources of electric power. The 1973 crisis spawned the modern wind and solar industries, too. By 1975, 5,000 people were flooding into Washington, D.C., for a conference on solar energy, which had been until then only “a subject for eco-freaks,” as one writer noted at the time.

That same year, Congress passed the first Corporate Average Fuel Economy standards, which required auto makers to double fuel efficiency—from 13.5 miles per gallon to 27 miles per gallon—ultimately saving about two millions barrels of oil per day. (The standards were raised in 2012 to 54.5 miles per gallon by 2025). France launched a “war on energy waste,” and Japan, short of resources and fearing that its economic miracle was at risk, began a drive for energy efficiency. Despite enormous growth in the U.S. economy since 1973, oil consumption today is up less than 7%.

The crisis also set the stage for the emergence of new importers that have growing weight in the global oil market. In 1973, most oil was consumed in the developed economies of North America, Western Europe and Japan—two thirds as late as 2000. But now oil consumption is flat or falling in those economies, and virtually all growth in demand is in developing economies, now better known as “emerging markets.” They represent half of world oil consumption today, and their share will continue to increase. Exporting countries will increasingly reorient themselves to those markets. Last month, China overtook the U.S. as the world’s largest net importer of oil.

A lasting lesson of the crisis years is the power of markets and their ability to adjust to disruptions, if government allows them to. The iconic images of the 1970s—gas lines and angry motorists—are trotted out whenever some new disruption happens. Yet those gas lines weren’t the result of markets. They were the largely self-inflicted result of government interference in markets with price controls and supply allocation. Today, the oil market is much more transparent owing to the development of futures markets.

The 1970s were also years of natural-gas shortages, which turned into a bitter political issue, particularly within the Democratic Party. Many at the time attributed these shortages to geology, but they too were the result of regulation and price controls. What solved the shortages wasn’t more controls but their elimination, which resulted in an oversupply that became known as the “gas bubble.” Today, abundant natural gas is the default fuel for new electricity generation. The lesson is that markets and price signals can work very efficiently, and surprisingly swiftly, even in crises, if they are allowed to.

There will be future energy disruptions because there is still much political risk around oil. In 2013, the Middle East is still in turmoil, but the alignments are different. In 1973, Iran was one of America’s strongest allies in the Middle East. Tehran didn’t participate in the embargo and pushed oil into the market. But since the 1979 Islamic revolution, Washington and Tehran have been adversaries. Meanwhile, Saudi Arabia, which was at the center of the 1973 embargo, is now America’s strongest Arab ally.

The real lesson of the shock of 1973 and the second oil shock set off by the overthrow of Iran’s shah in 1979 is that they provided incentives—and imperatives—to develop new resources. Today, total world oil production is 50% greater than in 1973. Exploration in the North Sea and Alaska was only the beginning. In the early 1990s, offshore production expanded farther out into the Gulf of Mexico, opening up deep water as a new oil frontier. In the late 1990s, Canadian oil sands embarked on an era of growth that today makes them a larger source of oil than Libya before its 2011 civil war.

Most recent is the development of “tight oil,” the spinoff from shale gas, which has increased U.S. oil output by more than 50% since 2008. This boom in domestic output increases energy supply, and combined with shale gas has a much wider economic impact in jobs, investment and household income. As these tight-oil supplies increase, and as the U.S. auto fleet becomes more efficient, oil imports have declined. Imports reached 60% of domestic consumption in 2005, but they are now down to 35%—the same level as in 1973.

As the U.S. imports less oil it also produces more to the benefit of energy security. There are several million barrels of oil now missing from the world oil market, owing to sanctions on Iranian oil, disappointments in Iraqi production, and disruptions to varying degrees in Libya, South Sudan, Nigeria and Yemen. The shortfall is being partly made up by Saudi Arabia, which is producing at its highest level.

But the growth in U.S. oil output has been crucial in compensating for the missing barrels. Without it, the world would be looking at higher oil prices, there would be talk of a possible new oil crisis, and no doubt Americans would once again start seeing images of those gas lines and angry motorists from 1973.

Mr. Yergin, vice chairman of IHS, is the author of “The Quest: Energy, Security, and the Remaking of the Modern World” (Penguin Press, 2012).

A version of this article appeared October 15, 2013, on page A19 in the U.S. edition of The Wall Street Journal, with the headline: Why OPEC No Longer Calls the Shots.

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