Tuesday, 8 August 2017

We Will Never See $100 Oil Again

Back in 2014 , I predicted that oil prices would spike down to $25 a barrel. They actually fell to $26 a barrel. I predicted that they would be limited in their recovery, because there was a lot of excess supply to absorb, and because, once prices rose to around $50-60 per barrel, large amounts of US shale oil would again come into the market, increasing supply and depressing prices. Again that was what happened. When prices spiked down to $25 a barrel, shale oil producers shut down rigs, but as prices steadily rose back above $40, some of the more efficient shale producers came back on stream. The shale producers also found ways of reducing their own production costs. I argued that oil prices would rise to a range between $40-$70, a barrel by the end of 2016, with a long run price of production around $80 per barrel. In fact, I now doubt we will see any prolonged period of oil prices above $80, and we will never see $100 oil (in 2017 Dollars) again.

In the last year, as I had predicted, oil prices did climb steadily higher, staying sustainably above $40 per barrel. But, $40 per barrel is crucifying for those oil states dependent on oil rents for their economies. Saudi Arabia, is probably the lowest cost oil producer. It can make profit on oil even at around $7-10 per barrel. However, the Saudi state requires oil at around $100 per barrel, in order to obtain the rents and taxes required to cover its state expenditure. Even with oil at prices around $50-60 per barrel, Saudi Arabia has gone from being a major source of loanable money-capital into global capital markets, to becoming a source of demand for loanable money-capital, in those markets. It has issued sovereign bonds to raise money to cover state spending, and it is selling off hundreds of billions of Dollars of shares in Saudi Aramco, to raise money to cover its budget deficit.

The same continued period of low oil prices has caused similar problems for the Norwegian sovereign wealth fund, which relied on North Sea oil and gas revenues. Russia has suffered from the same causes, and Venezuela which based its economic polices on high oil prices, rather than developing and diversifying its production, has suffered catastrophically, thereby undermining the bourgeois nationalist regime of Maduro. Not surprisingly, it has been those low oil prices that have prompted Russia to join with OPEC producers in setting output limits, so as to try to rebalance global markets, and lift the market price of oil. It is not that global oil demand has been falling. There is not a problem of underconsumption. Global oil demand has continued to rise by around 2% p.a. The crisis is a crisis of overproduction, as years of high prices encouraged exploration and development of new oil fields, along with the development of new technologies, such as fracking, to be able to extract greater quantities of oil.

But, that will not be the case in coming years. Where a few years ago, the talk was of “Peak Oil”, meaning that the potential to increase annual oil production had reached its limits, now it is more likely that we are near a point of peak oil consumption. Its not that demands for environmentally friendly energy production will have created that condition, but that alternative forms of energy production will simply have become more efficient, and lower cost. Some years ago, I reported on the comments of legendary USA oil man, T. Boone Pickens, who was campaigning for US truck and bus producers, to convert engines to LPG. The US had lots of gas, he argued, as shale gas production increased, and gas prices fell by around 80%, and that meant the cost of conversion would be quickly recovered, and the US dependence on Gulf oil producers would be removed.

In fact, there has been no real move to undertake such conversion, but there has been a shift in US energy production away from the use of oil to the use of gas, in power stations. That is one reason, the US was able to quickly reduce its carbon emissions. But, another reason has been that the US has also developed alternative energy production on a significant scale, not just in wind-power, but also in solar, where the development of technology has year on year reduced the cost of producing solar cells, and increased their efficiency. However much Trump seeks to reintroduce coal production in the US, he is fighting a losing battle, because US coal is losing out to US alternative energy producers, not to foreign energy producers. It is losing out, because these alternative energy sources are not just cleaner, but they are increasingly cheaper and more efficient.

In discussing, the diesel emissions scandal, that hit VW in 2015, I also pointed out that part of the reason for VW, and as we now know other European diesel engine producers spending money on trying to fiddle the emissions data was because they have spent decades investing in diesel engine production, and very little on the development of electric motor and battery powered cars, compared to Japanese producers, or US producers such as Tesla. I was recently looking at buying a hybrid car, which is the closest that European producers have come to moving towards electric cars. I was shocked at how bad they actually are, in terms of efficiency, because, of course, they end up falling between two stools. The range of just the electric battery is only around 30 miles, whilst, because they have to carry around an electric motor and batteries, as well as a conventional engine and fuel tank, they handle badly, and suffer higher fuel consumption, averaging only around 30 mpg when using the internal combustion engine. A Tesla, by comparison, can go between 350-400 miles on a full charge, and the cost of charging the battery is only around £3.

The German and French governments have said that they will ban the sale of internal combustion engined cars by 2040. That means they know that car producers will actually have stopped such production long before then. Volvo, now owned by the Chinese Geely Group, has said it will not produce any new solely petrol or diesel engined cars after 2020. China is now investing heavily in new battery technologies.  That still leaves Volvo the option of continuing production of its existing ranges, and of producing hybrids, after 2020. Other producers have been moving in a similar way, but a move directly from internal combustion to electric now seems to be the most likely transition. Its why BMW have only committed to building the existing body shell of the Mini at Cowley, whilst focussing on the development of their battery technology, and electric motor technology in Germany, If you are only going to travel short distances, and so use only the electric motor of a hybrid, you may as well just have an electric and charge it at the end of each short journey, and if you do longer journeys, the lower fuel efficiency of a hybrid makes a conventional engine a better bet.

According to one industry source recently, battery technology is developing at around 30% p.a. in terms of efficiency and cost, so that, by 2020, an electrically powered car will be cheaper to buy than a petrol/diesel engined car. The main problem at the moment is the lack of charging points, but again, one provider of fast charging service stations is already offering a full charge in around 15 minutes. An Israeli company has also been working on a system whereby batteries can be simply dropped out and replaced in a matter of seconds. Other options include the potential for charging cars while they are on the move from underground power loops, via wireless transmission, in the same way that mobile phones can now be charged, and of developing actual solar cells built into roads.

The potential to roll out an extensive charging network at existing service stations etc. could be done in fairly short order, if the will were there to do it, and at that point, electric cars will take off, spelling the death of the internal combustion engine, and thereby decimating future demand for oil. That appears now to be only 5-10 years into the future, and it is unlikely that oil demand from other sources will rise sufficiently to soak up the existing levels of supply, so as to push oil prices higher. As demand contracts, or at first fails to rise by historic averages, supply from the more expensive fields will become unprofitable and be shut down. That means North Sea Oil, which is only profitable at prices around $60 per barrel will close down. As the more expensive oilfields are removed, so that supply comes from the more efficient fields, then, as Marx describes in his analysis of primary product prices of production, market values, and rents, the market value of oil will fall, and the rents obtained from oil production will also thereby fall.

Its not just the imminent move to electric cars that is at hand. Over recent years we have seen the development of a sharing economy, particularly in relation to cars. The development of the Internet of things, and of mobile phone technology, means that alongside the development of driverless vehicles, the need to own a car, for many people, will become redundant. My son was recently involved in making a video for the Chinese company that produce Mobikes, which have been rolled out in Manchester. But, already there are companies offering a similar service with electrically powered scooters. The logical step, with driverless electric vehicles is to enable people to summon one via their smart phone, whenever, and wherever it is required, and to leave it when they have reached their destination. That would make vehicle usage enormously more efficient, given that today, most cars stand in one place for the vast majority of the day.

And, last week also saw the first successful test of the hyperloop in the US, another investment in real capital that has been supported by Elon Musk.  The hyper loop, which uses the same technology that some of us remember from our childhood that sent messages in department stores via vacuum tubes, offers the potential of travel, over long distances, at near supersonic speeds. It is another example, of the vast areas of new products and services that technology has opened up, and the potential, thereby of huge markets, and profits when, like Musk, other capitalists put money to work in actual capital, rather than in simply financial speculation on stock, bond and property markets.

As I wrote back in 2014/15, as oil prices fall, and the huge oil rents of the Gulf states and other large oil producers disappear, that will also remove a large element of the revenues that have been fuelling that financial speculation. Falling asset prices will create a big incentive for others to follow Musk in turning once more to a search for profits, rather than paper capital gains. The world will change greatly in the next five years.

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