Archive for the ‘Oil’ Category

file6071284660910We are not good at learning the lessons of the past. Alas, we are not so good at learning the lessons of the recent past. Take the oil price and the way the markets are failing to grasp that there is a thing called a cycle.

This is the theory. When the oil price is high, at first we just carrying on demanding it as before. Economists say that oil demand is price inelastic. But over time, things change. For one thing, when the oil price is high we see masses of investment into finding new sources of oil. For another thing, we change our habits.

So in the 1970s, for example, the US government imposed a speed limit on the roads, so that less petrol was consumed.  In recent years, people have been saving money by opting for more fuel efficient cars, putting solar panels on roofs, insulating lofts, while the likes of Elon Musk promote the electric car and battery bandwagon.

At the same time, we see innovation on the supply side, and we get oil from the Alberta tar sands, and shale gas and oil.

But always, the markets, and even the wise people at the top of business, fail to spot it. Oil is going to be expensive forever, we are running out of it, we are told. “We are at peak oil.”

But things change. Even the rise of China failed to have the impact on the oil price that had been expected, for the simple reason that China made very inefficient use of energy. As it grew, it became more efficient in its use of energy, and its demand did not rise at the pace that had been expected.

So the oil cycle turned, and the oil price collapsed. That is how the market cycle works. Always we seem to forget, and say this time it is for good.

Now the International Energy Agency has warned that Middle East oil producers, such as Saudi Arabia and Iraq have their highest share of world oil markets since the 1970s.

At the same time, the imperative of energy efficiency slowly seems to be in the process of being forgotten. According to the FT, sales of sports utility cars have risen such that sales of these cars now exceed ordinary cars by two and half times. Our habits are changing; we are slowly adjusting to cheaper oil.

Investment into new energy resources has been cut, less money is being spent on oil exploration. Shell maintains its dividend, and invests less in the future, less for the day when oil price starts to rise.

That is why the oil cycle will turn again. And why I suspect that the oil price will surge over $100 before this decade is out.

Now gaze even further into the future. I wonder whether the next turn in the cycle may be the last upwards one. The slump in the oil price has delayed alternatives but that is all it has done.  The internet of things will create unprecedented efficiency. Solar power is becoming ever more efficient. Battery technology is advancing, nano technology may even make it possible for us to create synthetic oil.

The oil cycle will turn upwards within a few years, and then a few years later it will turn down, but then it may not turn anymore.

This article originally appeared at Fresh Business Thinking:

file9961251406222Oil has fallen again in recent weeks. This week, West Texas Intermediate oil has been hovering at just a dollar or two above the year low. Meanwhile, a report from the National Institute of Economics and Social Research (NIESR) has predicted that 2015 will be the worst year for the global economy since 2008. It shouldn’t be like that. With oil as cheap as it is, the economy should be booming.  So this all begs the question, “why?” Is there some rather worrying underlying reason for the weakness in the global economy?

At the time of writing (6 August 2015, 6.45 am) West Texas Intermediate oil is trading at $45.17. To put that in context, just over a year ago it was trading at $104. Brent crude oil is just shy of $50. One day, black gold will probably go back over $100. Maybe, one day it will even pass the 2008 peak, when it went close to $150, but this day is not likely to be any time soon.   The oil cycle moves slowly. Investment in oil has dropped drastically, new projects have been shelved. It will be several years before these developments show up in rising oil prices, though.

There are winners and losers from cheaper oil. Apologies if this sounds like a lesson from the University of the Bleeding Obvious, but cheaper oil benefits its consumers and hits its producers. So in theory the effect of falling oil prices on the global economy should be neutral. It is just that on the whole, oil consumers have a much lower savings ratio that oil producers. A fall in the oil price distributes income from high savers to high spenders. Given that we are in a time when there is a chronic shortage of demand worldwide, this should be good news.

As an aside, there is another not commonly understood potential side effect of cheaper oil. Ask yourself this question, why are interest rates so low? That is to say, what is the real reason? Forget central bankers, they move with the tide. The main reason why rates are so low is because worldwide there is a shortage of demand and a savings glut.  Back in the noughties this savings glut funded consumer spending in the West, creating a bubble which burst in 2008. Since then it has been funding surging government debt, and maybe sharp rises in debt in emerging markets.  McKinsey has said that global debt has risen by $57 trillion since 2007. The savings glut made this possible. There are many reason for this, and many of these reasons have not gone away. But at least one driver of low interest rates, the rise in savings coming out of oil producers, has gone into reverse.  

Returning to the global economy in 2015, earlier this week NIESR projected that “The world economy will grow by 3 per cent in 2015 – the slowest rate since the crisis – and 3.5 per cent in 2016.” So that is odd. The price of oil has fallen by a half, and the global economy is weak. Something is wrong.

There are two ways looking at this. You can look at individual countries, one at a time, or you can look for some deeper underlying cause.

The US has a bad start to the year because of an exceptionally cold winter in the north east of the country. This had a knock-on effect worldwide. The UK, it appears, got caught up in it all with falling exports to the US dragging down on growth.  

By its standards, the Eurozone had a good first half of this year, this despite Greek woe. But then again, this is the Eurozone, and the key phrase here is “by its standards.”  The only other region in the world that puts in such a continuously poor performance is Japan.

The world’s second largest economy, China, has slowed fast. There is more than one reason. For one thing, China sits on a mounting debt pile, with local government especially badly exposed.  This is beginning to hurt. For another thing, the Chinese government is trying to re-engineer the shape of the Chinese economy, shifting it from investment and savings led, to consumption led. This is a good thing, but the transformation is hurting

Russia’s problem are well documented. It is clear that it has lost out big time to the falling oil price. Brazil has suffered from a wider fall in commodity prices, but like Russia, there were deep structural problems with the economy anyway.

So pick it apart, there is a reason for the slow growth. Even so, I can’t help but feel that the overall performance of the global economy, given how weak oil and other commodity prices are, is very disappointing. You could respond by saying that I have mixed up cause and effect. You could say that oil has fallen in price because global demand is low. But I would respond to that by saying at least part of the reason for the fall in the oil price has been the revolution in fracking and previous surges in oil investment. The rise of renewables are taking a toll, too.  I don’t accept that I have got things the wrong way round.

So what are the possible underlying drivers at work? There are to theories to explain what is happening, there is the Robert Gordon ‘innovation is slowing’ theory, and the Larry Summers Secular Stagnation theory. I will look at these theories in more depth in a few days.


Perspective makes all the difference. On this side of the pond, BP – along with its two US partners –made a dreadful error. In the case of BP the causes of the errors were complex. Its boss at the time was trying to change the culture, and make the company more safety aware. BP works with cutting edge technology, drilling for oil in the deep places of this planet. It possesses skills at searching for and releasing oil lying beneath the oceans which are second to none, but inevitably, when you push technology to its limit, you occasionally get it wrong. With the Macondo oil platform, the consequences of getting it wrong were calamitous. BP was unlucky, it could have been a rival, a US firm, for example, but alas BP was the one hit by a bolt of misfortune.

From the perspective on the other side of the Atlantic, the view is quite different. Run by a complacent Brit, “who wanted to get his life back”, BP put profits before all else. It ignored warnings. It allowed a culture to develop in which employees at the firm told their bosses what they thought they wanted to hear. BP was a company that represented all that was bad about corporate culture. Consider this anecdote to illustrate the point. Its partner, Halliburton told BP that it needed 21 metal centralising collars to stabilise cement laid down before drilling. So what did BP, with its attention forever on cost cutting, do? It laid down just six such collars.

There is no doubt that there are companies, individuals and indeed lawyers, in the region of the US affected by the Gulf of Mexico oil spill that have tried their luck. Ads have circulated urging people to lodge claims. Stories abound of firms gaining compensation from BP for the most spurious of reasons. Perhaps their turnover fell in the year of the oil spill, but for reasons quite unrelated to BP. Perhaps their turnover fell because their finance director booked invoices that would normally have been sent in the year of the oil spill into the following year. Perhaps their turnover fell because firms changed their accountancy practice for just that one year.

Is it fair? It depends on the narrative to which you are subjected. If you believe that BP was guilty of huge arrogance, with compete disregard to human life in the build-up to the oil spill, then you might say the company hasn’t changed; that it is shamelessly trying to put the blame on innocent US victims.

If you believe BP was unlucky, and is no more guilty than its two main US partners in the oil project – Halliburton and Transocean – if you believe that its former boss Tony Hayward was singled out by the US because they just didn’t get the British tendency for understatement, then you might feel that the giant oil company has been treated shamelessly by the US system of so-called justice.

The ‘FT’ has run a number of anonymous articles fighting BP’s corner. One article headlined America’s shameful shakedown of BP and said that the “gulf settlement should be fair, not an exercise in extortion.”

Robert Kennedy Jr told the other side of the story. In a recent interview with the ‘Telegraph’ he responded to the argument that BP was being bullied by the US legal system. He said: “They are being picked on as an oil company that wrecked our Gulf and lied about it… I don’t care if it’s a British company or Exxon. I would rather sue Exxon than BP, because I think Exxon is a worse company. But Exxon didn’t do the Gulf spill.” He said damages should be sufficiently punitive that “it gives an incentive to their industry to spend as much money on protecting the safety of the public and the environment as they do on their tax lawyers, who are trying to reduce their tax liabilities.” Now take legal fees. BP forked out no less than $1.5 billion in payments to law firms acting for apparent victims of the oil spill in May and June alone. BP called these charges “perverse and outrageous.”

What it has managed to do is get the US legal system to investigate and former judge and – more to the point – former director of the FBI Louis Freeh is on the case. The Feds, as it were, are trying to see whether BP has a right to cry foul.

Yet federal judge Carl Barbier doesn’t seem impressed with BP’s arguments. The oil company has been accusing the US claims administrator Patrick Juneau and his office of acting unfairly. But Judge Barbier accused BP Boss Bob Dudley of “going beyond the line”, and of making “unfair, inappropriate, personal attacks” on Mr Juneau.

It does seem to depend on the narrative to which you were subjected in the first place.

Supposing, however, the narrative is retrospectively changed. It turns out that had BP followed Halliburton’s advice and employed 21 metal centralising collars, instead of six, it would have made no difference. Soon after the oil spill, Halliburton ran two simulations of what would have happened in the event that BP had heeded its advice, and the simulations showed that the end result would have pretty much been the same. So what did Halliburton do? It asked the people who ran the simulations to destroy them.

Halliburton has been fined $200,000 for its wrong doing, while BP has forked out around $40 billion. Some say there is a disconnection there.

But then that is the snag with narratives. When pieces of the narrative are changed at a later date, the overall initial impression is unaltered. The narrative changes us, and retrospective changes to the narrative don’t reverse the original effect it had on us. If we were to find out years after we first heard the story that that actually Cinderella was a manipulative little so and so, we would probably still think she had an evil step mother and sisters. Not that BP is Cinderella, but there is someone who is as white as the hero from the best child’s story: Dick Cheney, former US Vice President, no less.

Of course Halliburton is essentially honourable; its former boss went on to become US Vice President.

But if your narrative of US history when Cheney was Vice President is a tad cynical, and you view him as something of a war monger, who made Attila the Hun seem like a socialist, then no doubt you will see this as yet more evidence that BP has been screwed by the US legal system, while Halliburton with its links to the very top of the US government, has got away with the tiniest of fines.

© Investment & Business News 2013

It has happened before, and when it did oil bears said told you so. And then it rose back up again. Brent Crude oil has fallen below $98 for the first time since last July. At the time of writing, US Sweet crude oil is at $86.57, the lowest level since last November.

The reasons for the fall are not obvious. Economic pessimists have been predicting falls in the price of oil for some time, and the economic news has not been so good of late. Notwithstanding falls of the last few days, the markets have been pretty euphoric of late, and, rightly or wrongly, many have invested a good deal of hope in Japan’s new QE friendly regime.

Capital Economics, long time oil bear, has already started factoring the effect of recent falls in the oil price on the Russian economy. After Saudi Arabia, these days Russia is the second biggest oil exporter in the world. Oil accounts for no less than 60 per cent of Russian exports, and around 50 per cent of government tax receipts.

Capital Economics calculates that, roughly speaking, for every $1 per barrel change in the price of Brent oil, Russia gains or loses – depending on which way the oil price moves – $2 billion worth of exports. But Neil Shearing, Chief Emerging Markets Economist at Capital Economics, said: “Prices would need to fall much further to pose a threat to economic stability (and fiscal sustainability) in Russia. We would only become concerned if oil fell below $80pb for a prolonged period.”

Okay, so that’s Brent, which – as was said above – is trading at just under $98 right now.

Looking at US crude, for which Investment and Businesses News has data going back many years, the story is as follows.

Over the last few years, oil has traded in a range between $80 and $110. The last time US Sweet crude was over $110 was in 2008. The last time it was under $80 was in 2011. The last time it was under $70 was June 2009.

In other words the current price of oil is nothing unusual. It is merely at the lower end of a range it has fluctuated within for some time.

In contrast, 2009 saw US Sweet crude fall to less than $40, and the global economy saw a reasonably strong pick-up soon afterwards.

We would need to see much stronger falls than we have seen over the last few weeks to start concluding that – thanks to the falling price of oil – the global economy is set to see a major impetus for growth, and that recessionary risk may return for Russia.

©2013 Investment and Business News.

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