22 January, 2016

“Oil prices could fall further this year as the market faces an ‘enormous strain’ on its ability to absorb new supplies from producers such as Iran…”. Thus read the lead to the Wall Street Journal’s story on Tuesday, relating to the International Energy Agency’s Oil Market Report for January.


Fall further they did, that day and the next, before staging an extraordinary rebound on Thursday. But the daily gyrations are only of interest to traders. For everyone else in the world, especially the oil producing countries, what really matters is the trend — which has, of course, been relentlessly and powerfully downwards.


Most of the world has not yet adjusted to sub-$40 per barrel oil, and here we are at sub-$30 prices. The markets have run far ahead of the analysts who are supposed to forecast and explain it — and the latter, in a desperate effort to get ahead of the game, have begun airing predictions of ‘$20 oil’ and even of ‘$10 oil’. Given the massive oversupply — to the point where the world is luridly depicted as “drowning in oil” — these forecasts cannot be dismissed, but their primary purpose is simply to shock. This attracts headlines and coverage, as well as providing cover for their authors, both against their past failure to predict the severity of the collapse to date and going forward, in the still-unlikely event that prices do indeed sink so low.


However, the critical consideration in the oil market is not how low prices go, but how long they stay very low. True, the definition of ‘very low’ varies from country to country, because production costs in the Saudi, Iraqi and Iranian fields are a tiny fraction of those in offshore fields in the North Sea, the Gulf of Mexico and other expensive and inaccessible places. But for any given price level — whether $100 or $10 — there are fields which, once prices fall beneath that level, generate losses for their operators.


More dependence, no diversification


By the same token, every country has its own levels of taxation and royalties which the government takes from the oil companies — even, or especially, if it owns them. Most critically, for each of these countries, the degree to which the state budget is dependent on these oil-based revenues varies. But what is true for every major oil-producing country in the world is that its reliance on oil (and/or natural gas in many cases) has increased over the last 10-15 years, during the period of the energy and commodity boom.


Thus the story of the 1970s has played out again, on an even larger scale: instead of utilizing the enormous revenues pouring in from oil and gas to diversify their economies into other areas and thereby reduce their dangerous dependency on energy production, almost every major energy-producing country has preferred to shoot itself in the foot and arm. On the one hand, it has done little or nothing to diversify its sources of income, and on the other it has channeled the wealth into subsidies and other give-aways which have weakened, rather than strengthened, its economy and society.


This generalization holds true across a remarkably wide swathe of countries, societies and political systems. Norway and Nigeria have little in common other than their energy dependence — but that is enough to put them in the same boat. There they will find, among their fellow-passengers, both Saudi Sunni extremists and Iranian Shi’ite fanatics — who are not only co-religionists (in the rest of the world’s eyes, if not their own) but co-reliers on oil to keep their regimes in power and their populations reasonably placid.


Bye bye, World Cups


Other berths are occupied by geographically gigantic Russia and postage-stamp Qatar, who at least can put their heads together to figure out how on earth they are going to deliver on their commitments to host the World Cup in respectively, 2018 and 2022. Fortunately for them, their man Sepp Blatter is gone, so they can hope that their ill-gotten honor of hosting the events will be taken from them — a disgrace, no doubt, but a minor and almost welcome one compared to having to admit that they simply can’t afford it any more.


The inability to put on massive spectacular events is a simple, obvious and very public example of the fallout from the fall. We may well see an early example this summer in Brazil, a country which is already in deep economic funk and hence unlikely to be able to deliver an impressive Olympic Games — and quite possibly not even a functional one either.


But the fallout from the oil/ energy/ commodities collapse will extend far beyond the ability to stage grand circuses. For all the developing countries, the focus of the masses is going to be on bread, not circuses. The five years since the ‘Arab Spring’ erupted have demonstrated the hopeless situation of governments that have been unable to provide basic sustenance for their populations, or divert their distress into nationalist campaigns or outright wars. Yet for most of that time, money was available from one source or another, with which to attempt to hold the line — albeit with very mixed results.


Now there is no-one left with either the will or the wherewithal — let alone both — to keep the show going, even if they want to. Everywhere, the public — after losing confidence in the organizers — is heading for the exits.

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