Friday, January 15, 2016

Reaping the Whirlwind

Thank you, Wolfram Alpha. Yes. We're doomed
In 2005, the price of crude oil hit $70 a barrel. And we simply knew things. We knew that peak oil was upon us. We knew that growing demand in the developing economies, along with the impending exhaustion of the 'easiest' reserves to extract had placed the world in an economically precarious condition. We knew that demand was almost exactly commensurate with the available supply, and every time the economy boomed it was likely to cause a spike in oil prices. We also knew that this was essentially an irreversible condition. That energy producers would have to exploit more difficult petroleum resources, and as production costs exceeded $50 per barrel, a kind of Rubicon was crossed. By 2008 the price rose above a hundred dollars, and except for a brief collapse after the global economic meltdown, it stayed in that triple digit range.

Today crude oil prices will close under $30/bbl, dragging equities markets deeply into the red. What could possibly have caused such a dramatic plunge so quickly? Two factors worked in tandem, a kind of negative feedback loop that eventually blew up the entire system. First, demand was rising throughout the world, and there was no reason to presume that would end. As emerging economies developed an urban middle class of consumers of their own, the growth of automobile travel would skyrocket. And modern cities and factories would consume massive amounts of energy. In the energy sector, particularly in North America, oil executives saw this permanent increase in demand, and particularly how it was bumping up against supply constraints. With middle east wars and sanctions, the world could barely pump enough oil to keep up with average daily demand. Any spike, however small, would create at least local shortages.

But these oilmen knew of other sources. They knew that using methods like hydraulic fracturing and horizontal drilling they could access huge additional reserves, far away from the chaos of the Gulf. Oil like this is more expensive to extract and refine, but with prices holding well above a hundred dollars, it was immensely profitable. By 2015 the US was once again the largest Oil and Gas producer in the world.

While all this was happening, nations around the world were waking up to the realities of carbon pollution and climate change. First came significant increases in energy efficiency, and then large and growing deployments of alternative energy sources, primarily solar and wind power.

By 2014 the global economic slowdown was in its fifth year. China was contracting, and demand for oil throughout the developing world was in free fall. Meanwhile, there was much more oil on the market, and the adoption of alternative energy sources was reducing demand in the developed world. A vicious cycle that had only one solution. In time past, Saudi Arabia would simply reduce production volumes to create an artificial shortage, and the price would return to optimal levels. But now the Kingdom felt the economic challenge from US and Canadian oil production, and, locked in a cold war with Iran, chose to defend her economic position by keeping the taps wide open. The gamble was that House of Saud and the Emirs would be the last man standing after everybody else quit the market.

That particular wager hasn't played itself out yet, but the Saudi economy is in fairly bad shape, running unprecedented deficits and reducing the energy subsidies it had always provided for its citizens.

And there you have it. A modern-day trillion dollar morality tale of the wages of greed in a global zero sum game. But before you spend too much of your schadenfreude budget gleefully considering the fate of the oil barons, remember that the global economy is teetering, and economies from Russia to Saudi Arabia to Iran to Nigeria are teetering with it. On net, this is not a positive contribution to peace in our time.

1 comment:

  1. The alternative (we keep pulling those hydrocarbons out of the ground and burning them as fast as we can) wasn't so good either.

    With all the countries we've 'regime-changed,' here's one we didn't that deserved it the most.