Peak Oil is You
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Page added on February 11, 2016
The petrodollar age is no more but with it go old certainties
The drop in oil price adds a twist to the forces driving fragmentation and conflict.
Vladimir Putin, the Russian president, is being forced to consider a fire sale of state assets even as he steps up the bombing of opposition forces in Syria. Waging a war of words with Iran, Saudi Arabia is planning its debut on international bond markets. Nigeria has started talks about assistance from the World Bank. Venezuela careers from bust to bankruptcy. Welcome to the world of $30 oil.
Conversations about the oil market once started from two ironclad assumptions. Cheap oil was good for global growth because consumers are more inclined than producers to spend windfall gains and disturbances in the Middle East would send prices higher so the west should back the Arab autocrats who kept the wells pumping.
Received wisdom has been upended. The fall from $100 a barrel in 2014 should have seen consuming nations throwing their hats in the air. Not a bit of it. Europe, beset by stagnation and overwhelmed by refugees, has other things on its mind. The US, now producer as much as consumer, is stuck with anaemic growth. China, the world’s thirstiest economy, has its own challenges. Global equity markets have tumbled in tandem with the oil price.
The geopolitics are likewise counterintuitive. Prices have fallen even as fighting in Iraq, Syria, Yemen and Libya has escalated. Saudi Arabia, once the guarantor of a floor price, now deploys higher output as a weapon against Iran. The nuclear deal with Iran has left the west torn between the old allegiance to Riyadh and the allure of detente with Tehran.
The third law of oil — that price falls are always cyclical diversions from an inexorable rise — looks shaky. The accumulating evidence points to a structural shift that will keep prices relatively low. During the century before the great price shock of the early 1970s the real cost of a barrel of oil was between $10 to $40. Economists at Llewellyn Consulting in London make a convincing case that this trading range offers a rough template for the future.
The 1970s shock rewrote the rules of international relations. The Middle East became a focus of geopolitical attention. The Soviet Union was given a new, albeit shortlived, lease of life. Venezuela, Brazil, Mexico and Nigeria were among those blessed — or perhaps cursed — by soaring prices. Now reimagine this landscape in an era of permanently cheap oil. Some producers doubtless will fare better than others but the power of the petrodollar has gone.
My sense is that western foreign policymakers are still clinging to the idea that nothing much has changed. Low prices will be disruptive — dangerously so in places — but temporary and thus unlikely to alter the geopolitical balance much. Producers will get their act together, high-cost wells will go out of business and the return of global growth will see the price rise again. The doctrine of “peak oil” — that a finite supply of hydrocarbons over time will always pull prices upwards — has its devotees.
Doubtless there will be price spikes but there are strong reasons to suppose the rules have changed. A decade ago, the US was the world’s largest oil importer. Shale oil and gas now assure it of energy self-sufficiency during the 2020s. Shale wells can be capped and uncapped relatively cheaply, providing a shock absorber in international markets. Saudi Arabia remains a swing producer but the “swing” has lost its force.
Russia will be weakened further but declining powers can be more dangerous than rising ones
Opec has been enfeebled. A 1 per cent cut in oil output should push up prices by 10 per cent in the short term, but no single supplier has enough capacity to increase revenues by cutting output. The result is a free-for-all fight for market share. As Llewellyn Consulting puts it, Opec now more closely resembles a secretariat than a cartel.
Environmental laws and alternative energy sources conspire against hydrocarbons. You do not have to believe that governments will meet their climate change targets to forecast an accelerating shift into renewables and alternative energy sources, whether electric cars or solar power. Energy efficiency is pressing in the same direction.
All this means that policymakers should be thinking a lot harder about the geopolitics.
There is not much that is reassuring for a world already described by its insecurities. Whatever the theoretical benefits, the scale and speed of the oil price drop has added another destabilising twist to the forces driving fragmentation and conflict.
Russia, facing powerful economic and demographic headwinds, will be weakened further. Events in Syria suggest Mr Putin may be more threatening for that.
Declining powers can be more dangerous than rising ones. Falling state revenues threaten to undercut the strides made by Nigeria in fighting corruption and the security threat from Boko Haram. The last oil price collapse was among the triggers for civil war in Algeria.
Cheap oil sharpens the Sunni-Shia confrontation in the Gulf, could undermine fatally the Iraqi government and is weakening the Kurds fighting Isis. It may also hasten US and European disengagement from the region. Why get involved if they do not need the oil?
Like the cold war, the petrodollar age imposed a predictability on the world. It would be absurd to lament its passing but just as unwise to ignore the consequences. We may discover soon enough that $30 oil comes with another type of price.
9 Comments on "The petrodollar age is no more but with it go old certainties"
Davy on Thu, 11th Feb 2016 6:58 am
It is not only the petrodollar that is becoming increasingly irrelevant it is all global institutions. This is what happens when a system slows down and approaches a break point. The post WWII world that culminated in the house of cards we have today is dissolving like sand castles in a rising tide. Right is wrong and wrong is right in the sense of a world following a forgone narrative. The last hope for those hoping was the dream the Brics would rise from the ashes of the west demise. This was the last of the false narratives that nations can decouple from a global system. There are no longer any winners to bet on.
It is the global system we are all connected to that is itself decaying and with it every nation will decay. Oil and the economy are clearly in a demand and supply destruction phase. Prices may bounce around while the global system still has life but the oil and economy relationship dwelling in a price environment that is an economically healthy range appears over.
We have a compression across the board going on with relationships of nations, sectors, and economic systems. As the global world decays the connections that support the interconnection are fraying. They have not broken yet and may not for several years but they are in an end game of decay. A complex world built on cheap abundant energy cannot overcome entropic decay except with a complex world with cheap and abundant energy. We are at limits on cheap and abundant energy and complexity is hitting diminishing returns.
We are caught in a scale trap. We do not have the time to adapt nor the resources. We do not have the time to lower our population in a manner that does not destroy the global system. Death is disruptive and expensive for a just-in-time interconnected world. Worst of all we have disturbed the one thing that gave us civilization to begin with and that is our climate, healthy soil, and clean water. We have across the board decay. There is nothing without decay except our storytelling which gets livelier by the day.
The petro-dollar is dead but that is the least of our worries and should be little comfort for those who hate the US and the dollar. This is about the death of globalism and what that means to cities that are too big and people who need grocery stores for food. It is about each and every one of our locals that are naked and helpless without a thriving global system supplying our vital needs.
paulo1 on Thu, 11th Feb 2016 9:05 am
Good morning Davy
regarding: “without a thriving global system supplying our vital needs.”
Ah, that’s the catch, ddefining needs from wants. I suspect circumstances will define it for us. Somehow, foreign luxury cars and strawberries in February find their way into people’s mindset of ‘importance’. When I think of ‘Globalism’ I think of Apple products being built with economic slave labour in China, or Nike using Vietnamese slave factories.
The Americas have everything we need in way of resources and skills to produce anything we could ever possibly need. I am looking forward to the end of Globalism and realistic lifestyles. I include foreign travel for luxury vacations on the list.
The last 50 years has been more more more. More stuff, (we don’t need). More consumption, (our bodies and finances don’t need), and more experiences (many think they need or by God we just haven’t lived). Cities can purchase from their more immediate surroundings and perhaps do with less variety. Cities that exist in the middle of nowhere should perhaps devolve back into sanity of purpose and location. It’ll happen, one way or another. The world is full of Ghost Towns.
paulo1 on Thu, 11th Feb 2016 9:06 am
I should have said, “the end of Globalism for more realistic lifestyles”. Should have proof read before…..
Davy on Thu, 11th Feb 2016 10:27 am
Paulo, the end of globalism and a forced drop to regionalism sounds good in the abstract. It is the getting from here to there that is the big question. When I say vital global supplies I am referring to all those things, including financials, that are composed of multiple sourcing. There will surely be a horrible crisis when globalism breaks down and dangerous shortages appear. If we can make it through that crisis in one piece then regionalism may have a chance. There is still likely to be huge loss of life and productive capacity in such a dramatic forced devolution.
I want an end of globalism. I want all of us to be poor relative to today. We have become horrible creatures destroying and killing our environment. I want to see localism, seasonal living, and group survival cooperation just like it used to be. It will never be like it was but what we have today can end…maybe…with some kind of life.
The next round of crisis will be waiting in the wings. The 21st century will be the age of crisis and decay. We are just now beggining this process. I say we but much of the poor of the world are already there. We have just a few years of normal before it all slips away into the surreal of decay and dysfunction none of us have ever known because recent history has only known a growth period.
penury on Thu, 11th Feb 2016 10:54 am
All the furor over the fact that only the banks and the rich have any money. When people finally realize the whole problem is that the 99 per cent have NO MONEY. Demand is dead. It will not return until the economic system is purged. War is their hope, but reality is all the efforts only exacerbate the problem. There are no solutions. at is the nature of predicaments.
Harquebus on Thu, 11th Feb 2016 6:36 pm
“Producers will get their act together, high-cost wells will go out of business and the return of global growth will see the price rise again.”
The pursuit of infinite growth on our finite planet is what has got us into this mess in the first place. The author is deluded if they think that more of the same will solve our problems.
Increase energy production, grow populations, grow the economy, build massive amounts of energy guzzling infrastructure and pay off debt all while trying to reduce greenhouse gasses and budget deficits? Ha!
makati1 on Thu, 11th Feb 2016 8:28 pm
penury,, you are spot on. Growth is over for most people and countries. If everyone was forced to pay off their debts before they spent another dollar/peso, there would be no economy. No growth. No anything. Soon the cards will all be maxed. The home equity withdrawals dry. The cheap auto, home loans and school loans maxed out. THEN reality will set in and the fun will begin.
As for world war, that may be the last desperate attempt by the Empire to hold on to power and wealth, but that will end in extinction for all of us. Not to say that they are not trying desperately to get one going.
Davy on Fri, 12th Feb 2016 3:34 am
“Canada sells off large chunks of its gold reserves”
http://globalnews.ca/news/2508940/canada-sells-nearly-half-of-all-its-gold-reserves/
“The government of Canada sold off large chunks of its gold reserves in recent weeks, continuing a pattern of moving away from the precious metal as a government asset. According to the International Monetary Fund’s International Financial Statistics, Canada held three tonnes of gold reserves as of late 2015.”
“The latest data, published last week by the Department of Finance, show the total Canadian gold reserves have now dropped to 0.62 tonnes. That’s less than 0.1 per cent of the country’s total reserves, which also include foreign currency deposits and bonds. In comparison, the U.S. holds 8,133 tonnes of gold, while the United Kingdom weighs in at 310 tonnes.”
Davy on Fri, 12th Feb 2016 3:47 am
“JPM’s Kolanovic Warns Upcoming Recession Could Be Comparable To 2008 Crisis; Says “Buy Gold, Cash And VIX”
http://www.zerohedge.com/news/2016-02-11/jpms-kolanovic-warns-upcoming-recession-could-be-comparable-2008-crisis-says-buy-gol
“More apropos to the current global bear market and economic slowdown, is Kolanovic’ warning that a recession as a result of the market’s loss of trillions in market cap now seems inevitable: Global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.”