Posts Tagged ‘oil’

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.


Shale gas and oil – -it is everywhere, or at least if feels that way. It is in Russia, and the US, China, Argentina, Venezuela, Brazil and Mexico. It is in Libya and Algeria, Pakistan and Indonesia. It is in Australia and South Africa, and, at the other end of the world, it is in Canada.

For some more good news, there is some in the UK too, and for the really good news, most of it is up north, so there will be no need to spoil the aesthetic qualities of southern England’s rolling hills with wind farms. Instead all we need to do is dig up the Yorkshire Dales, and other areas that Londoners hardly ever visit.

Here is some bad news. There are also deposits in the south – bring back wind farms.

In all, the Energy Information Administration (EIA) reckons there are 26 trillion cubic feet of shale gas and 0.7 billion barrels of shale oil in the UK. So what does that mean? Well, the UK currently consumes around 3 trillion cubic feet of gas a year, so 26 trillion would last around ten years. Click here .

Actually, compared to some countries the UK is small fry. The EIA reckons that China has over 1,000 trillion cubic feet of shale gas – or a quadrillion, as they also call numbers with nine noughts. The countries that make up the top ten, in terms of reserves of shale gas – with the largest first – are: China, Argentina, Algeria, US, Canada, Mexico, Australia, South Africa, Russia and Brazil. As for shale oil, Russia has 75 billion barrels, followed by the US, China, Argentina, Libya, Venezuela, Mexico, Pakistan, Canada and Indonesia. You may have noticed there is a pretty good correlation with size of country – Venezuela, perhaps, is the exception.

All in all, analysts are talking about there being enough shale gas and oil to feed world demand for ten years. You may have noticed that the global economy slipped into recession just as oil started to approach $150 a barrel. The good news on the US economy went from a trickle to gushing torrent, just as the price of gas fell. The cost of energy matters, and may yet be the key to determining economic strength.

Stop: let’s repeat that STOP. The EIA says its estimates of shale oil and shale gas resources outside the US are highly uncertain and will remain so until they are extensively tested with production wells. As for the UK, the jury is out on how practical it is to access shale gas and oil deposits, and not everyone is all that keen on the idea of digging up Yorkshire, or fracking in a country as small as Britain. Some might choose to switch the r in the word ‘fracking’ to a u and then add the suffix awful.

We keep hearing about how shale is not a global warming gas. Well, maybe that is right, but as this article points out: “Gas fracking involves the release of significant amounts of methane into the atmosphere in the form of ‘fugitive emissions’ – an extremely powerful greenhouse gas (72 times the warming potential of carbon dioxide over 20 years).” See: Gas fracking will cause ‘irreversible’ damage, says Conservation Council of WA 

The clue may be in the name. On the south coast of England there are what the EIA calls Jurassic-age shale formations. We have all heard of the Jurassic-age and know it happened a long time ago. Less of us have heard of the Carboniferous age, which occurred from around 359.2 million years ago, to 299 million years ago. There are reserves of Carboniferous age shale gas in northern England. In other words, we are talking about reserves of shale gas and oil that have been sitting in the ground for a very long time. And in just ten years we are talking about digging up a big chunk of these reserves that have sat in the ground for hundreds of millions of years; that took hundreds of millions of years to form. Does that strike you as a good idea? How do you think future historians, from say 200 years in the future, will respond when they read about all this so-called “good news on shale gas” in 2013?

What we forget is that the Earth’s climate has changed over millions of years, and it changed as carbon dioxide was sucked out of the atmosphere and deposited in the ground. In just a few years we are reversing a process that took place over millions, maybe even a billion years.

Just to play devil’s advocate, here is question for you: what will shale gas exploration do for renewables? Will investment into shale gas and fracking crowd out investment in renewable energies?

Remember Moore’s Law. In its literal sense, this refers to computers doubling in speed every 18 months or so. But use Moore’s law as a metaphor for rapidly increasing technology and maybe it can be applied to renewables.

Where renewable technologies differ from other energy industries and yet are similar to the computer industry is that the generation gap between each stage in their development is quite small. It can take three decades to build a nuclear power plant, months to build wind farms, and just days to install solar panels.

The more we invest in renewables, the cheaper they get, and the progress rate in the efficiency of the technology can be very rapid.

Forward wind the clock 20 years, and assume that in 2013 the world moved away from carbon fuels and instead invested billions, even trillions, in renewables. Is it not possible that by 2033 our energy would be much cheaper than it is today?

James Martin, in his book ‘The Meaning of the 21st Century’, said: “The world’s reserves of oil, not counting the undiscovered ones, have a value of about 60 trillion US dollars… coal reserves have a similarly high value. If humanity set out to save energy and move to non-carbon forms of energy… much of this vast amount of energy would be abandoned. Both oil-rich countries and petroleum companies want to hang on to their potential wealth.”

Apologies if this sounds like a conspiracy theory, which is not something this column tends to support, but why don’t we hear as much hype about renewables as we do about shale gas, when, by the way, surveys show that most people do not think wind farms are aesthetically ugly at all.

For the EIS report, go to Shale oil and shale gas resources are globally abundant 

© Investment & Business News 2013