Peak Oil is You
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Page added on December 14, 2014
The high cost of low-priced oil
As a consumer of oil, you may regard recent sharp declines in the world oil price as a blessing. But…
If you work in the oil industry, you will not.
If you work in the renewable energy industry, you will not.
If you work in the energy efficiency business, you will not.
If you work to address climate change, you will not.
If you have investments in the oil industry (and nearly everyone does through pensions or 401k plans), you will not.
If you live in a country that exports a lot of oil (not just Saudi Arabia, but
The declining price of oil is supposed to have a balanced ledger of winners and losers. But we may be on our way to finding out that in the long run we will have a much larger list of losers than winners.
And, the list will lengthen if the price continues to fall, and especially if it stays down for a long time. (Low prices are not necessarily an indication of future abundance. Remember that oil reached $35 a barrel at the end of 2008 before returning to record average daily prices in 2011, 2012 and 2013.)
Now here is something to contemplate. Is the price of oil falling because we can no longer afford it? This is not an idle question. Record high average daily prices for oil in the last three years have been an unrecognized cause of sluggish overall worldwide economic growth. That subpar growth appears to be exhausting itself now, particularly in Asia and Europe. In dampening growth, high oil prices sewed the seeds of their own demise by ultimately dampening demand.
But, low oil prices will make it even harder to secure future oil supplies. The oil industry was already cutting back its exploration budgets before the price plunge. The industry said that there were not enough profitable prospects available even at $100 per barrel. What happens to industry exploration and development budgets with oil prices now around $60? Without exploration there can be no new production; and without new production, oil supply falls automatically.
Now, exploration and development are not being cut to zero. But they are being cut substantially. And, as with any mineral exploration, there is no guarantee of success–even less so with cutbacks. With existing oil production worldwide declining around 4 to 5 percent per year, the industry already had a huge task keeping production growth just barely positive. Now, that will be almost impossible if oil prices remain low.
What that means is supply will likely stagnate or even shrink. Barring a deep and prolonged economic slump now (which would send oil prices even lower and keep them there for some time), as demand for oil reignites, we’re setting up for another big price spike later that might then send the economy off a cliff into a serious slide.
For now, those in the renewable energy business are finding it more difficult to be competitive with lower-cost oil. Energy efficiency business owners must tell their clients that many efficiency measures will have a longer payback period while oil prices stay low. Both these outcomes send us in the wrong direction.
And, there is climate change. When petroleum products are cheap, there is less incentive to use them parsimoniously. All things being equal, that means more oil products are burned which produces additional greenhouse gas emissions.
Now, regarding the financial consequences of low oil prices, one could say, “Well, if you’ve chosen to work in the oil industry or if you’ve staked your whole country’s future on the price of oil, then that’s just your tough luck. Some of the wealth that flowed to you is now going to start to flow back to me.”
And therein lies a problem. If that money flows too quickly away from the oil industry and the major oil exporters, it could create a financial cascade in the debt markets, in the world’s stock markets, in the currency markets–oh wait, it already has. The question is how far will these disruptions carry, and will they cascade in a way that leads to a recession or depression.
One can be passive in the face of such events. But, a smarter plan would be to implement something along the lines I proposed last week–an oil tariff that keeps prices high and so keeps renewables and energy efficiency attractive. In fact, a system that keeps all carbon-based fuels high-priced would do more to move the world toward a sustainable energy system than all the current renewable energy subsidies combined. And, it would prevent the kind of price manipulation now engaged in by OPEC from wrecking havoc on any plan to move toward a renewable energy society.
It is just such disruptions in the fossil fuel markets that make us believe things that aren’t good for us–that we can somehow burn cheap oil and forget about climate change. That cheap oil will go on forever. That cheap oil is a sign that the marketplace solves all problems (rather than creating new problems that it can’t solve by itself).
We can celebrate lower gasoline, diesel and heating oil prices now. But like any overindulgence, we will pay for it later. When a pusher offers a junkie a discount on his drugs, we shouldn’t take it as an act of kindness.
13 Comments on "The high cost of low-priced oil"
Tom on Sun, 14th Dec 2014 5:15 pm
So we keep oil prices high by adding taxes, who then will get the taxes? If not the oil producers, how then will they keep drilling for hard to get oil? And if alternative energy sources aren’t really competitive with oil on a net energy basis, then why should they be subsidized?
Maybe the best solution is to tell the public the truth about declining energy and then let them make their own decisions about how to deal with a lower energy future.
Apneaman on Sun, 14th Dec 2014 5:38 pm
It’s all high priced if you add in the ever growing externalities.
Bangladesh oil spill ‘threatens rare dolphins’
Bangladesh officials warn that an oil spill from a crashed tanker is threatening endangered dolphins and other wildlife in the massive Sundarbans mangrove region, branding the leak an ecological ‘catastrophe’
http://www.theguardian.com/environment/2014/dec/11/bangladesh-oil-spill-threatens-rare-dolphins
Davy on Sun, 14th Dec 2014 5:39 pm
Tommy, maybe the public should be told no more stupidities like trips to the mall for ice cream or bass boats. Let’s declare a national emergency and stop wasteful attitudes and lifestyles dead in their tracks. This will kill the economy but it would also be getting ahead of the game.
Davy on Sun, 14th Dec 2014 5:52 pm
The articles are flying out of zero hedge. These dogs got a bone and they are running!! Check this great article out. It shows the nasty that occurs when oil drops below the $70dish range on WTI structured notes. It is basically WTF downside moment.
The Oil-Price-Shock Contagion-Transmission Pathway
http://www.zerohedge.com/news/2014-12-14/exposing-oil-price-shock-contagion-transmission-pathway
“As we noted previously, counterparty risk concerns (and thus financial system fragility) are starting to rear their ugly heads. In the mid 2000s, it was massive one-way levered bets on “house prices will never go down again.” When the cracks started to appear, the mark-to-market losses in derivatives led to forced liquidations and snowballed systemically. In the mid 2010s, it is massively levered one-way asymmetric bets on “commodity prices [oil] will never go down again.” Meet WTI-structured-notes… the transmission mechanism for oil-price-shocks blowing up the financial system.”
Makati1 on Sun, 14th Dec 2014 6:54 pm
I personally hope it drops under $50 and stays there long enough to take out the financial system propping it (fraking/deep sea/tar sands) all up. Better to lose an arm to amputation than your life to a long, painful, gangrene infection.
We have a gangrene infection, called global warming, that will kill off the human species for sure before 2020 if we don’t so something drastic to prevent it. As long as burning hydrocarbons is not reigned in, we have no hope. $40 by Christmas?
Rodster on Sun, 14th Dec 2014 9:07 pm
UK energy firms go under as oil price tumbles
http://www.theguardian.com/environment/2014/dec/15/uk-energy-firms-oil-insolvencies-price-tumbles
Rita on Mon, 15th Dec 2014 2:07 am
The article says climate will suffer because there will be consumed too much oil, but the oil producers will also suffer because there will be produced too little oil. So, which one? In the long term less oil will be produced and it will be better for the climate.
Bandits on Mon, 15th Dec 2014 5:59 am
“In the long term less oil will be produced and it will be better for the climate”.
It would have been better for some animal species and some fish stocks if humans had stopped “producing” sooner. But sometimes the damage is just too great to recover from. The same for the climate, the damage has been done and can’t be undone, it will run its course now. Hoping and rationalization won’t change that fact.
We were warned on all fronts many decades ago. I think we deserve everything that comes our way.
Dredd on Mon, 15th Dec 2014 6:26 am
Lame post.
The price of oil is not the problem.
The use of oil is the problem.
Davy on Mon, 15th Dec 2014 10:29 am
This is a significant occurrence and one that points to contagion if this market remain frozen for a length of time. Broad confidences going to get clobbered. Maybe throw in some Russian troop movement into UKR and maestro. I imagine the banks are doing some digging to see who is in the WTF position. The counterparty hush is on:
https://www.youtube.com/watch?v=h8lEORb9-P8
http://www.zerohedge.com/news/2014-12-15/todays-market-contagion-energy-high-yield-credit-spreads-blow-above-1000bps-first-ti
Today’s Market Contagion: Energy High-Yield Credit Spreads Blow Above 1000bps For First Time Ever
“For the first time on record, HY Energy OAS has broken above 1000bps – signifying dramatic systemic business risk in that sector (despite a modest rebound today in crude prices). The energy sector is entirely frozen out of the credit markets at this point with desk chatter that there is no bid for this distressed debt at all and air-pockets appear everywhere as each new trade reprices the entire sector. The broad high-yield ‘yield’ and ‘spread’ markets are now under significant pressure – both pushing to the cycle’s worst levels.”
bobinget on Mon, 15th Dec 2014 11:02 am
More intended consequence>>>
Venezuela Bonds Fall Below 40 Cents as Maduro Affirms Subsidies
By Sebastian Boyd Dec 15, 2014 10:53 AM CT 0 e
Venezuelan bonds dropped to a 16-year low as President Nicolas Maduro said he has no plans to curb gasoline subsidies while not ruling out the possibility of default.
The government’s benchmark bonds due in 2027 fell 8.3 percent to 37.825 cents on the dollar, the lowest on a closing basis since 1998, as of 11:21 a.m. in New York. The extra yield investors demand to hold Venezuela’s overseas notes instead of Treasuries rose the most in the world. The upfront cost to protect Venezuelan debt against default for five years using credit default swaps rose to 64.21 today, implying a 97 percent probability, from 62.05, according to CMA data.
Maduro said in televised speeches over the weekend that he saw no need to reduce the government’s gasoline subsidies just yet and that he will keep a 6.3 bolivar-per-dollar fixed exchange rate for priority imports. He said there’s no possibility of default unless it was part of a strategy to bolster economic development and no such plans are in place. Venezuelan debt plunged as the price of oil, which makes up 95 percent of exports, fell 1.5 percent in New York.
“Everything he said was bad news,” Donato Guarino, a strategist at Barclays Plc, said by telephone from New York. “A lot of emerging-markets people are throwing in the towel.”
Barclays today reiterated its overweight recommendation on Venezuelan debt. The longer-dated bonds of Petroleos de Venezuela SA are trading at or below the level investors could get back in the event of default, analysts led by Guarino wrote in a note to clients.
‘Extremely Vulnerable’
While declining oil prices have left Venezuela in an “extremely vulnerable position”, it still has the capacity to avoid a default, they wrote.
Venezuelan debt is the worst-performing among emerging markets this year. Bonds from the state oil company due in 2017 lost 6.3 percent to 44.95 cents on the dollar, a record low.
The Venezuelan bolivar trades at 179.08 per dollar in the black market, according to dolartoday.com. Maduro could save his government money by selling fewer dollars at the 96 percent discount represented by the official rate and more of them at the 49.978 rate on the government’s legal Sicad II market.
The Venezuelan oil ministry hasn’t yet published last week’s oil basket, which was due on Dec. 12. The week before, the price of Venezuela oil fell to $61.92 per barrel the lowest since 2009.
“There is no possibility of default, unless we would decide to not pay anymore as part of an economic strategy for development,” Maduro said Dec. 13. “And that’s not the strategy that has been constructed in these years of economic thought laid out by Hugo Chavez.”
‘Immoral Blockade’
Maduro blamed the country’s high bond yields on a “vulgar, immoral blockade” by credit rating companies, egged on by “neoliberal technocrats” who had been expelled from Venezuela.
Since he took office, Venezuela has had the world’s fastest inflation and is on course to post the second-deepest budget deficit in emerging markets as he spends income he doesn’t have and prints bolivars to replace it. Among major emerging economies, only Libya will run a steeper deficit this year, according to International Monetary Fund estimates from October.
Venezuela had $21.4 billion in international reserves on Dec. 11. The government and state-owned oil company Petroleos de Venezuela SA have about $21 billion of debt to pay by the end of 2016.
bobinget on Mon, 15th Dec 2014 11:35 am
” only Libya will run a steeper deficit this year, according to International Monetary Fund estimates from October”.
All that BS about supply and demand is mistaken.If Venezuela defaults, Venezuela can’t borrow….
except from China, who for all intents capture all of China’s exports. The forth largest supplier, Venezuela will be history. CITGO’s refineries will be
attached for debt.
Venezuela will join with Russia, Libya, Iran, and Iraq
forming OPEC version 2.0
Russia, Iran, Iraq, Libya will eventually use only yen
currency of the world’s biggest economy.
China gets to print money (as we do) to import
Iranian, Venezuelan, Libyan, eventually Iraqi oil.
As for North America, Canada is already reversing useless gas pipelines to ship oil East.
Mexico needs to risk billions it does not have to
staunch the bleeding.
The US needs to convert to natural gas.
bobinget on Mon, 15th Dec 2014 11:37 am
That should read ‘Venezuela’s’ (oil exports)