Crude oil price agreement and a fatal delusion
In a report originally done by Nafeez Ahmed for the Motherboard Online, it is clear, crude oil’s days of glory has given way to its present price delusion, not even with the efforts being put in place by the Organization of Petroleum Exporting Countries, OPEC to ramp up oil prices. The evolving uncertainties demand a deeper understanding of the politics and economics of an oil price hike. An understanding that will pave way for mutually assured progression between poor and rich countries rather than structural demand destruction premised on a fatal delusion!
A new OPEC deal designed to return the global oil industry to profitability will fail to prevent its ongoing march toward a trillion dollar debt defaults according to a new report published by a Washington group of senior global banking executives. The report also warns that the rise of renewable energy and climate policy agreements will rapidly make oil obsolete, whatever OPEC does in efforts to prolong its market share. The six-month supply deal brokered with non-OPEC members, including Russia, could slash global oil stockpiles by 139 million barrels. OPEC, whose members include major producers from Saudi Arabia to Venezuela, has been hit particularly badly by the weak oil market. In 2014, OPEC had a collective surplus of $238 billion but by 2015, and as prices plummeted, so did profits and OPEC faced a deficit of $100 billion. The immediate impact of the deal was a 4 percent price rally that saw Brent crude (the benchmark price for worldwide oil prices) rise to 56.64%, its highest since mid-July, 2016.
According to Michael Bradshaw, Professor of Global Energy at Warwick Business School, a price hike would not solve OPEC’s deeper problems as it could further speed up the transition away from oil. “The current agreement is only for 6 months and decisions about involvement in Oil and Gas is based on a 20 to 30 year view of future demand,” Bradshaw said. “On what time scale, none of the uncertainties are addressed by the current agreement and oil exporting states need a strategy beyond achieving a short term agreement on production. They need to start preparing for a world after fossil fuels”. As oil price rises, there is more incentive to use alternative, cheaper forms of energy like solar photovoltaics which can now generate more energy than oil for every unit of energy invested. “They will also incentivize more unconventional oil production that will challenge OPEC production.
Clearly, there is a balance to be struck and it is not a return to $100 a barrel,” Bradshaw posited. He warns that higher prices might kick-start a United States tight production which would increase competition with OPEC thereby making the production cut agreement a joke! They also might add “inflationary pressures in the economy” that could prolong sluggish economic growth. Both factors could end up keeping prices lower than OPEC wants. “Higher prices for oil and gas will drive investment in efficiency and demand reduction and also substitution, so they may actually promote structural demand destruction,” Bradshaw submitted. It’s not just OPEC that needs to be prepared.
A report published in October, 2016 by the group of 30 (G-30), a Washington DC based financial advisory group run by executives of the World’s biggest banks, warns investors that the entire global oil industry has expanded on the basis of an unsustainable debt bubble. G-30’s leadership includes the heads and former chiefs of the European Central Bank, JP Morgan Chase International and the Bank for International Settlements. The industry’s long-term debts now total over $2 trillion, the report concludes, half of which “will never be repaid because the issuing firms comprehend neither how dramatically their industry has changed nor how these changes threaten to soon engulf them.” The report is authored by Philip Verieger, a former economic advisor to President Ford who went on to head the United States Treasury Office of Energy Policy under President Carter and Abdalatif al-Hamad, Director-General of the Arab Fund for Economic and Social Development.
Its main finding is that permanent shifts in global energy markets will inevitably overwhelm oil companies along with all economies which depend primarily on fossil fuel production. The attempt to rally prices, the report confirms, is a somewhat futile effort to avoid a major debt crisis by lifting revenues but it won’t work because the global oil industry is in denial about the bigger trends disrupting energy markets as we know them. Oil majors, the report says, are holding on to a number of fatal delusions.
They believe that the oil price decline is “transitory”, that oil consumption will grow despite ongoing economic stagnation; that the industry will be magically immune to public and policy demands to reduce greenhouse gas emissions; that technological progress will never be able to “displace fossil fuels such as oil”, and finally’ that fracking will not produce enough supply to undermine OPEC’s market monopoly. If these assumptions are wrong, “They represent an ossified industry that will gradually fade away and hundreds of billions if not trillions in debt issued by these firms and countries may never be repaid.” So, instead of tinkering with production quotas, Bradshaw said, “They (oil producing countries) should also be promoting greater energy efficiency and renewable energy in their domestic economies to preserve their exportable surplus as some will struggle otherwise due to rapidly increasing domestic demand.”