The oil world as we have known it is dead.
As the established market price setter, OPEC has reigned supreme internationally since 1960. In that year Saudi Arabia, Iran, Iraq, Venezuela and Kuwait founded the organization - known as the "Founding Members". In 1973, US President Richard Nixon signed an agreement with Saudi Arabia that in exchange for US protection, and arms, the Saudis would accept only US dollars in oil transactions. The other OPEC members then followed suit. All was well in the Kingdom.
Things have changed for three primary reasons. Firstly, China has risen to the point where it is now the second largest consumer of oil in the world. Secondly, the US with its fracking policies has now become the largest producer of oil in the world. Thirdly, Russia has grown to challenge Saudi Arabia's production levels. Three monumental shifts. Essentially the shifts have on the one hand structurally reduced the value of oil, and on the other hand have changed the demand cycle for oil.
Between 1973 and 1980, the US produced roughly an equal amount of oil as that of Saudi Arabia. However, from 1980 to 2009 US production dropped dramatically until the fracking revolution again placed it near Saudi production. At the same time Russia dramatically grew its production of oil just after the collapse of the Soviet Union in the 1990's, to the point that Russia shares top spot with the US, and Saudi.
Then there were wars. The US and Saudi Arabia covertly and overtly attempted to either control or destroy the oil capabilities of Iran, Iraq and Venezuela (three of OPEC's founding members) by way of military force or revolution. For the most part these actions were successful to one degree or another. However, now all three have gravitated toward Russia and China for their economic well being. In a sense, this is another monumental shift to add to the three above.
That brings us to today. Russia and China have moved to eliminate the US as the controller of world-wide oil wealth. They have created a Eurasian trading community that speaks to the production of oil, and perhaps more importantly the consumption of oil.
In 2015, Russia and China began signing oil supply and purchase agreements that required transactions to be conducted in local currencies - not US dollars. That had the effect of increasing oil production and trading among the Eurasian bloc of countries. It excluded the US, but also Saudi Arabia, from oil market influence. For example, Russia signed agreements with Venezuela to swap Venezuelan oil for Russian consumer goods - not much different than the old Soviet model of international trading. China signed oil supply agreements with Iran. And so it goes.
That left the old King of OPEC, Saudi Arabia, out in the cold. In an attempt to restore its position Saudi Arabia increased production, along with the Americans, The resulting massive price per barrel decline had the effect of driving many countries into recession and/or hyperinflation (Venezuela). But, and it's a big but, the move failed in its objective. The Eurasian community, and its allies, simply turned inward and compensated each other by trading in their own currencies and products.
Hence the recent visits by Saudi royalty to Russia. On the face of it, Saudi is looking for Russian cooperation in Syria - ie: a departure of Russia from the Syria conflict. However, the real reason for the sudden Saudi diplomacy toward Russia is peace overtures in an oil war they have lost. Saudi is now a lonely supplier of oil running out of markets. Worse for them, the US now no longer needs them for supply and or control of OPEC. The new OPEC is in Eurasia. Specifically Russia.
What all this means for the world of oil is that the cartel days are over. The US stands alone as an oil force. Eurasia and allies stand alone as an oil force. Saudi stands alone with Kuwait and Qatar. It means that world oil prices will now be permanently depressed - likely well below where they rest today. It means an end to the boom of the expensive oil exploration and trade that fueled petro economies around the world - my own included. It's a new reality. Oil is no longer King, and it is no longer exclusive. So, while OPEC is dead, a new oil King has been anointed. That King without any doubt whatsoever is Eurasia.
Showing posts with label Oil Prices. Show all posts
Showing posts with label Oil Prices. Show all posts
Thursday, October 22, 2015
Monday, March 16, 2015
The Oil Overdose
Oil is done as a "gold" standard. "Black Gold" is now more like "Black Coal". It's everywhere and plentiful. Many countries in the world, and provinces in Canada (like my home province of Newfoundland and Labrador) have bet the farm on unending oil wealth to fuel their growth. Some, like Norway, have banked all those petro dollars into a trillion dollar savings fund that essentially makes every Norwegian a millionaire. Others have used the big bucks to build massive militaries - like Russia; Saudi Arabia; and Iran to name a few. The old black gold has been a God send for those that have it, but those days have come and gone.
Some economists are predicting a relatively short turn around for oil prices - somewhere between a year or two. Very few economists have ventured into the permanently depressed price projection. So, does the evidence support a short term downturn or a fundamental, long-term decline in the price of crude oil? One of the few interesting trends in oil, that has not been discussed much, is the narrowing of the price for oil between the benchmarks of West Texas Crude (WTI) and Brent Crude. Generally, Brent Crude is a world price for oil, while the WTI is the American price. Not too long ago there was a 20% difference in the two benchmarks - WTI being the cheapest. Today that gap has narrowed to the point of near parity. What does that indicate? In two words - European deflation. The European economy is spiraling downward with massive unemployment in places like Spain and Greece, and negative bond issues in places like Germany and Switzerland. In effect, Europe as an economic entity is tapped out.
Then there is the suppression of oil exports into the world oil trade. Most notably Iran. Iran has been severely restrained from exporting oil due to US led sanctions. It has some of the largest oil reserves in the world, and is strategically located to send that oil to market at a low cost. In effect Iran's oil has already been priced out of the market price. Then there is Libya. It has been torn apart by civil war like conditions, inter-tribal warfare, and now Islamic warfare. Its oil exports have been essentially removed from the market. Nigeria is falling into a similar position. Ditto for Iraq, In other words, the glut of oil in the world is really only a small measure of what that glut would look like if and when these countries come back into the market in a significant way.
There is the major factor of new discoveries and technology to consider. A massive oil and gas field has been discovered off the coasts of Israel and Gaza, and is as yet untapped. There are major oil plays in the Kurdistan region of Iraq and to some extent Turkey that remain well underutilized. The dueling technologies of fracking and offshore sub sea "tentical"lines have revolutionized the ability to recover oil from previously trapped locations.
In other words, there is just too much oil in the world, for the foreseeable future, to warrant a scarcity price. The current prices really reflect almost a Debeers - type strategy. Debeers of course controls the world diamond market and ensures that prices remain high by restricting volume in the market. A similar trend is happening with oil. In reality, oil should be at $15-25 per barrel US. Prices above this reflect artificial interventions in the market place, which cushion the fall for many governments that have built societies based on $100 + oil. My province is no different. In fact, even at the current inflated prices, Newfoundland and Labrador looks to be taking a 15-20% hit on its annual budget. Addressing these issues of revenue loss for governments is guaranteed to add further to deflation as consumer confidence crashes and the internal markets realign to economic reality. The same can be said for countries like Russia, Iran, Iraq, Saudi-Arabia, etc.
Predicting the future is a tough task indeed. But, as the CSI saying goes: "people lie, the evidence doesn't." In order to see that future we need to understand demographic trends, political/trade trends, supply and demand trends, etc and synthesize them into one living organism (our world). It's abundantly clear that artificial barriers, primarily caused by speculators in the trading markets, are becoming more and more redundant. As the world economy deflates, which it is, those artificial barriers to the true market value of oil fall away. Expect to see oil decline as the world economy deflates. They go hand in hand, with one racing before the other. Unfortunately, for people like ours that have been subjected to "good times" spending and zero savings, the end of the oil bounty is the end of the party. The government has suffered an oil overdose, and we let them.
Some economists are predicting a relatively short turn around for oil prices - somewhere between a year or two. Very few economists have ventured into the permanently depressed price projection. So, does the evidence support a short term downturn or a fundamental, long-term decline in the price of crude oil? One of the few interesting trends in oil, that has not been discussed much, is the narrowing of the price for oil between the benchmarks of West Texas Crude (WTI) and Brent Crude. Generally, Brent Crude is a world price for oil, while the WTI is the American price. Not too long ago there was a 20% difference in the two benchmarks - WTI being the cheapest. Today that gap has narrowed to the point of near parity. What does that indicate? In two words - European deflation. The European economy is spiraling downward with massive unemployment in places like Spain and Greece, and negative bond issues in places like Germany and Switzerland. In effect, Europe as an economic entity is tapped out.
Then there is the suppression of oil exports into the world oil trade. Most notably Iran. Iran has been severely restrained from exporting oil due to US led sanctions. It has some of the largest oil reserves in the world, and is strategically located to send that oil to market at a low cost. In effect Iran's oil has already been priced out of the market price. Then there is Libya. It has been torn apart by civil war like conditions, inter-tribal warfare, and now Islamic warfare. Its oil exports have been essentially removed from the market. Nigeria is falling into a similar position. Ditto for Iraq, In other words, the glut of oil in the world is really only a small measure of what that glut would look like if and when these countries come back into the market in a significant way.
There is the major factor of new discoveries and technology to consider. A massive oil and gas field has been discovered off the coasts of Israel and Gaza, and is as yet untapped. There are major oil plays in the Kurdistan region of Iraq and to some extent Turkey that remain well underutilized. The dueling technologies of fracking and offshore sub sea "tentical"lines have revolutionized the ability to recover oil from previously trapped locations.
In other words, there is just too much oil in the world, for the foreseeable future, to warrant a scarcity price. The current prices really reflect almost a Debeers - type strategy. Debeers of course controls the world diamond market and ensures that prices remain high by restricting volume in the market. A similar trend is happening with oil. In reality, oil should be at $15-25 per barrel US. Prices above this reflect artificial interventions in the market place, which cushion the fall for many governments that have built societies based on $100 + oil. My province is no different. In fact, even at the current inflated prices, Newfoundland and Labrador looks to be taking a 15-20% hit on its annual budget. Addressing these issues of revenue loss for governments is guaranteed to add further to deflation as consumer confidence crashes and the internal markets realign to economic reality. The same can be said for countries like Russia, Iran, Iraq, Saudi-Arabia, etc.
Predicting the future is a tough task indeed. But, as the CSI saying goes: "people lie, the evidence doesn't." In order to see that future we need to understand demographic trends, political/trade trends, supply and demand trends, etc and synthesize them into one living organism (our world). It's abundantly clear that artificial barriers, primarily caused by speculators in the trading markets, are becoming more and more redundant. As the world economy deflates, which it is, those artificial barriers to the true market value of oil fall away. Expect to see oil decline as the world economy deflates. They go hand in hand, with one racing before the other. Unfortunately, for people like ours that have been subjected to "good times" spending and zero savings, the end of the oil bounty is the end of the party. The government has suffered an oil overdose, and we let them.
Monday, December 8, 2014
In NL the Budget Man Cometh
Danny Williams ' big spin was Newfoundland and Labrador would become Master of its own house. Remember that? He created Nalcor for that purpose. His government acted as if this was somehow possible. It wasn't then, and it isn't now.
There is no better modern example of how every economy in the world is dependent on each other than the world-wide economic war happening right now. It's a war the US thinks it's winning, yet it's a war the US has already lost. Hand-in-hand with Saudi Arabia, the US is flooding the market with oil to devastate economies that depend on its revenue. Russia just happens to be the number one oil producer in the world. The aim is of course to drain Russia, Iran and Venezuela of budget revenue, and ultimately ruin the new Eurasian/BRIC alliance while in its infancy.
The problem with the strategy is the intended victims, Russia and China, have historically proven they can withstand any adversity. The 25 million Russians killed while bleeding the German army white during WW II is one example. Ditto for Napoleon. Etc. The Chinese sent 250 million people back to their villages without jobs or income after the last big world economic collapse in 2008. Not even a bead of sweat creased their brow. These are tough populations, used to adversity, and determined. Our side not so much. In a game of mutually assured economic destruction, as is being played out now world-wide, the only sure bet is the populations of Europe and North America are far less willing or able to withstand economic hardship than our fellow human beings on the other side.
Where its all leading for oil is fairly predictable. Putin hinted as much when he recently commented that ISIS was surviving by selling oil on the international black market for $30 a barrel. I take that comment, in the context it was made, as a direct challenge to the Western powers attempting to empty his coffers: "Russia is prepared to see oil fall as low as $30 a barrel in an international game of chicken". Let's say that's true, what are the ramifications of that strategy for us?
Oil accounts for 33% of all revenue in our provincial budget each year. We are now fully dependent on oil revenue for our standard of living - government and the population. We have borrowed. We are in debt to our eyeballs. An oil recession in this province would be far more dangerous here than most places. The government has spent every cent of oil revenue in the last 9 years, except the $2 billion or so that is needed for the Muskrat Falls down payment required by the federal loan guarantee. They borrowed a billion dollars last year on top of that to pay bills. This year the deficit looks to be about $600 million or so. That will have to be borrowed as well. That means our gross debt, the money we actually owe, is almost $1.5 billion higher than when Williams was elected , and the oil money started coming in.
But what will it mean going forward? If oil settles at $60 a barrel, as many economists are predicting, our annual budget will lose about $1.25 billion. That is catastrophic for the provincial economy. That is recession. The reason is that this province relies heavily on government spending to drive the economy. Some examples are Muskrat Falls, hospitals, etc. Without that expenditure, the private companies that relied on it die on the vine. Have no illusion, they will die on the vine. That means much higher unemployment numbers, serious drops in real estate values, and all that spirals from that as usual.
It means massive cuts in government spending on programs and people. It means recession. Now, if Russia carries out its implied intention to ride the oil wave down to $30 a barrel, the consequences are much different. A $30 per barrel drop means Newfoundland and Labrador loses over $2 billion in oil revenue per year. That means depression. That means default on large loans - like the federal loan guarantee on Muskrat Falls. That means Hebron is cancelled. It means an end to all oil exploration, and the end for the many local companies living off servicing the oil industry. It means massive unemployment in the private sector and the public sector. At least in the range of 25%.
Now, you might think this is an exaggeration, but remember that the provincial GDP increases of the last decade have been almost solely based on oil revenue. The economy and society have inflated along with the boom. Personal debt has increased with the expressed idea that oil would keep going up. Government debt ditto. Therefore, the dramatic shock of oil deflation has even more severe consequences than would normally be expected. If you want a really good example, look to the oil bust in Alberta in the 1980's. That was Alberta's first big bust. They were like us. They spent like it would never end. It ended, and when it did people walked away from their houses... Alberta was devastated, and it had a government savings account - the Heritage Fund. We don't have one of those.
At $30 a barrel the refinery at Come-by-Chance is almost certain to close. Ditto for the Hebron development. Those two projects alone would have a massive financial effect in central Newfoundland. Muskrat Falls also comes into focus. Selling power at a loss for the sake of it may be trumped by common financial sense, and that project may be abandoned. As bad as its financial are now, financial arrangements still have not been made with the Nunatukavut or Nunatsiavut governments, which can be expected to be at least $1 billion extra. Then there is the prospect of Hydro-Quebec winning its lawsuit over the water management agreement. That one you can take to the bank. In 2010, the provincial department of Natural Resources estimated such a loss in court would result in billions of dollars in damages being awarded by the courts. It also stated that CF(L)Co would be bankrupted. These are the facts.
There is no bright side to the economic war being waged by the big powers in the world. Not even for them. It's the kind of "battle to the last man" that by necessity means no one else survives. We are and will remain casualties of the "greater good". We are also casualties of a foolish and irresponsible spending policy of the Williams' regime. We are also casualties of our own acquiescence to the Williams' vision. The problem, and it's a very serious problem, is Newfoundlanders and Labradorians are not being informed of the reasons for it all. It's put down to "lower oil prices" and that's about the extent of the explanation by government. They say only two things are certain: death; and taxes. Add a third: ignorance is no excuse.
There is no better modern example of how every economy in the world is dependent on each other than the world-wide economic war happening right now. It's a war the US thinks it's winning, yet it's a war the US has already lost. Hand-in-hand with Saudi Arabia, the US is flooding the market with oil to devastate economies that depend on its revenue. Russia just happens to be the number one oil producer in the world. The aim is of course to drain Russia, Iran and Venezuela of budget revenue, and ultimately ruin the new Eurasian/BRIC alliance while in its infancy.
The problem with the strategy is the intended victims, Russia and China, have historically proven they can withstand any adversity. The 25 million Russians killed while bleeding the German army white during WW II is one example. Ditto for Napoleon. Etc. The Chinese sent 250 million people back to their villages without jobs or income after the last big world economic collapse in 2008. Not even a bead of sweat creased their brow. These are tough populations, used to adversity, and determined. Our side not so much. In a game of mutually assured economic destruction, as is being played out now world-wide, the only sure bet is the populations of Europe and North America are far less willing or able to withstand economic hardship than our fellow human beings on the other side.
Where its all leading for oil is fairly predictable. Putin hinted as much when he recently commented that ISIS was surviving by selling oil on the international black market for $30 a barrel. I take that comment, in the context it was made, as a direct challenge to the Western powers attempting to empty his coffers: "Russia is prepared to see oil fall as low as $30 a barrel in an international game of chicken". Let's say that's true, what are the ramifications of that strategy for us?
Oil accounts for 33% of all revenue in our provincial budget each year. We are now fully dependent on oil revenue for our standard of living - government and the population. We have borrowed. We are in debt to our eyeballs. An oil recession in this province would be far more dangerous here than most places. The government has spent every cent of oil revenue in the last 9 years, except the $2 billion or so that is needed for the Muskrat Falls down payment required by the federal loan guarantee. They borrowed a billion dollars last year on top of that to pay bills. This year the deficit looks to be about $600 million or so. That will have to be borrowed as well. That means our gross debt, the money we actually owe, is almost $1.5 billion higher than when Williams was elected , and the oil money started coming in.
But what will it mean going forward? If oil settles at $60 a barrel, as many economists are predicting, our annual budget will lose about $1.25 billion. That is catastrophic for the provincial economy. That is recession. The reason is that this province relies heavily on government spending to drive the economy. Some examples are Muskrat Falls, hospitals, etc. Without that expenditure, the private companies that relied on it die on the vine. Have no illusion, they will die on the vine. That means much higher unemployment numbers, serious drops in real estate values, and all that spirals from that as usual.
It means massive cuts in government spending on programs and people. It means recession. Now, if Russia carries out its implied intention to ride the oil wave down to $30 a barrel, the consequences are much different. A $30 per barrel drop means Newfoundland and Labrador loses over $2 billion in oil revenue per year. That means depression. That means default on large loans - like the federal loan guarantee on Muskrat Falls. That means Hebron is cancelled. It means an end to all oil exploration, and the end for the many local companies living off servicing the oil industry. It means massive unemployment in the private sector and the public sector. At least in the range of 25%.
Now, you might think this is an exaggeration, but remember that the provincial GDP increases of the last decade have been almost solely based on oil revenue. The economy and society have inflated along with the boom. Personal debt has increased with the expressed idea that oil would keep going up. Government debt ditto. Therefore, the dramatic shock of oil deflation has even more severe consequences than would normally be expected. If you want a really good example, look to the oil bust in Alberta in the 1980's. That was Alberta's first big bust. They were like us. They spent like it would never end. It ended, and when it did people walked away from their houses... Alberta was devastated, and it had a government savings account - the Heritage Fund. We don't have one of those.
At $30 a barrel the refinery at Come-by-Chance is almost certain to close. Ditto for the Hebron development. Those two projects alone would have a massive financial effect in central Newfoundland. Muskrat Falls also comes into focus. Selling power at a loss for the sake of it may be trumped by common financial sense, and that project may be abandoned. As bad as its financial are now, financial arrangements still have not been made with the Nunatukavut or Nunatsiavut governments, which can be expected to be at least $1 billion extra. Then there is the prospect of Hydro-Quebec winning its lawsuit over the water management agreement. That one you can take to the bank. In 2010, the provincial department of Natural Resources estimated such a loss in court would result in billions of dollars in damages being awarded by the courts. It also stated that CF(L)Co would be bankrupted. These are the facts.
There is no bright side to the economic war being waged by the big powers in the world. Not even for them. It's the kind of "battle to the last man" that by necessity means no one else survives. We are and will remain casualties of the "greater good". We are also casualties of a foolish and irresponsible spending policy of the Williams' regime. We are also casualties of our own acquiescence to the Williams' vision. The problem, and it's a very serious problem, is Newfoundlanders and Labradorians are not being informed of the reasons for it all. It's put down to "lower oil prices" and that's about the extent of the explanation by government. They say only two things are certain: death; and taxes. Add a third: ignorance is no excuse.
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