1. Calling a reduction in oil spending a "transfer of wealth" is confusing and clickbaity. In economic terms, a transfer is a redistribution of income that is made without the exchange of any goods or services. We do not call a drop in the price of computers a "transfer of wealth," we call it a price cut.
2. While oil has a EDIT:LOW elasticity of demand (people need to drive to work and heat their houses), I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets. Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices? Car sales are driven mainly by income growth, marketing, and social pressures.
3. Who is going to buy more oil because it has become cheaper? The plastics manufacturing industry might shift their recycled/new mix towards new as it is now relatively cheaper, but aggregate demand for oil would still be the same.
The article does a poor job of explaining oil market dynamics and is little more than unfounded speculation with a misleading graph and a few numbers thrown in.
> I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets.
If you look at the sales figures it is quite obvious that you're not in the majority here. It's a little tricky to model because cars are all getting better mileage every year, but when gas is expensive gas guzzlers definitely experience a dip in sales (and vice versa).
> Based on the simulation results, we estimate that a 10 percent increase in gasoline prices will generate a 0.22 percent increase in fleet fuel economy in the short run (one year)
> We also find that sustained $4.00 per gallon gasoline prices will generate a 14 percent long-run increase in fleet fuel economy relative to 2005 levels, although this prediction should be interpreted cautiously in
light of the relatively large out-of-sample price change considered and the Lucas critique (Robert E. Lucas, Jr. 1976)
The strength of the effect of oil prices on fleet efficiency is 0.0022 over a year. I would consider that extremely incremental. Meanwhile, we observe a 22% decrease in total car sales over the 2007-2009 period due to changes in disposable income and household wealth. [1]
So I would still argue that gas prices change the fleet efficiency mix around the margin, but that purchasing decisions are driven primarily by changes in income, government policy, and social norms.
The best proof of this behavior is the Prius. It's a simple appliance car that is cheap and reliable. By all accounts, it's a great car to own if cheap and dependable are your top considerations. However, the sales and depreciation of the Prius are highly correlated with gas prices to a much larger degree than similar economy cars, like the Camry.
Car sales are at record highs and Toyota just released a next generation (which always coincides with increased sales and higher transaction prices). Yet, sales are down 12% YoY.
Meanwhile, Jeep sales are at record levels and their best selling models are also their least fuel efficient.
> 2. While oil has a high elasticity of demand (people need to drive to work and heat their houses), I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets. Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices? Car sales are driven mainly by income growth, marketing, and social pressures.
Oil generally is considered to have a low elasticity of demand, or better said, is relatively inelastic, especially in the short term. You appear to be using the concept backwards.
And while you may not have bought the argument that oil prices affect car sales, that fact continues to be true without your consent and is borne out by economic research.
I agree with you. Not only is it not really a transfer of wealth, but they never define what they mean by this abstract phrase anyway, nor does the article even link to the paper it's is using as it's basis (unless an adblocker is stopping me from seeing it.)
Beyond all that, I have contracted in and currently work on the fringes of the Permian Basin oil industry, and I am pretty sure that this rut in oil prices is actually going to create even more wealth for the uber-wealthy oilmen, because there was a lot of money floating around and a lot of new fresh upstarts got going in the boom, but now that prices are down and banks are calling in the dues, all the small guys are falling out one by one and the big guys are just mergers&aquisition-ing their way into bigger positions of control of the market. T Boone Pickens has already said he thinks we've seen the lowest low at 26 and it's only up from there. So after all the little guys get gobbled up, the big guys will go heavy long on oil futures and make a ton of money, drive oil prices right back up (through manipulation as always), and suddenly this supposed "transfer of wealth to the consumer" is going to be more like $10 a gallon bleeding of the consumer.
2 - In the UK we have vehicle excise duty (annual car tax) which is related to the official figures for emissions of the vehicle. Generally larger engines produce more emissions so there is a recurring cost to buying a larger car beyond the fuel itself.
3 - I heard a UK insurance industry analyst explaining that premiums are up year on year because the most fuel price sensitive customers (predominantly younger drivers and retirees) are driving more miles since prices fell last year, and these groups are also more accident prone.
> Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices?
Not you or me, but it's more common than anyone with the ability to make long-term financial decisions would think it is. The frequency of filling up at the gas station causes people to lose sight of the overall financial impact gas prices have on their budget (it's much less than they think it is).
That's what confused me too. If I've been selling everyone apples at $5/bag forever, and all of a sudden I start selling them at $2.50/bag, Bloomberg logic would dictate I'm giving them a $2.50 * number of sales wealth transfer?
Probably because while people may not decide to buy a vehicle because of low oil prices, they may however decide not to invest in a vehicle right now if petrol/diesel prices are tending upwards.
At least that is the case among middle classes in emerging economies.
3. Who is going to substitute something else for oil if they can, if oil is expensive? Everybody. Who is going to not bother (or not try as urgently) if oil is cheap? Many people. In practice, that's buying more oil because it's cheaper.
It's only a wealth transfer because the industries receiving revenue from oil consider that income 'theirs'. Besides being misguided, I think it's interesting insight into the mindset of businesses.
The shortsightedness of this article (and I guess business analysts in general) is breathtaking. Isolated, it might be positive for consumers, but any increase in the consumption of oil due to low prices should be feared. Celebrating Chinese buying more SUVs, the worst automotive fashion in the last two decades? Yeah, great.
We'll pay for these short term wealth transfers with a further uptick in warming and a huge shock in the future when no one's saving energy any more, renewable energy installations have come to a standstill and oil rapidly becomes more expensive again.
> The shortsightedness of this article [...] is breathtaking. [...] Celebrating Chinese buying more SUVs, the worst automotive fashion in the last two decades? Yeah, great.
Did we read the same article? There are many consequences for the oil crash. The article doesn't claim to rank all consequences - it just reports on a BofA study about the size of the wealth transfer. It also cites an increase in Chinese SUV purchases. Since when is reporting on facts equivalent to "celebrating" them?
You are right and the reporter should not have been the target of my anger. The analyst's statement is for me a symptom of what's wrong in our consumer society, but I cannot blame him personally for doing what he's paid to do: identifying investment opportunities and exploring future economic consequences of today's events.
Here's where my rage came from: (i) we cannot go on like this. We as a western society started with baby steps towards a future with a smaller ecological footprint. This was obviously also triggered by the last oil shock. (ii) we know that we cannot go on like this, yet many of our decisions are made considering only a single proxy of societal well-being, money.
The analyst states correctly "that's where money can be made, BMW will profit!". Yet for global society, it's a disastrous direction.
If you're investing on a longer-term horizon (a year or more), the monthly futures roll where the USO fund sells the current month's oil contracts (because it doesn't want the actual oil to be delivered) and buys the following month's oil futures (normally at a higher price than what it sold the current month's at) will eat into any returns you get from price appreciation.
To put some numbers to the example, let's say the fund has 100 barrels of oil, and the current month's price is $20, and next month is $21. When it rolls the contracts, it sells 100 barrels for $2000, and buys 95 barrels, with $5 left over.
Fast forward a month. Prices have gone up by $1 for all months oil. It will sell 95 barrels for $22 ($2090, plus the prior month's leftover $5) and buy 91 barrels for $23, with $2 left over.
Fast forward another month. Let's say you owned the entire fund and decided to liquidate it. Prices for your contract have gone up another $1, so you sell your 91 barrels for $24, receiving $2184, and adding the extra $2 in cash you had gives you $2186. That's a 9.3% return in two months.
Compare that to the price of oil as reported in the news - it's the front month contract, so on the face of it, oil has gone from $20 to $24 (20% increase) while you've only made 9.3%.
The numbers are somewhat exaggerated here, and it can work the other way (current month more expensive than forward month) but is uncommon. This is why USO has historically been a bad long-term proxy for the price of oil.
Note that this is SUPER RISKY investment fund. If you look at the chart it has major swings up and down. The fund is down 20% for 2016 (yikes!). But if you had held it from 2012 -> 2014 you would have gotten a 40% return on your investment.
I like Vanguard funds since they have a low management cost to them and they tend to be a little more conservative in their selection.
Good luck, remember me when you make your million!
I just exchanged a bunch of other funds for VGENX. These companies are some of the most profitable in history. Even with the recent massive price collapse, this fund has outperformed the market since 1984.
USO is an ETF based off of a basket of futures contracts. The problem with owning USO is that there is basically inefficiency when rolling futures contracts and there is a some decay in the price. If you truly want to play in oil, best to use the futures themselves. Futures are the highest leverage instruments available, so be careful to note their size, but there is nothing more risky about futures than the equivalent notional value of stocks.
Be careful, though, because when oil reaches its end game, the price will fall and never come back up. Are we there yet? Or is this just temporary drop? There's no way to know, now.
Wait, wouldn't the scarcity of oil force a premium on the price? Wouldn't a dwindling resource with lots of legacy uses and equipment requiring it command even higher prices than when it's abundant?
The oil end game isn't that we run out; its we find something better (electric cars) and oil loses its value and becomes a stranded asset in the ground.
Good for humanity, bad for O&G industries.
EDIT: I'm fairly confident this is the start of the end. The US Congress extended the production tax credit for renewables for 5 years, along with Tesla's Gigafactory ramping up production, which means we're going to be awash in renewable-generated power and have the capacity to store it (in cars, and in stationary storage).
Yes, that's what I meant. The oil game as we know it today--financially speaking--ends when future supplies are no longer considered to be the most important constraint on economic growth.
That's very hard to analyze because the issue is not just how oil is sourced and used, it is how people on average expect it to be sourced and used.
On the supply side, while producers like the Saudis are trying to undercut fracking with low prices now, they can't make people forget about fracking. If the Saudis try to raise prices again, then fracking becomes a viable competitor again.
On the demand site, the world is not going to forget about global warming. Population growth will keep slowing. Infrastructure will keep getting built and keep getting smarter.
At some point the supply and demand sides will diverge enough to knock oil from its privileged position as THE key resource for the economy. This is similar to earlier essential resources like food, clothing, water, shelter, mining, etc. We still spend a lot of money on these things, but there is no expectation that they are guaranteed growth industries.
The area I live in was supposed to be headed towards a fracking boom and it mostly fizzled. The combination of dropping prices and lower-than-expected output from test wells kept the drilling far more isolated than it was supposed to.
I suspect if prices rise again, those test wells may have proved to be profitable. However, the oil companies came through and leased tons of acreage already and spent lots of money on the leases. Even if prices come back, many of the leases would have either expired or the gas companies would have to pay for their extension provisions. Given the state of the companies that started leasing (CHK: down 86% since they leased my father-in-laws old farm property), I don't think they have the money to do that. Even if the original leaser sold the leases off, which happened in many cases, the new owner would still have to pony up the extension and then start drilling again, exposing themselves to OPEC under-cutting them again.
> The oil end game isn't that we run out; its we find something better (electric cars) and oil loses its value and becomes a stranded asset in the ground.
I think its about equally likely that the end game is that the price of oil (ultimately driven by energy to extract each unit) goes up until other things that are known are more cost effective for most uses; this doesn't make it "lose its value" -- the use value remains the same and the market clearing cost per unit is high -- but it shrinks the size of the market (there may be some uses for which it is still cost effective, but not as many) and is still bad for the oil & gas industry.
Once industries transition away from tooling that uses gas/oil, there will be significant cost to re-tooling back to using oil or gas. At this point oil/gas losses value because there is a barrier to using it. If all cars on the road are electric cars, then oil refined into gasoline won't see much use and the price will drop (relative to the costs to harvest it). It's not like a rise in the price of electricity will send people with 100% electric cars running to the gas pump.
Well, my point was that the 100% electric cars don't run on gas. They would have to purchase a new car to take advantage of the gas prices, which is a higher barrier than just choosing to fill up with "electric fuel" or "liquid fuel" when your car is running low.
Because the cheapest watt to generate is the one you didn't have to generate in the first place.
On the other hand, Texas has so much wind power locally that they can't ship out of the state yet that some utilities give power away for free at night:
That's an interesting argument, but as the p[rice drops, less companies will be willing to drill it, and that will provide an upward pressure from lack of supply, will it not? At some point I imagine it will stabilize at a new price (based on then demand), I guess the question is do we have models of something like this happening before?
We reached peak oil, it just wasn't supply. It was demand.
Nifty redefinition, but I take this to confirm that the Peak Oil aficionados were kooks, just as they seemed to be. They and Paul Ehrlich will eventually be joined by many others in my "confirmed kook" bucket, but so far my "strongly suspected kook" bucket seems pretty accurate too.
Agreed but I doubt we are anywhere close to this. The majority of the world's critical transportation infrastructure is oil powered and the sunk cost is massive. Electric vehicles are only a blip. Oil has decades left as the "rate limiting reagent" of the industrial world.
This is definitely a buying opportunity for those with the money to make such investments.
We're never going to stop using petroleum (for fertilizer, plastics, other chemicals, etc.), but hopefully we'll stop burning it for fuel. While marginal sources like tar sands could likely never be used, the rest will most likely be used for something. Unless there's some revolution in Genetic engineering that lets us make all of these useful products from microbes.
If you stand for delivery, you pay to store and insure it. If you don't stand for delivery, you pay contango to roll over the contracts. Going long commodities with uncertain date of sale always costs money.
You mean ETFs? If not, what is an "oil share"? Futures contracts have maturity dates. At the end you sell them (at a price you might not like), roll them over (not free or even necessarily cheap) or take delivery on the oil (also usually not cheap, depending on your facilities).
You could buy and hold until a stock went to zero, for example.
Edit: Whoever is downvoting obviously has never seen this happen. There was just an article about it on HN the other day, describing how Dragon lost it all when the company they sold to plummeted to zero stock value.
That's certainly what I'm up to. MLPs are on sale right now -- and they give interesting benefits (large guaranteed dividends and capital deprecation on your income tax forms) if you're willing to buy and hold. I'm aiming for 10 years to financial independence; I might get there in 5, with the way things are going right now.
I don't think there's much risk of bankruptcy for high-cap MLPs, and for low-cap ones the risk is priced into the stock (and then some). The price of oil has to recover sooner or later; the Saudis don't have an economy unless they have high oil prices, and they're the ones behind the current glut. Kuwait is already negotiating with OPEC and non-OPEC producers to raise oil prices again...
Renewable energy will have its time, when it is ready -- and that time is coming. By 'ready', I mean 'when it is cost competitive with other technologies'. I recently read that one Chinese solar manufacturer has achieved < $0.50/watt cost for PV module production, and it hasn't bottomed out yet. At the current rate of declining equipment prices, it doesn't matter how cheap oil is, eventually solar will be cheaper ... and when that happens, we will be living in a solar-first world faster than anyone can imagine.
The next question is how to deal with troughs in production due to the weather, and for that I really do hope we get back in the business of reactor innovation, because nuclear is the only option that provides the reliability of fuel-based power with 0 carbon output.
If the price of oil consumption keeps falling, that indicates high supply, which indicates that the "deadline" for non-fossil fuels is pushed further into the future, where there most-assuredly will be improved technology. One of our patent system's broken assumptions is that without economic incentive, no one will invent new technology. Mr. Jonas Salk would like a word with you, patent system. Breakthroughs in clean energy will continue, with or without economic incentive.
That's true, for the definition of "the environment" being: "the environment that humans and all of humanity's dependencies exist in currently."
That environment may or may not change dramatically(1), and humans and animals and plants as they exist now may not exist in the future, but I would guess that life in some form will survive, and if you define the environment to be "earth and its atmosphere," it will survive as well. It just may not have humans or animals or plants in it. Who knows.
(1) I'm not a climate scientist, but it seems like dramatic changes in our environment may well be guaranteed already. That said, I don't know for sure, so I'm being careful with my language.
I'm just trying to be a pragmatist. I am a staunch advocate of conservation and of the environment. I think those that have downvoted me have mistaken me for someone who is disagreeing with climatologists. However, that's on me for not communicating effectively. I should have made that stuff into a separate post or just not posted at all, lol.
What I'm saying is that it in the long run, humanity may well be doomed for the things we've put into play in the environment. That would be bad. I don't think that we'll kill off ALL living organisms. Earth will definitely survive, and I think that life on Earth will also likely survive. That life may well only be single celled organisms. Who knows.
I also conserve where I can - I heat my home with renewable fuel, for instance, installed a whole-house energy monitor to reduce consumption, upgraded to a 95% efficient backup furnace (most alt fuel heat is not as reliable as lpgas, unfortunately), and I'm going to pull the trigger on solar probably in 4-5 years (waiting a couple more tech generations). So in no way interpret the following to mean that I'm not for conservation where possible.
Having said that, like you, I think that people get extremely hung up on global warming without pragmatically looking at the environmental cost will be if it keeps going for another 50 years. Warming over the last 18 years has been minimal, and if we have similar warming for another 50 years, that would provide enough time for solar to become economical and efficient without pushing the second and third world back into poverty -- because let's face it: at this point in history, limiting carbon generation also limits the productive capacity of an economy, and lowers the standard of living for everyone involved.
Yes, we might have to move our farmland a bit north, lose a bit of coastal land area, and reduce biodiversity a bit. If this is the price to save millions of human lives through better nutrition, better medical care, better transportation, better housing, etc ... then in the short term, I think we need to proceed with any far-reaching carbon regulation with extreme caution.
Right now, I think that the most pragmatic and practical thing to do is research, improve, and build out nuclear power. Unfortunately, many of the same people who are staunchly anti-combustion (I can't say 'anti-fuel', since technically radioactive material is also fuel) are also anti-nuclear. To those people, living in this world, with the primitive energy storage tech that we have today -- without a hard dose of pragmatism you'd be living in the cold and dark during a Michigan winter, and I can tell you that -10f is COLD :( (we don't get a lot of sun and wind here during this time of the year)
After living with nuclear naysayers for decades (and rolling my eyes at them), I hate to be a nuclear naysayer myself; but there's been some use of "pumped hydro" for storing electricity generated by solar power.
The principle is simple: build a hydroelectric dam and run it in reverse. Of course, this can't be done everywhere; you need a lot of peak solar production, a lot of water, and an easily-dammed valley, and you don't often see all three together... But it does get used to store power, and solar plus pumped hydro represent a kinda-sorta alternative to nuclear.
They're also anti-nuke. I've even heard people who are anti-wind (the watchword is "birdchoppers") and anti-solar (since solar panels wreck desert ecologies)... Let's just say it's a good thing they aren't responsible for development.
I know the author of the article says 'upside potential' but I'm not sure if Blanch is quite 'celebrating' the increase in SUV sales but rather just noting it.
I'm tempted to think that the volatility of oil prices may actually push people towards renewables.
They doubled in the years leading to 2008, and since then have plunged three-quarters.
If Saudi Arabia's bet pays off, and they manage to choke all the alternative suppliers of oil, perhaps the price will bounce all the way back up in another 8 years?
Or perhaps they won't. But then if they don't, maybe Saudi Arabia collapses or has to be propped up with US money.
The human race is basically just screwed. Warming is going to happen on a massive scale and there is little anyone can do to stop it. In 50 years, we'll be killing each other over the remaining usable farm land. Until then, we'll keep buying SUVs and burning more oil.
> Actually, the farmland will just move. Northern regions will become more arable. There will be disruption but maybe nothing we can't handle.
Even if we ignore the effects of increased variability (which makes investing in production anywhere less secure) and just consider, as you do, the averages, this is problem for people as long as countries and borders are a thing, because shifting where its possible for humans to support themselves has some pretty drastic consequences.
When we lose the wild species of the plants we eat, we start running a huge risk that any future disease wipes out that whole cultivated species, and our existing ways to manage this (selective breeding, or transferring genes from the wild plant) lose the material they depend upon.
Coffee is one worrying example. It originates from Ethiopia and Sudan, in the mountains, at particular altitudes (temperatures). As temperatures rise, it grows higher — but we soon run out of soil on the mountain, or run out of mountain altogether.
You're not considering the politics. The arable farmland will "just move" into different countries. Russia, Europe and Canada win. Africa, India, most of Central and South America and China lose.
It's not literally a war over food where the winner gets to eat. It's riots because food in North Africa triples in price because it has to be transported from Russia or Europe instead of grown locally and people are angry but the local government has no capacity to fix it.
The thing about food riots is, they are over quickly because, starvation. So a very temporary condition.
And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
> The thing about food riots is, they are over quickly because, starvation.
Food riots usually happen well before mass starvation, and usually are over quickly because one of four things happens:
(a) The government accedes to the demands of the rioters, or
(b) The government distracts the rioters, often with a manufactured external crisis, or
(c) The government convinces the rioters that continuing the riot will lead to more pain than whatever provoked the riot and no positive results (often, by fairly direct demonstration of this),
(d) The riots escalate to outright rebellion, and the government is toppled and replaced (often resulting in [a], but sometimes this becomes a distraction along the lines of [b]; this often follows an attempt by the government at [c].)
> And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
Even granting that, manifestly people do go hungry, particularly in nations that don't generate enough domestically to feed their people and would have to rely on imports to do so (though, even in the most developed countries that are also net food exporters, some still go hungry.)
Climate change, even before considering increased variability, changes which countries political deficiencies produce major food distribution problems and the accompanying pressures, which, historically, have led to mass violence, both internal and interstate. That its a political and not technical problem might be emotionally satisfying, especially when the problem is mostly in distant countries, but it doesn't actually magically make the problem go away.
> The thing about food riots is, they are over quickly because, starvation. So a very temporary condition.
Your answer to food riots is don't worry, they'll starve to death soon enough?
> And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
We can grow enough food for everybody. We can put the food on trucks. We can put the trucks on roads.
Somebody still has to pay for the food and the trucks and the roads. And that's going to be significantly more expensive than locally grown food. For people who have no money to begin with.
> And that's going to be significantly more expensive than locally grown food
Depends on the food and the transportation method. Is growing tomatoes in a green house during winter months in a northern country more or less efficient than shipping them from the southern hemisphere?
> We can also put the people on trucks or planes or boats and move them to where the food is.
We could, but the people where the food (and associated economic security) is may object to that.
Refugees often aren't all that well received, and economic refugees (as opposed to political refugees who are politically aligned with the receiving state, which is opposed to the regime from which they are fleeing) -- external and, often, internal -- often are the worst received.
> Why should I expect that to result in us killing each other over arable farm land, any more than we're killing each other over arable farm land now?
Arable farmland and access to fresh water have been a fairly common thing for people to kill each other over historically, including in the modern era. To the extent we aren't, its because many countries have reached settled states with their neighbors that are stable given a relatively stable distribution of those resources.
Major shifts would leave large existing populations without support and others newly prosperous, giving the former little to lose and the latter something quite valuable to defend.
Yeah, but those without are going to be continents away from those 'with'. Not really in a position to fight, especially as they're starving. Not talking knights in armor fighting over a moor here.
> Yeah, but those without are going to be continents away from those 'with'.
No, they aren't. The US will be one of the losers, Canada one of the winners (again, ignoring effects of variability, etc.) And lots of the relative winning/losing pairs are going to be immediate neighbors.
> Not really in a position to fight, especially as they're starving.
There'll be a whole long period where the losses will be to established economic position rather than mass starvation. Its not going to be "breadbasket today, wasteland tomorrow". There'll be a long period where declining economic position, rising food prices, and less food security (and similar effects with water in place of food) will be evident and starvation visible down the road before mass starvation -- and its in that period that there will be strong pressures on governments to reverse that position by any means at their disposal.
Maybe the average temp/rainfall moves north in some places, but doesn't the variability also increase delivering more frequent swings into extreme conditions, in turn causing more frequent crop failures?
True. But in modern agriculture, the soil is irrelevant. Corn in Iowa grows because of Anhydrous Ammonia applications. That's it. Eroded clay hillsides produce as well as (or even better than) black loam. So no worries there.
Considering that we are still moving out of an ice age I don't really expect are burning oil to be an issue that will have a noticeable effect. Consider also that crops do better as CO2 concentrations rise. If anything the world can easily use and withstand a little warming.
One other interesting thing to consider, we really are not even using a good percentage of land that could grow food. There are many parts of the world that because of conflict do not fully use the lands they have and in many western nations the majority of land is held by government and not open to use.
An oil tax is the obvious policy here. A good oil tax would capture some of that wealth transfer and use it to invest in alternative energy. Of course it will never be implemented because humanity is too stupid to save itself.
I guess when too few people are buying your crack anymore, and there are too many competing sellers, you drop your price until the addicts pick back up.
it's not shortsightedness. it's conscious myopia. you are on "bloomberg BUSINESS" after all. scoped to business concerns. financial business itself is scoped to days, weeks, and quarters.
now, if this tone was struck at an article in US News or Time, then yes, surely you could accuse the writer of "shortsightedness"
I'm really having a hard time with the current market conditions. Ok, so the Saudis are acting to stop fracking, oil-shale exploitation and all of the other increases in production from non-OPEC countries. Again. Yay.
I get that low oil prices mean bad days for energy companies, many "emerging" countries, and the financial markets, to whom any news is bad news.
But in the "developed" countries, this makes literally everything else cheaper. In the short and medium term, yay. And when the Saudis have made their point, they'll drop production, prices will go back up, everything will return to normal, more or less.
The problem with that reasoning is that there's no fundamental law of nature that dictactes what "normal" means; instead there is a complex network of interrelated forces that is itself kind of resilient but whose individual states are very fragile. Under those conditions, it is practically imposible to "go back" after having disrupted the status quo.
On the one hand, there is such thing as supply destruction, oil producers that are marginally profitable and that go out of business if price collapses, taking tons of hard capital (not financial, but equipment, personnel know how, etc). The Saudis are pressumably aware of this and very much doing it on purpose.
The problem is that there also exist demand destruction. Companies that consume energy in large quantities to produce economically useful but expensive goods and services. This guys conversely go out of business when oil price spikes (there was some statistic going around in 2008 about how 5 out of the last 6 recesions in the US where correlated with high energy prices), which is the intended effect of Saudi strategy.
So, eventually, when the noise signal introduced in oil prices gets absorbed by the market negative feedback loops, the economy we go back to will likely be smaller than the economy we started with. We could debate wether this is a good thing or a bad thing, but many actors are nervous because this is a game of musical chairs, and very few can say they will have a guarrantied place at the table by the time the rubble stops bouncing.
Parts of North Dakota are a good example of the impact of the fluctuating oil markets. They experienced an economic boom, with more jobs than manpower which spurred an influx of people, new housing development, and growth in the local economies. Now that the price of oil has collapsed, it's left towns in financial despair:
> On the one hand, there is such thing as supply destruction, oil producers that are marginally profitable and that go out of business if price collapses, taking tons of hard capital (not financial, but equipment, personnel know how, etc). The Saudis are pressumably aware of this and very much doing it on purpose.
Doesn't that equipment get sold? If not immediately, then eventually, modulo the odd pipe that gets bent or rusted in storage.
And those people are largely available for the jobs they're experienced at when jobs are available, so they aren't "destroyed" either, they're just idled. Some will move on, some won't.
> Doesn't that equipment get sold? If not immediately, then eventually, modulo the odd pipe that gets bent or rusted in storage.
A lot of it, no. A lot of equipment is built on site and would have to be destructively disassembled to be moved, but just leaving it there without using or maintaining it will cause it to rust or be damaged by the elements. And even the equipment that can be resold and still physically exists would have to be transported back to the site at significant expense. A lot of the sites are in remote locations.
> And those people are largely available for the jobs they're experienced at when jobs are available, so they aren't "destroyed" either, they're just idled. Some will move on, some won't.
The "some will move on" being the trouble. You have somebody who knows how to do a specific thing not many people know how to do, you lay them off and they go find some other job doing something else that pays about as well, move house, put their kids into new schools, now you want them back. Good luck with that.
Assests are not abstract. They are deployed to one particular site, and a big part of the cost goes to install them in that site. That's why all producers are basically operating at a cost right now.
You may reopen a closed oil ring (assuming you did nothing destructive to maximize your short term wins, which fraking companies are, AFAIK).
The personnel question is a tricky one. People need to eat, so if they face a downturn, many will be discouraged and move to different careers. Some will return, if the market picks up enough to pay way above average wages, but some just definitively won't. You will have to make up the difference by training a fresh crop of young crew members.
And I find it amusing to see that a subset of the HN audience can have such a hard time to grasp that other industries might have their own talent acquisition problems.
Is there any evidence that anyone is actually worried, or is it just people worrying that other people might be worried?
I mean, the markets are down, but that's just a "quickly grab a chair now that the music's stopped" situation isn't it? Or alternatively, regression to the mean?
Someone please correct me if I'm grossly misunderstanding here. As you may be able to tell I'm no expert, to put it mildly.
The Saudis tried petro-power politics by driving prices up through cutting production, but other OPEC members immediately increased production for the additional lucrative revenue.
OPEC has been dead for a while -- why? It was a cartel that survived on the basis of raising and lowering production in unison, and now it is a race to the bottom. The Saudis were betrayed and this is their revenge.
The oil flood is as much about punishing other OPEC members as it is about killing potential Iranian oil revenue.
Or, the Saudis realized that they make more money in the long term with price swings than a steady increase.
At 100$/barrel people would just switch to something else. At 100-40-120-60-200, people are going to keep buying low mileage gas powered cars in massive numbers, building car infrastructure, and living in the suburbs.
PS: Don't forget you can manufacture oil for
~100$ per barrel, but if your factory folds when prices drop under 90$ it's a poor bet at those prices. It takes huge investments to create an alternative over decades, but you can kill them off with a few lean years.
The $100 dollar barrel was a huge mistake, if the price was engineered through cartel maneuvers. It launched shale oil but, much more importantly, it made solar cheaper one decade ahead of time.
The solar energy cat is out of the bag[1], it will forever loom over oil.
Depends on why oil prices are low. If aggregate demand has dropped then it means another recession may be coming. If it is simply an over supply, then you're right. Everything I have read says over supply, but people are worried that China is really slowing down and the numbers are cooked to hide that fact.
So while high oil prices seem bad, they indicate huge demand and high economic activity.
The worst case is that various oil-exporting states find they suddenly have a huge budget hole and are forced into cutting the social programs which hold them together, resulting in riots and civil wars. Russia, Iraq, and Nigeria are obvious risks here. Potentially the proxy war between KSA and Iran might turn into an actual war between those two countries.
I keep forgetting about Russia. :-) It's a relatively new player and their production is currently as high as Saudi Arabia, although their reserves are smaller.
There has also been a large 'forced' sell off of equities from sovereign wealth funds, due to the decrease in oil prices, so they can keep their country operations going. That impacted US company stock prices which might otherwise benefit from lower oil prices.
It is the massive liquidation of sovereign wealth funds that is causing markets to move lower. When someone is forced to sell, what happens to the price? It tanks. There is no floor. Technicals take over. This coupled with expected negative earnings outlook creates a vicious cycle of downward trajectory.
"This coupled with expected negative earnings outlook creates a vicious cycle of downward trajectory."
That's kinda my point: what negative earnings outlook? Lower oil prices means lower costs for every industry but energy. "Developed" markets are mostly oil-importers, and are still (as far as I know) the source of most industries' profits.
Surely this will give an increased incentive to countries divest from oil completely in order to ensure long term economic stability. Take Singapore for example. Oil is cheap for them now which is good from an import perspective but they are also invested in oil with something like 6% of their sovereign fund which is not so good. They also have an abundance of sunshine. It makes perfect sense for them to use this as a catalyst for transitioning to renewables even though in the short term oil is cheap to import.
Are you assuming that developed countries are net energy importers, and developing countries exporters? The U.S. is close to coming into balance, thanks to fracking. Plus, some large profits from oil come to the U.S. when prices are high, because many oil companies are based in the U.S.
A net-petro-exporter USA is still a USA the economy of which is mostly not based on resource extraction. That's why the USA dollar has appreciated against those of e.g. Canada or Australia.
1) The drop in prices could be a signal that people aren't creating stuff which could be a slow down in growth,
2) It's difficult to quantify the impact the oil and gas boom had as a percentage of global GDP growth and therefore what the impact will be in its absence.
I get the "leveraged up the wazoo" part, it's unpleasant when someone defaults on debt that you hold. To match 2008 however, the pile of debt ought to be large enough and the risk has to be mispriced. (Those who hold junk bonds expect defaults and so hold a large bunch of such bonds hoping that only some will be defaulted on, and they also hold other assets. That plus the high yield of the bond before it defaulted should make things smoother.)
The deflationary spiral bit I do not get. By itself, a cheaper resource should increase consumption because now everything is cheaper and you have as much money you can spend on stuff as you used to. Externalities aside, this kind of deflation is not what's called a "deflationary spiral", is it? A deflationary spiral is when consumption goes down because people don't have money to buy stuff, and then producers lower prices, profits fall, people are fired, consumption drops further, prices fall even lower, etc. But cheap resource availability is different, theoretically, because then consumption should rise instead of drop, not? (Also it'd be a bit strange if say finding large new deposits of some resource were a guaranteed economic disaster; one would think it should make things better.)
It can be spiral-like locally without it necessarily being so nationally or globally. Ask your average roughneck or metal bender in Texas or North Dakota about layoffs, salary cuts or personal spending trends and you'll find all of the spiral characteristics.
Yes, this is not obviously deflationary. Especially when it's a resource that contributes to market inefficiency, like transportation costs. If it becomes cheaper to move things from A to B, then price differentials between A and B become harder to sustain. (that can contribute both to price falls as well as price increases - if it costs less to export something to a foreign market, domestic consumers might have to pay suppliers MORE to persuade them to sell the item locally rather than ship it overseas).
There's a major difference from 2008: one well crashing and closing increases the price of oil, while one mortgage being defaulted on decreases the value of houses.
> But in the "developed" countries, this makes literally everything else cheaper
Not necessarily. Take a look at Canada. With the Canadian dollar tanking, the price of everything imported is going up (because it's imported from the US and the USD-CAD exchange rate is lopsided).
Maybe what you really mean by "developed" countries is "just for people in the US."
> Ok, so the Saudis are acting to stop fracking, oil-shale exploitation
> And when the Saudis have made their point, they'll drop production, prices will go back up, everything will return to normal, more or less.
Something will happen, but I think the cat's out of the bag: Even if prices rise significantly, the US has proven to itself that it is/came become very quickly self supplying in oil. This significantly decreases the Saudi's leverage in world politics which changes some balances in the middle east and beyond quite significantly.
Similar things are true for Europe (especially in the east) with regard to Russia. Russia's medium-sized stick has been the threat to cut off gas to its western neighbours, and it gets really cold there in the winter.
>in the "developed" countries, this makes literally everything else cheaper
LOL. In Canada, the drop of oil prices dropped the loonie, and now grocery prices are through the freaking roof. It's harder to eat healthy when a cauliflower is $13.
They're worried for several reasons. The biggest is, what if it isn't dropping because of the Saudis, but because of a weak economy in China? And what if that spreads to the rest of the world?
Additionally, the lower oil prices wrecked the income of a number of state and national governments that just assumed the price would stay that way for the foreseeable future.
> And when the Saudis have made their point, they'll drop production, prices will go back up, everything will return to normal, more or less.
When Saudis drop production, they stop acting against fracking. In that case, normal means about $60-$70 per barrel. It's the point where fracking starts making financial sense.
I suspect, the oil money, was going to Saudis and then coming back. Making the economy run more. I've been to the middle-east a few times: Construction, Cars, Yachts, Electronics... were all financed by oil.
Right at the moment, markets are quite scared. Anything different means "run for the exits, then evaluate it, then get back in cautiously if I decide that it wasn't bad after all". Everybody has 2008 on the brain; they don't want to be caught holding the bag if everything falls apart again.
Saudi oil production is higher than it has been since the late '70s. Which means to me that they're driving supply well above any kind of stable point. Certainly, they're taking an economic hit from it. Which they have done before to drive other suppliers into line.
The Saudis are not so much chasing hares as cockroaches.
If all of those countries which are currently dependent on bringing in oil money (Russia et al) are destabilized politically and financially then we all suffer. Plus if the Saudis survive and knock off all of the other competitors the price will go through the roof and then where are we?
USA have basically been daring Russia to make us suffer for decades now. If they had it in them I guess we would have suffered already. It turns out that suffering is mostly an export for us.
The Saudis will certainly "survive". They might put many other production areas out of business in the short term, and that is bad for current investors. It's good for alternate fuels, however, and it only keeps other areas out of production for as long as the price stays down. The internal contradictions of the Saudi state will eventually dictate a price rise...
I've asked this thought exercise before (here) and I'll ask it again: what happens when the world stops paying for oil?
A significant portion of the world in terms of area and population derive virtually all their earning power from oil. When oil ceases to be valuable one must consider the consequences. Look at Nigeria which recently requested $3.5 billion dollars in emergency aid from the World Bank[0], like yesterday, to fill their budget gap. This will get worse not only due to current market conditions but let's look past those to utopia: a world with no need for fossil fuels. These economies are completely dependent on fossil fuels - for everything - what would that utopia look like for them?
If you adhere to the school of jobs and economy equates to less terrorism then the environmental panacea that awaits us in a world of free renewable energy will be paradoxically diminished by terrorism and human tragedy.
Its going to come sooner or later though. Maybe this could be a good kick in the butt for nations that lived off selling their natural resources for so long that they have never bothered doing anything else. Middle east is the biggest offender, followed by Russia and a few in Latin America.
In August 2014, the Government Pension Fund controlled assets were valued at approximately US$884 billion (equal to US$173,000 per capita) which is about 174% of Norway's current GDP. It is the largest sovereign wealth fund in the worldhttps://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...
An effect, from the same charts, which partially mitigates what you're highlighting is that Norway has a totally different balance of exports versus imports:
Canada: Imports $437 B Exports $438 B
Norway: Imports $92 B Exports $147 B
Not through regular popularity contests, that's for sure. For all the positives this is the greatest flaw of democracy IMHO. There is a conflict of interest between keeping voters happy in the short term (and voters memories are very very short) and doing the right thing for the long term. This is where planned economies and single party states have the potential to out strategise liberal democracies.
I don't think there actually is much in the way of supporting that position. It just seems to be the school of thought espoused by certain folks in politics and the media. It's as if to say poor people are predisposed to becoming terrorists. Is that logical? I actually don't think there is any evidence to support that.
We need to change our economic thinking from a growth perspective to a circulation perspective. Global negative interest rates and land taxes would be a good place to start.
This will make food cheaper for billions around the world, as price of food is strongly tied to the price of oil.
In US alone, going from $4/gallon to $2/gallon gives $400B/year (oil and food) more spending money in the pockets of consumers.
Oil industries favor relatively a few, but lower prices favor everyone.
On the flip side, the decade which includes heavy Iran sanctions and the Iraq war, Saudi's foreign reserve increased by almost $700B, in contrast the decade prior increased only by almost $20B.
The price crash triggered by Saudis wanting to make Iran a less interesting investment after Obama's Iran Deal (with a huge cash reserve, the thinking is they can last a lot longer) and the market prospect of more oil flooding the markets after Iran's sanctions were removed.
OT: How many know Saudis are the largest shareholders of Fox News outside of Murdoch family [0]?
There is so much going on in this article. The quote from a wall street banker says lower oil prices "will push back $3 trillion a year from oil producers to global consumers"... But since oil companies don't pay us to take their oil, the only way that could be true is if you believe that the people's money is supposed to be yours. Which perfectly sums up the attitudes of wall street bankers.
If I used to pay you a big pile of money, and now I pay you a smaller pile of money, that isn't a shift of money from you to me.
Barring deliberate cost saving measures, consider something like electricity costs. Your electric use is probably pretty consistent whether the price is $0.10 or $0.15 per kWh (ok, perhaps not yours, but average across the economy). Depending on your environment and what you do, you have to run your fridge, you have to run your AC/heat, you have to turn on lights, you have to manufacture your goods (if you're a business and want to stay in business). The same (roughly) amount of electricity will be used regardless of the cost.
If electricity suddenly drops in cost by 50%, then money you expected to spend on electricity is now being left in your accounts. There's been no actual shift, but the expected movement of money has been altered.
I think the point was that the direction never changed, only the amount, yet it's portrayed as if the direction was reversed, leading to the conclusion that folks on wall st have a tainted view of the world.
Oil use is relatively inelastic. If prices drop, money you expected to pay and money they expected to receive isn't going to do what it was expected to do.
The value of oil has not changed during the last nine months. If the buyers had been breaking even at $100/barrel, at $30/barrel, they're getting $70 worth of merchandise for free. Imagine the shoe were on the other hand, and the average hourly wage were slashed by 70%.
It is important in this example, that I assume the original deal is not unfair, which is not always the case. Price of oil as well as price of labour has other dimensions; if it weren't so, there would be much less war and revolution, respectively.
The oil-producing countries still has to buy stuff, as they make little themselves, and they have to pay with the money they have hoarded. Hence a wealth transfer.
As someone who cares about the environment. It's really sad to me that Truck and SUV sales are going up. It's kind of crazy that people have already forgotten about $5 oil...
Is this really something that would traditionally be called a wealth transfer?
The oil producers are mostly going to be selling all that oil at a profit, so they aren't expending any wealth. The Saudi's are foregoing holding onto a bunch of wealth by selling oil at low prices instead of cutting production, but they aren't transferring wealth to oil consumers, they are spending their wealth on the national budget there. Other producers seem a lot more inclined to cut production, so they aren't really transferring wealth either.
Many (most?) petrostates budgeted a much higher price for oil so the current market has them running giant deficits and dumping any easy to sell assets they have (sovereign wealth funds have been liquidating bonds and stocks). Wealth transfer sounds about right.
Yes, but as I at least alluded to in my comment, I think it is reasonable to describe most of that as a transfer of wealth to their citizens, not to oil consumers (if you assume that they are still earning at least a small amount on the oil they sell, which is likely true for Saudi Arabia).
Saudi Arabia ran a record deficit of $98bn last year (~16% of GDP). That's massive and oil wasn't so cheap the whole year so 2016 could be really massive. The government and citizens of Saudi Arabia have a lot less wealth because of the oil price downturn.
To pay for it they are slashing spending and liquidating non-oil assets. Their foreign reserves have gone down over $100bn from their peak and is down to four years at current spending levels. Who wins? Whoever was buying their oil.
Yes, I understand that consumers benefit massively. But they are selling the oil at a lesser profit, not selling it at a loss.
If there was an extrinsic way to say that the value of oil in that ground is higher than the price they are charging for it, then it would clearly be a wealth transfer. Short of that, I don't think it is so clear, it can just be sensible trade.
A dumb insulting analogy: I build you a dresser (pump oil) and use the money you give me to pay for part of a car (I spend the proceeds locally, but also spend more than the proceeds).
If the price for the dresser is fair, I'm obviously not transferring wealth to you.
Even if they are not technically selling at a loss (I actually suspect that they are, but in any case), their opportunity for a particularly high profit margin is something that is priced in to their outlook when they are looking to invest and purchase assets. If all of a sudden they don't have as many marbles to play with, they either need to liquidate assets they currently have to the control of foreign owners and invest more strategically (greater chance of using these marbles in non-wealth creating opportunities) or don't invest at all and lose all of these opportunities in the future.
I can transfer my wealth to you either by just giving it to you, or I can transfer my wealth to you slowly over time by not being able to invest in wealth generation at the same rate as you while my base investments depreciate.
The American oil producers are actually losing money or just breaking even on many of their drilling operations currently. This might seem like it does not make sense, but for many of these companies, the losses associated with this are directly related to their attempts to keep their employees employed. They are eating through cash reserves quite quickly. While this may not effect the very large oil companies like Exxon that drill world wide, this definitely affects the Sandridge, Devon, Chesapeake and smaller sized producers where the majority of their oil production is in the United States.
Sure, but they are going to bust, not keep pumping for 5 years. That is, if they can't actually make money at $40 (I am only a very casual observer, but it seems to be the case that some of them are at least in that vicinity).
>> they are spending their wealth on the national budget there
This is a good point. The Saudi's are rethinking many parts of their economy and attempting to get off of their own dependency on oil by making drastic changes:
The role of foreign investors in the economy has always been a controversial issue in Saudi Arabia, which follows an austere version of Sunni Islam. Yet as oil prices plummet to around $30 a barrel, authorities are racing to find alternatives to revenue from crude exports to finance a budget deficit about 15 percent of economic output.
The slump in oil prices has already pushed Saudi authorities to cut spending, issue more debt and draw down the kingdom’s foreign-currency reserves. Officials are also weighing plans to sell stakes in state-owned entities from hospitals to airports and even Saudi Arabian Oil Co., the kingdom’s biggest oil company, known as Aramco.
There's talk that in 5 years the Saudi's could burn through all of their foreign currency reserves at the current rate.
Going a little bit off on a tangent here but this article reminded me of how the gold price against the dollar has historically been set:
>Every morning at nine o'clock, [acting treasury secretary] Morgenthau; Jesse Jones, the head of the RFC; and George Warren would meet with the president over his breakfast of soft-boiled eggs, to determine the price of gold for that day. They began at $31.36 an ounce. The next morning this increased to $31.54, then $31.76 and $31.82. No one had a clue how they went about setting the price, although everyone presumed that some subtle analyses of the world bullion and foreign exchange markets went into the calculations. In fact, the choice of price was completely random. All they were trying to do was to push the price a little higher than the day before. The exercise brought out the juvenile in Roosevelt. One day he picked an increase of 21 cents, and when asked why, replied that it was a lucky number, three times seven.
The point of setting magic numbers in that manner is the continuous employment of people tasked with explaining how discovering that this was how it worked all along was "unexpected" and "surprising".
I do not get it. Are people really that shortsighted? Are analysts who only thinks, that people are shortsighted?
I get, that if oil/gas goes down, there is an incentive that I drive more with my car.
But I don't make a car buying decision depending on oil/gas prices. When I buy a car, I buy it for use for the next 3 years. But I will not know the oil/gas price in the next 3 years. So my decision depends more on the car price itself and not on the oil/gas price.
People that reason like you are in the exception, even if they come to the same conclusion, they will do so for different reasons.
There is a market for SUVs, and they are sensitive to oil prices. Specially because when oil prices go up, other necesities go up as well at the same time. On the other hand, price go down, and they will act on the aspirations they already had of owning a SUV. They see prices going down as an opportunity.
There is also a market for small cars. Whether they do it because they are frugal, or because they are green, or because they drive in down town and need a vehicle that will navigate the traffic efficiently and is easy to park in tight spots, they won't buy SUVs no matter how much the oil price goes down, or the SUVs price goes down I'd say. Many will see buying such product as going too strongly against their individual or tribal identities!
In my opinion its the other way round, the current prices are comparable to the ones 12 years ago, so the current oil prices have stopped the wealth transfer.
I suppose the perspective that I also missed in my top level comment is that the oil buried in the ground is a form of wealth.
So selling it cheap transfers that wealth to the people that use it. The global economy seemed functional enough at $60 oil, so the decision to keep the pumps flying when the price is below that is a little bit of a wealth transfer.
This feels like a feel-good article designed to stem the negativity in the market over oil prices. Who thinks of falling prices as wealth transfer? And the article doesn't even show wealth transfer and instead talks about more consumption due to cheap oil.
If you were an airline expecting to pay $100/bbl and are now getting oil for $40/bbl, it would look an awful lot like manna is falling from heaven. Or at least that the OPEC countries are transferring a chunk of their treasury to your asset sheet.
It was a wealth transfer when the prices were higher -- you were giving your money ultimately to the oil producers. When the price is down, you are just saving money -- there is no transfer of wealth.
I believe wealth transfer is not the right terminology. Short to medium term economic leverage would be more appropriate, IMHO. Producers have temporarily lost the upper hand, while over capacity allows consumption growth that would not have been possible otherwise. The opposite mouvement that strong demand and restrictive policy caused pushing prices to incredible heights not too long ago. That enticed a ramp up of less economical production such as tar sands and fracking. The pendulum will swing, it's 100% certain, the key to profit from it is to time that swing... to see the signal in macro factors, some of which are alluded to in the article.
This is short sighted, and fails to consider what drives the price of oil, and what the current movement means for the chaotic system that is the petrochemical economy.
Oil prices are down due to massive overproduction over recent years, due to high oil prices, and opec sitting quietly on vast reserves that weren't on the market.
The cause isn't important, though - what is is the effect. Over recent years petro companies have invested in getting at fuels based on high prices - deep drilling, fracking, tar sands, all are really expensive. This means that they've invested in stuff that has eaten at their bottom line and they can't currently use as it's not economically viable.
Bp's earnings statement today illustrates this impact, and it's early days yet - if the price remains suppressed, which it likely will, there will be insolvencies, which will then be bailed out or bring down leveraged up to the eyeballs banks and investors with them.
Once that happens, supply will fall again, prices will rise, and we'll have another, even more violent cycle - except maybe we won't, as industry won't tolerate a wildly unpredictable energy price and will look to other more reliable sources.
Anyway. I reckon that we'll see the energy industry turned on its head before this chapter closes.
This happens every few decades. The supermajors (ExxonMobil, Chevron, BP, Total, Shell) are all structured to survive events like this. Smaller upstream companies and suppliers are going to get wiped out, but the supermajors will persist.
>Take China for example, where the strategist sees the oil plunge helping to fuel a boom in SUV sales: "Moreover, the low oil price is encouraging Chinese consumers to buy increasingly larger cars. Sales of SUVs, the heaviest passenger vehicles category, are up 60 percent year-on-year in the last three months, while overall passenger vehicle sales are growing robustly at 22 percent."
This is terrible news for renewable energy causes.
While I have read so many different oil "stories" over the years from we're going to run out in 1981, to "peak oil", to "enough for millenia" to "its made by microbes not dead dinosaurs" to "we don't really need it, its just cheap". That it all sort of swirls together :-)
However, the bump in economic activity should be a wake up call to everyone that the current recession/malaise isn't about interest rates or fiat currencies, its about a lack of circulation of capital, not enough is getting back to the consumers to support economic activity (or at least that is what seems to be shown by giving people a bit more disposable income by reducing the drain from one of the 'must spend' sources[1].
[1] Typically food, housing, energy, and of late communications.
I wonder how the Saudis and company will respond once EVs become as reliable as ICVs? Mind you, I don't see an EV 18-wheeler taking over any time soon, but I can see an EV sedan becoming the dominant vehicle in most of suburbia in the next decade. I think their attempt to kill shale oil is a bad move. They should be focused on maximizing the value of their reserves while they have time to do it. A soft landing should be preferable to a hard one where most oil becomes more or less a junk commodity (excluding plastics).
Also, I wonder how does all this factor in with regard to other renewables (just solar and wind, no fusion since that's a crap shoot either way). Any ideas where that may lead?
What about the emerging resource economies that send raw materials to China? If they lose serious business then for them it's not a wealth transfer - it's a cessation.
Besides, if we in the developed world have learned anything in 30+ years, it's that falling commodity prices fail to provide a sustainable higher standard of living when incomes stagnate and housing costs rise. I would hardly call that a wealth transfer, more like a temporary bonus - and a weak one at that.
Growing up in Houston, Ive seen the boom bust cycle that seems to have been a part of the oil business since Rockefeller was running Standard Oil. Just because oil is cheap right now doesn't mean that people are going to stop working on clean energy and a replacement for petroleum based transportation. It may slow things negligibly but people who are smart enough to be looking into that aren't really swayed by the price of a barrel of oil.
The Saudis are trying to sweat out the more expensive production methods,(tar sands, bitumen, shale) as part of a long term play to get the price of a barrel of oil to where they want it ~80-100/bbl. I don't think they anticipated that US and other producers would just make up for the lost revenue by producing more(again, something that goes back to the beginnings of the oil business). The government is at risk of making themselves insolvent in the next 5 years or so if they continue this policy[1] and Im not really sure why they(or any producer) are making such short sighted decisions. Its not going to get better until the reduce the supply side glut[2]. Most producers are reactionary to this type of volatility and cancel well completions which take many months to bring online. Once we have reduced the over supply look for another swing as consumption overtakes available of supply until new wells can be brought back up to speed. From the information I have being in the business, that will take about 2-3 years or more, which may cause some pretty catastrophic financial crashes as Saudi Arabia, Nigeria, and other producers run out of money, which is already happening.[3]
keeping oil in the 50-100 dollar range is probably best for the world economy, but keeping everyone honest enough to produce the amount needed to get oil prices there is the problem. IMO, the blip in SUV sales isn't going to significantly impact the environment. Even SUVs are getting 20mpg hwy in real world driving now. This is easily 25-50% better than the last time oil was cheap 10-15 years ago. Government standards are still mandating better CAFE scores, and everyone will be producing electric cars in the next 5-10 years. Some of the supply glut could be blamed on the fact that most cars are more efficient now and are using less oil.
In the long term this is bad for US dollar. Oil exporters will sell US obligations to cover their budget, this could possible lead to global deleveraging and US dollar collapse.
Unless you're in a country that isn't like the US, such as Canada. Then your dollar just tanks and everything besides the price of oil goes up, including food...
2. While oil has a EDIT:LOW elasticity of demand (people need to drive to work and heat their houses), I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets. Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices? Car sales are driven mainly by income growth, marketing, and social pressures.
3. Who is going to buy more oil because it has become cheaper? The plastics manufacturing industry might shift their recycled/new mix towards new as it is now relatively cheaper, but aggregate demand for oil would still be the same.
The article does a poor job of explaining oil market dynamics and is little more than unfounded speculation with a misleading graph and a few numbers thrown in.