With oil, money comes to you in your sleep; with debt, money comes to you by crawling. With work, money comes to you by sweating. MENA’s oil boom is a perfect illustration of the cohabitation between the permanence of endemic moral misery and the existence of abundant financial resources.
The high price of oil has structurally the perverse effect of perpetuating the systems put in place to infinity. Because of oil and gas, America has lost all moral sense. Through the grace of oil and gas, a typical MENA’s oil exporter no longer thinks, it spends. And it pays without counting. It does not need economists; those are holiday troublers; it prefers to deal with merry lurons. It has a visceral desire to entertain the gallery. The public does not ask for so much. Money is flowing. And let the rentier industry live! An industry that does not need a strategy, seminars, speeches, no supply problems, no market problems. It runs at full capacity, and it can do without any government and parliament. It works on its own and is not accountable to anyone, not even to itself. It is royally free from the productive work and creative intelligence of Algerians, Libyans and GCC inhabitants. An industry that cradles illusions, those from the top and feeds the despair of others, those at the bottom. Finally, an industry that works from, by and for abroad. An annuity that oil-consuming states compete for or share tax to finance their mesmerising democracy and producing countries cheaply to perpetuate the obsolete political regimes in place with high costs. The largest share goes to influential locals or foreigners. Some were supporting each other, and vice versa. A society that does not think of itself is a society that is slowly but surely dying. The life of a nation ceases, it is said, when dreams turn into regrets. Oil has made institutions, pale copies of those of our illustrious Western thinkers, empty shells bloated and budgetivorous, without impact on society, intended to camouflage reality to view of the foreigner, but no one is fooled. The world today no longer believes in Santa Claus. At the slightest drop in the price of a barrel of oil, they collapse like a house of cards. They serve only as a storefront in the eyes of international opinion. Non-hydrocarbon exports are insignificant. Yet only labor can oppose oil. But it is marginal. It has accounted for less than 2% of exports over the past several decades. Is this not the apparent sign of the failure of so-called public economic policies that have only the funds, carried out by successive elites and who today have converted into opposition or Islamism. Democracy is a view of the mind in a rent economy dominated by politics. Any political opposition that relies on hard-working forces is doomed to failure. The weight of inertia is predominant; the living muscles are weak. Work has lost its credentials; it bows to the diktat of oil. It is access to petrodollars that guarantees wealth. Easy money fascinates. On another register, who better do without the hen with the golden eggs? Of course not anyone. Would a prolonged and increasing decline in the price of hydrocarbons, reserves or markets be life-saving or lethal for the country? What did the natives live on before the discovery of oil in 1956 by the French? The nation-state is a dupe market between a power and a nation, namely bread against freedom, security against obedience, order against anarchy, external recognition against internal legitimacy. The concept of the welfare state is a convenient fraud that the population believes that providence is at the top of the State and not in the Sahara desert subsoil. One of the criteria for immediately determining whether a nation belongs to the third world is corruption. Wherever the representatives of the State, civil servants, or politicians, from the top to the bottom of the hierarchy are corrupt and where this practice is almost official, we are in a third world country. The membership of people in the third world is above all its political system. The Arab world is dominated by authoritarian or totalitarian powers, by political castes that manipulate words and institutions. This is why no one now believes in development; everyone sees the corruption of political power daily. Governments have deliberately chosen economic growth from the accumulation of oil and gas revenues or to the absence of debt pledged on hypothetical reserves rather than on development and internal mobilisation based on training and employment of men. The States have carried out a vast salary generalisation whose overall social effect is the dependence in which a significant proportion of the working population is located about the income distributed by the State from the revenues export of hydrocarbons to retain an increasingly large and demanding customer base. The essence of the economic and socio-political game is, therefore, to capture an ever-increasing share of this pension and to determine which groups will benefit from it. It gives the State the means to redistribute clientelist. It frees the State from any fiscal dependence on the population and allows the ruling elite to dispense with any need for popular legitimisation. It has the extraordinary turnaround capabilities stifling any attempt to challenge society. The oil will be the engine of corruption in business and the fuel of social violence. It has the art of war and initiating peace. It is both fire and water. He sometimes acts as an arsonist, sometimes as a fireman. It is one thing, and its opposite; wealth and poverty, both are illusions. And as with any illusion, there is a manipulator. We are our gravediggers. To get out of the hole we are sinking into, every day more, we have to stop digging because the solution is on dry land and not at the bottom of a hole. To do this, you have to raise your head, stand up straight, and look yourself in the eye, in all humility, without fear and reproach. You have to arm yourself with science and have faith in God. Science is the key to our problems, religion the ultimate goal of our brief existence. Oil intoxicates us; gas pollutes us, easy money blinds us. It’s dirty money. Money that kills, corrupts, rots, destroys consciences. It is the petrodollars that run the country and give it its substance and stability. The institutions, empty shells, are only there as a garnish to make the “cake” appetising. “Oil is the devil’s excrement; it corrupts countries and perverts’ economic decisions” Juan Pablo Perez Alfonzo, the founding father of OPEC Venezuela 1970.
Saudi Arabia abruptly altered its oil production strategy in early March and began to flood the market with cheap oil. Financial markets worldwide haemorrhaged value at the prospect of a protracted and painful price war, and American oil firms immediately cut back spending and dividend payments as the price for their primary product halved. As of this morning, WTI Crude (a pricing benchmark tied to U.S. supply) was barely north of $20/bbl, prices not seen since 2002.
This sudden tumult represents an opportunity for the renewable energy sector. At first glance, this may sound counterintuitive. After all, oil prices seem largely unrelated to the prospects of wind, solar, and other renewables in the electricity generation sector, because in the United States the primary fossil source of electricity is natural gas. Natural gas prices have been largely uncorrelated with the price of oil since 2007, when large-scale domestic shale-gas production began to come online (see chart). In other parts of the world, coal drives electricity generation, which is similarly decoupled. Virtually nobody uses oil as a primary electricity source, except in certain very specific locations, such as Hawaii, where the demands of unique geography and supply logistics align to make oil the best bet for power production.
Oil’s link to renewables instead comes through competition in the financing marketplace. As new projects are developed and financing is sought, the infrastructure funds that provide capital to enable these developments naturally prefer projects that promise the most attractive financial returns. With relatively high prices over the last decade and unmatched value as a transportation fuel, oil exploration has beaten out renewable project development on the financial metrics time after time.Today In: Energy
The oil shocks over the last weeks could dramatically alter that calculus. Revenues for potential oil projects have suddenly dropped by over 50%, and futures contracts currently show only a modest improvement in prices by year’s end. The market is already pricing in the expectation that oil prices remain below $40/bbl for the foreseeable future, a dramatic change from the $55+/bbl that has been the norm for the last few years.
Even if prices do recover, the sudden volatility will still weigh on the minds of project investors. Oil markets haven’t resembled a purely competitive market since the mid-1960s, and since that time prices have been regularly impacted by sudden and unforeseen changes in supply by OPEC producers, primarily Saudi Arabia. The rise in shale-oil in the U.S. in the last decade has effectively put a cap on prices and provided a counterweight to OPEC’s pricing power. But the muscle being flexed now shows that the OPEC nations and Russia still maintain substantial influence over the fate of American oil producers. This ‘stroke of the pen’ risk, now that it has again bared its head, maybe unlikely to be forgotten in the near future.
Renewables, by contrast, have no supply risk whatsoever, and are primarily exposed to fluctuations in the price of electricity. Insomuch as this relates to the price of natural gas, investors in the U.S. will take comfort knowing gas is essentially a local market, with U.S. prices driven by supply and demand within North America; there is little ability to arbitrage against global markets due to limited export capacity. Therefore, as oil prices come down, project financiers should start to turn more of their attention to the new safe bets that offer more durable returns: wind, solar, and the like.
This isn’t to say that renewables don’t face headwinds in the current environment. Cheap oil also competes with renewables in the transportation sector. Electric Vehicles will be less competitive with their gasoline-powered cousins as the price for gasoline at the pump drops, lowering demand for new grid capacity and forcing renewables to wait for retirements of current assets. The price for natural gas in the U.S. is dropping as well, driven primarily by the sudden decrease in demand due to the shuttering of entire industries. These drops make fossil power from natural gas more competitive with their renewable counterparts.
Futures markets, however, are currently pricing in a full rebound of natural gas prices by year’s end, with the futures contract for Henry Hub for December 2020 currently priced above market levels at the end of 2019. This suggests that the drop in prices of natural gas will be temporary, and investors making long-term bets do not view the current situation as durable. Further, natural gas prices are just one component of the price paid by utilities to power producers, and so a drop in natural gas prices doesn’t necessarily imply a similar fall in the rates negotiated in new power purchase agreements. So the drop in natural gas prices evident in the market now looks to be temporary, and unlikely to dramatically alter the widespread conclusion that renewables are now the cheapest power source to build.
Altogether, the oil market has changed dramatically in the last three weeks, in ways unforeseen just a few short months ago. But despite the headlines and worrying drops across financial markets, opportunity lies in these disruptions. Renewables are well positioned to capitalize.
Brentan Alexander‘s words: I am the Chief Science Officer and Chief Commercial Officer at New Energy Risk, where I lead the detailed diligence of novel technologies and business models across the energy landscape. I have devoted my career to advancing solutions to the climate crisis and use my experience to help technology companies assemble everything they need to reach the market faster. I hold a PhD in Mechanical Engineering from Stanford University, where I studied gasification, thermochemistry, and electrochemistry, and Masters and Bachelors degrees in Mechanical Engineering from the Massachusetts Institute of Technology. When I’m not in the office, you can find me hiking the hills outside Oakland, California, or turning wood in the shop. All of my articles reflect my personal views and not those of my employer nor the volunteer initiatives that I am involved in. You can find out more about me via my website (brentanalexander.com) or follow me on Twitter or LinkedIn.
Oil market rout as Saudi Arabia and Russia launch a price war and the coronavirus pandemic sparks an equities meltdown.
Oil prices were headed for their worst weekly loss in more than a decade Friday after Saudi Arabia and Russia launched a price war and the coronavirus pandemic sparked an equities meltdown.
US benchmark West Texas Intermediate reversed earlier losses in afternoon trade, rising about two percent to around $32 a barrel after the US military launched air strikes in major crude producer Iraq.
But prices are still down more than 20 percent this week and on course for their biggest weekly drop since the global financial crisis of 2008.
Brent crude, the global benchmark, also jumped about two percent to about $34, erasing earlier losses — but is still down 25 percent for the week, Bloomberg News reported.
Crude markets were plunged into turmoil at the start of the week after top exporter Saudi Arabia began a price war amid a row with Russia over whether to cut output to support the virus-battered energy sector.
That triggered the biggest one-day drop on Monday since the start of the Gulf War in the 1990s.
The virus outbreak then added to downward pressure, as growing concerns about a global recession and travel restrictions — including a temporary ban on travel from mainland Europe to the US — dimmed the outlook for demand.
“The scale of the oil price crash would have economists and analysts revaluating their forecast for growth, and even increase the urgency among central bankers to cut interest rates,” said Phillip Futures in a note.
Emergency measures by central banks Thursday failed to douse concerns about the economic toll from the outbreak, and markets suffered their worst day for decades.
The rout continued in Asia Friday with stocks and oil plummeting in morning trade, although they pared their losses in the afternoon.
Analysts said oil prices were boosted after US air strikes against a pro-Iranian group in Iraq, a member of the oil-exporting cartel OPEC.
The price war started after Saudi Arabia and other OPEC members pushed for an output cut to combat the impact of the virus outbreak.
But Moscow, the world’s second-biggest oil producer, refused — prompting Riyadh to drive through massive price cuts and pledge to boost production.
Energy generation through renewable sources is improving exponentially and is something that is no longer simply better for the planet but also for investors. Nevertheless, the oil industry has no intention of voting itself out of office and will continue extracting and exploiting the planet’s oil reserves. We don’t have time to wait for investors to tire of these companies. The much-needed end of the oil industry should be brought about not by its profitability or otherwise, because it could linger on for decades, but instead through political decisions guided by scientific evidence, links to which can be found throughout this article. The writing is on the wall, and has been for years; when will we bother to read it? Follow me on Twitter or LinkedIn. Check out my website.
Enrique Dans Teaching Innovation at IE Business School since 1990, and now, hacking education as Senior Advisor for Digital Transformation at IE University. BSc (Universidade de Santiago de Compostela), MBA (Instituto de Empresa) and Ph.D. in Management Information Systems (UCLA).
Today, 8 January 2020, it appears that the US is more relaxed about oil spike than Europe – which helps explain differences over Iran, according to Mueid Al Raee, of United Nations University.
Oil prices shot up following the US assassination of Iranian general Qassem Soleimani, rising more than US$5 per barrel to more than US$71 (£54) on January 6, its highest level since the Saudi oil refinery attack last September. Brent crude has since eased to around US$69 at the time of writing, though there is much discussion that it could climb a lot higher if the current crisis leads to an all-out war.
In keeping with many recent developments in US-Iranian relations, the Europeans have taken a dim view of America’s decision to take out the military commander. When trying to make sense of the very different approaches Iran on either side of the Atlantic, one factor that is often overlooked is that the US and Europe are affected in different ways by a rising oil price.
People tend to see more expensive oil as bad news for the global economy, but the reality is that it’s not necessarily bad for America. It may be that, in continuing to provoke Iran, driving up the oil price is almost seen by the Americans as an added incentive.
The complex oil effect
Oil pricing and its associated effects are often more complex than portrayed. As citizens, we are most often concerned with the price of fuel for our cars and the cost of heating our homes. This is the first way that oil prices affect the broader economy: if consumers have to spend more on fuel and associated taxes, they have less to spend elsewhere – and this can lead to a global slowdown.
Like all countries, the US is affected by this. Yet on previous occasions where US actions on the geopolitical stage drove up oil prices, there were also benefits to the country’s economy. Take the 2003 invasion of Iraq, which ushered in a period that would see the price of Brent nearly triple by the end of the decade. This led to a wave of investment into the US shale oil sector, which would eventually account for approaching two-thirds of the country’s total oil production.
Brent crude price, 1940s to present day
The trouble with shale oil is that it is expensive to produce, with average break-even of fields not far below US$50 per barrel. Shale oil wells also produce most of their oil in the first year of production, which means that producers have to continually drill new wells.
Due to the lower prices of the last few years, a large number of oil-related companies in the US have filed for bankruptcy, including both producers and services businesses. And while US production of shale oil managed to continue rising impressively throughout this period, mainly thanks to the bigger producers, it has been slowing down markedly in recent months.
If the oil price now trends higher, it could well mean that shale oil production in the US can resume its upward march. It also raises the prospect of US oil services companies earning more both locally but, most importantly, from foreign oil-production ventures, since there is a well-established correlation between their stock price and higher oil prices.
At the same time, six of the last eight recessions in the US were followed by high oil prices. One reason why this was not a hindrance for the economy is that, in the longer term, stable higher prices promoted the development of more energy-efficient technologies within the country.
The Americans can also argue that there are some longer-term economic benefits to higher oil prices that can help everyone. Oil-producing countries with surplus cash from oil profits invest in foreign technology and foreign assets. At the same time, oil-importing countries innovate to mitigate the profit-reducing effects of higher oil prices. These are both ultimately good for economic vibrancy and growth.
On the other hand, there are advantages to cheaper oil that are particularly important to countries in Europe – including the UK – because, unlike America, they are not oil self-reliant. Lower oil prices are shown to be beneficial for Europe’s highly energy-intensive economies and are expected to help with job creation. During the oil price drops of 1986 and the early 1990s, for instance, energy-intensive industries in Europe increased their earnings. Consumer product businesses and European airlines benefit from lower oil prices, too.
What happens next
Whether or not the Americans actually want higher oil prices, there are certainly good economic reasons why they probably won’t mind them. Deepening the chaos that started with the US withdrawing from the West’s nuclear deal with Iran is an “easy” way to achieve higher oil prices while meeting other strategic objectives.
Yet how the Europeans, China and Russia respond will also determine the global flow of oil from Iran and Iraq. Whatever the ultimate pros and cons of a higher oil price from an economic point of view, the Europeans clearly have more reasons to be unenthusiastic than the US. If the new exchange and payment instruments that have been developed by Europe to circumvent US sanctions are effective, and the US does not escalate the conflict, it may yet mean that oil prices remain stable at current levels.
Originally posted on HUMAN WRONGS WATCH: Human Wrongs Watch (UN News)* — Disinformation, hate speech and deadly attacks against journalists are threatening freedom of the press worldwide, UN Secretary-General António Guterres said on Tuesday [2 May 2023], calling for greater solidarity with the people who bring us the news. UN Photo/Mark Garten | File photo…
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