Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on January 8, 2015
How $50 Oil Changes Almost Everything
The plummeting price of oil means no more trout ice cream.
Coromoto, a parlor in Merida, Venezuela, famous for its 900 flavors, closed during its busiest season in November because of a milk shortage caused by the country’s 64 percent inflation rate, the world’s fastest.
That’s the plight of an oil-producing nation. At the same time, consuming countries like the U.S. are taking advantage. Trucks, which burn more gasoline, outsold cars in December by the most since 2005, according to data from Ward’s Automotive Group.
The biggest collapse in energy prices since the 2008 global recession is shifting wealth and power from autocratic petro-states to industrialized consumers, which could make the world safer, according to a Berenberg Bank AG report. Surging U.S. shale supply, weakening Asian and European demand and a stronger dollar are pushing oil past threshold after threshold to a five-and-half-year low, with a dip below $40 a barrel “not out of the question,” said Rob Haworth, a Seattle-based senior investment strategist at U.S. Bank Wealth Management, which oversees about $120 billion.
“Oil prices are the big story for 2015,” said Kenneth Rogoff, a Harvard University economics professor. “They are a once-in-a-generation shock and will have huge reverberations.”
Weak Prices
Brent crude, the international benchmark, fell as low as $49.66 a barrel today, dropping below $50 for first time since 2009. Prices dropped 48 percent in 2014 after three years of the highest average prices in history. West Texas Intermediate, the U.S. benchmark, plunged to as low as $46.83 today, about a 56 percent decline from its June high.
“We see prices remaining weak for the whole of the first half” of 2015, said Gareth Lewis-Davies, an analyst at BNP Paribas in London.
If the price falls past $39 a barrel, we could see it go as low as $30 a barrel, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey, who projected the 2014 drop.
“Where prices bottom will be based on an emotional decision,” Zimmerman said. “It won’t be based on the supply-demand fundamentals, so it’s guaranteed to be overdone to the downside.”
The biggest winner would be the Philippines, whose economic growth would accelerate to 7.6 percent on average over the next two years if oil fell to $40, while Russia would contract 2.5 percent over the same period, according to an Oxford Economics Ltd.’s December analysis of 45 national economies.
Inflation Outlook
Among advanced economies, Hong Kong is the biggest winner, while Saudi Arabia, Russia and the United Arab Emirates fare the worst, according to Oxford Economics.
One concern of central bankers is the effect of falling oil prices on inflation. If crude remains below $60 per barrel this quarter, global inflation will reach levels not seen since the worldwide recession ended in 2009, according to JP Morgan Securities LLC economists led by Bruce Kasman in New York.
Kasman and his team are already predicting global inflation to reach 1.5 percent in the first half of this year, while sustained weakness in oil suggest a decline to 1 percent, they said.
Negative Inflation
The euro area would probably witness negative inflation, while rates in the U.S., U.K. and Japan also would weaken to about 0.5 percent. For what it calls price stability, the Federal Reserve’s inflation target is 2 percent. Emerging-market inflation would also fade although lower currencies and policies aimed at slowing the effects on retail prices may limit the fall.
As for growth, a long-lasting price of $60 would add 0.5 percentage point to global gross domestic product, they estimate.
Even as cheaper fuel stimulates the global economy, it could aggravate political tension by squeezing government revenue and social benefits, Citigroup Inc. analysts said in a Jan. 5 report.
Either way, previously unthinkable events now look more likely. Byron Wien, a Blackstone Group LP vice chairman, predicting that Russian President Vladimir Putin will resign in 2015 and Iran will agree to stop its nuclear program.
Iran Losses
Iran is already missing tens of billions of dollars in oil revenue due to Western sanctions and years of economic mismanagement under former President Mahmoud Ahmadinejad.
President Hassan Rouhani, elected on a pledge of prosperity to be achieved by ending Iran’s global isolation, is facing a falling stock market and weakening currency. Iranian officials are warning of spending and investment cuts in next year’s budget, which will be based on $72-a-barrel crude. Even that forecast is proving too optimistic.
“Iran will stumble along with less growth and development,” said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech in Blacksburg, Virginia, who specializes in Iran’s economy. “The oil price fall is not reason enough for Iran to compromise.”
The Russian economy may shrink 4.7 percent this year if oil averages $60 a barrel under a “stress scenario,” the central bank said in December. The plunge in crude prices prompted a selloff in the ruble with the Russian currency falling to a record low against the dollar last month and tumbling 46 percent last year, its worst performance since 1998, when Russia defaulted on local debt.
Russian Production
“The risk is that, as a badly-wounded and cornered bear, Russia may turn more aggressive in its increasing desperation, threatening global peace and the European economic outlook,” said Holger Schmieding, Berenberg Bank’s London-based chief economist. However, “the massive blow to Russia’s economic capabilities should –- over time –- make it less likely that Russia will wage another war.”
Russian oil production rose to a post-Soviet record last month, showing how pumping of the nation’s biggest source of revenue has so far been unaffected by U.S. and European sanctions or a price collapse. The nation increased output to 10.667 million barrels a day, according to preliminary data from the Energy Ministry on Jan. 2. That compares with global consumption of 93.3 million barrels a day, based on the International Energy Agency’s estimate for 2015.
Venezuela, which relies on oil for 95 percent of its export revenue, risks insolvency, Jefferies LLC said in a Jan. 6 note. The cost of insuring the country’s five-year debt has tripled since July, Citigroup said. President Nicolas Maduro is visiting China to discuss financing and expects to travel to other OPEC nations to work out a pricing strategy.
Confounding Investors
The U.S., still a net oil importer, would accelerate economic growth to 3.8 percent in the next two years with oil at $40 a barrel, compared with 3 percent at $84, the Oxford Economics study found. The boost to consumers could be offset by oil companies’ scaling back investments, according to Kate Moore, chief investment strategist at JPMorgan Private Bank. Producers are cutting spending by 20 percent to 40 percent, according to Fadel Gheit, an analyst at Oppenheimer & Co.
The mixed picture is confounding investors. The Standard & Poor’s 500 Index of U.S. equities fell 1.9 percent on Jan. 5, the biggest decline since October, as oil brought down energy shares and stoked concerns that global growth is slowing.
While cheaper oil helps consumers, business spending has a bigger effect on equities, and oil companies are set to cut investments. Oil at $50 a barrel could trim $6 a share off earnings in the S&P 500 Index this year, according to Savita Subramanian and Dan Suzuki, New York-based strategists at Bank of America Corp.
Bets on high energy prices have mashed share prices of companies such as Ford Motor Co., Tesla Motors Inc. and Boeing Co.
Redistributes Income
Fifth Third Bancorp (FITB), one of the regional lenders that tried to chase the fracking boom, is down 12 percent since June 20.
Caterpillar Inc., Joy Global Inc., Allegheny Technologies Inc., Dover Corp., Jacobs Engineering Group and Quanta Services Inc. are all down more than 20 percent since oil peaked at almost $108.
Despite those losses, Morgan Stanley last month concluded cheaper fuel is a net benefit for the U.S. economy.
“Any massive redistribution of income can raise political tensions,” Schmieding of Berenberg Bank said in the Jan. 6 report. “But, net/net, strengthening the U.S., Europe, Japan, China and India, while weakening Russia, Iran, Saudi Arabia and Venezuela, is likely to make the world a safer place in the end.”
Brent traded at $50.88 a barrel and WTI at $48.03 as of 12:03 p.m. London time.
16 Comments on "How $50 Oil Changes Almost Everything"
Makati1 on Thu, 8th Jan 2015 7:54 am
First we eliminate the lawyers, and then the economists…
rockman on Thu, 8th Jan 2015 8:10 am
“…while weakening Russia, Iran, Saudi Arabia and Venezuela, is likely to make the world a safer place in the end.” Interesting theory: so the increase in political and social instability in a nuclear armed country, a country trying to develop nuclear weapons and countries who are some of the largest oil exporters will make the world a safer place.
shortonoil on Thu, 8th Jan 2015 9:08 am
“Where prices bottom will be based on an emotional decision,” Zimmerman said. “It won’t be based on the supply-demand fundamentals, so it’s guaranteed to be overdone to the downside.”
The opinions of a flock of economists! WOW!! There can be no doubt that every word they speak will turn out to be the truth, but they do seem to have a little problem with their Ps & Qs. According to their most recondite hypothesis the demand curve for petroleum now has a slope of 3000! A supply increase of 1.5 mb/d has morphed into a price decline of 50%. Of course the last time a demand curve had a slope that steep was when the Titanic sunk. It was the momentary demand for life boats as the ship slipped below the waves.
If these erudite scholars would only apply their esteemed theories to practical applications the price crisis that is now threatening sovereign nations, thousands of independent oil companies, the world’s bond market, the banking system, the monetary system, and the Best Buys discount policy would evaporate in an instant. A demand curve that steep could be moved sufficiently enough to cure the ails of the world by having Americans mow their lawns on Tuesdays, rather than Thursdays.
We are beginning to wonder if economists are really taking seriously their responsibility to steer the world’s ship of commerce? The fate of mankind could be endangered if they shirked their responsibilities by becoming preoccupied with their golf game, or tuning their Ouija Boards. In case they fail to adequately ponder their Ps & Qs, we would like to put forward another proposal to explain the perplexing crash of the world’s petroleum industry:
http://www.thehillsgroup.org/depletion2_022.htm
Of course, this should only be considered if the world’s economists don’t come forward with some brilliant plan to cure the now rapidly declining economic disaster we are facing. Perhaps they will suggest a world wide BINGO game; with the proceeds to support the collapsing shale industry?
http://www.thehillsgroup.org/
paulo1 on Thu, 8th Jan 2015 9:28 am
These twits do everything in their power to never utter the word, “DEFLATION”.
For God’s sake, ‘negative inflation”?
Even the trend to slowing in actually deflation.
Nicole Foss had it right years ago and was laughed at by the ‘trained economists’. Defaltion would be the main problem followed by….. She was right. I’ll bet her Ontario farm looks better everyday.
steve on Thu, 8th Jan 2015 9:45 am
Yes Nicole was right and I think Gail piggy backed on her ideas..but she also said we will have lots of swings up and down and she is right about that also…She has moved to NZ and no longer lives in Canada.
Apneaman on Thu, 8th Jan 2015 10:22 am
Nicole, the lady who doesn’t think talking about climate change is helpful has adopted the much talked about lifeboat New Zealand strategy. Safe in the arms of Fascist Bankster John Key.
GregT on Thu, 8th Jan 2015 11:12 am
“The biggest collapse in energy prices since the 2008 global recession is shifting wealth and power from autocratic petro-states to industrialized consumers, which could make the world safer”
“Russian President Vladimir Putin will resign in 2015 and Iran will agree to stop its nuclear program.”
“Iran is already missing tens of billions of dollars in oil revenue due to Western sanctions”
“a badly-wounded and cornered bear, Russia may turn more aggressive in its increasing desperation, threatening global peace and the European economic outlook….“the massive blow to Russia’s economic capabilities should –- over time –- make it less likely that Russia will wage another war.”
“The U.S., still a net oil importer, would accelerate economic growth to 3.8 percent in the next two years with oil at $40 a barrel, compared with 3 percent at $84”
MSM propaganda at it’s finest. Anyone still have any questions over the reasons for this latest retraction in oil prices?
bobinget on Thu, 8th Jan 2015 11:29 am
shortonoil shoots the messenger.
Islam has been hijacked for power and profit.
In North America, Australia, Europe people are turning Right, frightened of this ‘new world order, Secular and Religious wars, not least,climate change, have turned old ideas on their heads.
Shortonoil gets that right. He also alludes to ‘magic thinking’ which of course brings us back to
this fit of religious madness the world finds itself in.
France, one of the more democratic nations in Europe, is trying to deal with violence with strength.
I insist, we are already deeply involved in an international struggle over control of oil.
It’s not about an extra hundred thousand barrels per day out of 92.7 MILLION barrels per day.
It’s all about a mammoth struggle between religious and secular powers. Religion, a convenient ideology embraced by most nationalities with just a few exceptions is a powerful, convenient glue.
If we study Palestine 1948 to present, we see that entire microcosm on display.
Obviously, Islam, or Christianity or Judaism, Hinduism, Buddhism etc are not in themselves to blame. None-the-less, except possibly France or Iceland & Denmark, no self proclaimed atheist could possible get elected to high office in North American or Australian or Europe. (I know someone knows an exception) proves the rule..
Like the cartoonists gunned down in Paris, plenty
more sacrilegious innocents will die for oil in guise
of old religious intolerance.
jjhman on Thu, 8th Jan 2015 12:34 pm
I’d be interested in the opinion of some of our oil company professionals regarding Short’s assertion that it takes 50% of the energy content of oil to get it out of the ground. If we are anywhere near that situation we have a lot less time in this paradigm than anyone except the most pessimistic doomer imagines.
shortonoil on Thu, 8th Jan 2015 2:17 pm
I’d be interested in the opinion of some of our oil company professionals regarding Short’s assertion that it takes 50% of the energy content of oil to get it out of the ground.
That statement is INCORRECT. What we say is that in 2012 it took 50% of the energy content of 37.5 API crude to extract, process, and distribute it to the end consumer. A more explicit description can be found here:
http://www.thehillsgroup.org/depletion2_019.htm
and here:
http://www.thehillsgroup.org/depletion2_020.htm
That statement is derived from the the Etp model, which is a thermodynamic statement extracted from the “entropy rate balance equation for control volumes”. To validate it we use the BTU/$ conversion method that comes from a graph constructed from EIA, and World Bank data-sets:
http://www.thehillsgroup.org/depletion2_008.htm
The two methods produce results that are within 2% of each other. The Etp model itself (which is derived from a Second Law Statement) is validated against the WTI 1960 – 2009 price data set as reported by the EIA. It produces a price data-set that is 96.5% in agreement with the EIA report. The model is also validated through several other means. One of those being the reserve estimates projected by Campbell-Leharrere in the 2000 WEO publication.
The full derivation of the production energy balance can be found on page 45 of our report, “Depletion: A determination for the world’s petroleum reserve”. That report can be obtained at our web site.
http://www.thehillsgroup.org/
James Tipper on Thu, 8th Jan 2015 2:30 pm
I believe as someone with a degree in Economics how utterly stupid these MSM mouthpieces are, it is absurd. Like most sane people I believe in peak oil and believe the consequences will be devastating. An economist who denies peak oil might as well be denying the theory of gravity or the heliocentric theory, we should laugh and move on.
Remember as Matthew Hirsch put it(paraphrasing it), “A 3-5% decline in oil output does not correlate with gas and other goods going up 3-5% in price, it double overnight”
shortonoil on Thu, 8th Jan 2015 2:37 pm
Also, in 2012 it took (on average) 14,315 BTU/gal (601,000 per barrel) to extract petroleum. That is about 10.2% of the energy content of the petroleum. The oil age will not end because it will require too much energy to extract oil. It will end because it will require too much energy to produced finished fuels for the end consumer. If technology can be developed that will allow for the direct consumption of “raw” crude the oil age could be extended by several centuries.
We are on a constant look for such development.
http://www.thehillsgroup.org/
Makati1 on Thu, 8th Jan 2015 7:32 pm
When we read these articles, we have to remember that these people have their whole life and reputation tied to the economic system that provides their paycheck. Fear that it is ending is likely to be the power behind their reasoning.
If you only knew how to make buggy whips and you saw Henry Ford building his first factory, would you be nervous? Would you be telling everyone that cars will never replace the horse and buggy, that they are unsafe and expensive and … ?
Harquebus on Fri, 9th Jan 2015 9:49 pm
It appears that the horse and buggy is going to outlast cars. What was that about being replaced?
Davy on Sat, 10th Jan 2015 7:01 am
HarK, you got it man, human and animal labor are the future. If you are prepping you can’t go wrong investing in tools and equipment related to this epic change.
GregT on Sat, 10th Jan 2015 11:48 am
Food, shelter and security. In that order. Without them society breaks down and human beings revert back to the animals that they really are.