Oil Crash is Kicking Off One of the Largest Wealth Transfers in History
bloomberg.com
bloomberg.com
2. While oil has a EDIT:LOW elasticity of demand (people need to drive to work and heat their houses), I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets. Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices? Car sales are driven mainly by income growth, marketing, and social pressures.
3. Who is going to buy more oil because it has become cheaper? The plastics manufacturing industry might shift their recycled/new mix towards new as it is now relatively cheaper, but aggregate demand for oil would still be the same.
The article does a poor job of explaining oil market dynamics and is little more than unfounded speculation with a misleading graph and a few numbers thrown in.
3 - I heard a UK insurance industry analyst explaining that premiums are up year on year because the most fuel price sensitive customers (predominantly younger drivers and retirees) are driving more miles since prices fell last year, and these groups are also more accident prone.
If you look at the sales figures it is quite obvious that you're not in the majority here. It's a little tricky to model because cars are all getting better mileage every year, but when gas is expensive gas guzzlers definitely experience a dip in sales (and vice versa).
> We also find that sustained $4.00 per gallon gasoline prices will generate a 14 percent long-run increase in fleet fuel economy relative to 2005 levels, although this prediction should be interpreted cautiously in light of the relatively large out-of-sample price change considered and the Lucas critique (Robert E. Lucas, Jr. 1976)
The strength of the effect of oil prices on fleet efficiency is 0.0022 over a year. I would consider that extremely incremental. Meanwhile, we observe a 22% decrease in total car sales over the 2007-2009 period due to changes in disposable income and household wealth. [1]
So I would still argue that gas prices change the fleet efficiency mix around the margin, but that purchasing decisions are driven primarily by changes in income, government policy, and social norms.
[1] http://www.federalreserve.gov/econresdata/feds/2014/files/20...
Car sales are at record highs and Toyota just released a next generation (which always coincides with increased sales and higher transaction prices). Yet, sales are down 12% YoY.
Meanwhile, Jeep sales are at record levels and their best selling models are also their least fuel efficient.
Oil generally is considered to have a low elasticity of demand, or better said, is relatively inelastic, especially in the short term. You appear to be using the concept backwards.
And while you may not have bought the argument that oil prices affect car sales, that fact continues to be true without your consent and is borne out by economic research.
Not you or me, but it's more common than anyone with the ability to make long-term financial decisions would think it is. The frequency of filling up at the gas station causes people to lose sight of the overall financial impact gas prices have on their budget (it's much less than they think it is).
Beyond all that, I have contracted in and currently work on the fringes of the Permian Basin oil industry, and I am pretty sure that this rut in oil prices is actually going to create even more wealth for the uber-wealthy oilmen, because there was a lot of money floating around and a lot of new fresh upstarts got going in the boom, but now that prices are down and banks are calling in the dues, all the small guys are falling out one by one and the big guys are just mergers&aquisition-ing their way into bigger positions of control of the market. T Boone Pickens has already said he thinks we've seen the lowest low at 26 and it's only up from there. So after all the little guys get gobbled up, the big guys will go heavy long on oil futures and make a ton of money, drive oil prices right back up (through manipulation as always), and suddenly this supposed "transfer of wealth to the consumer" is going to be more like $10 a gallon bleeding of the consumer.
At least that is the case among middle classes in emerging economies.
We'll pay for these short term wealth transfers with a further uptick in warming and a huge shock in the future when no one's saving energy any more, renewable energy installations have come to a standstill and oil rapidly becomes more expensive again.
Being too early is the same as being wrong.
Edit: Whoever is downvoting obviously has never seen this happen. There was just an article about it on HN the other day, describing how Dragon lost it all when the company they sold to plummeted to zero stock value.
You can't simply buy "Oil". So if you buy an oil contract I'll expect, on the long run, to pay fees for storage at least.
http://thedailywtf.com/articles/Special-Delivery don't know if it's true and not that bothered as it's still fairly hilarious.
I think there would be legs in a Silicon Valley/IT crowd style show about market traders.
https://personal.vanguard.com/us/funds/snapshot?FundId=0051&...
Note that this is SUPER RISKY investment fund. If you look at the chart it has major swings up and down. The fund is down 20% for 2016 (yikes!). But if you had held it from 2012 -> 2014 you would have gotten a 40% return on your investment.
I like Vanguard funds since they have a low management cost to them and they tend to be a little more conservative in their selection.
Good luck, remember me when you make your million!
Also consider whether you want to invest in oil related companies or in the price of oil itself (which is just as possible).
NB. I have nothing for or against Vanguard funds and have heard a few people supporting them.
Oldest trick in the book: fove out free advice and take a share of the wins, but don't pay a share of the losses ;-)
That's the key underpinning to the stock market. Just ask any broker.
If you're investing on a longer-term horizon (a year or more), the monthly futures roll where the USO fund sells the current month's oil contracts (because it doesn't want the actual oil to be delivered) and buys the following month's oil futures (normally at a higher price than what it sold the current month's at) will eat into any returns you get from price appreciation.
To put some numbers to the example, let's say the fund has 100 barrels of oil, and the current month's price is $20, and next month is $21. When it rolls the contracts, it sells 100 barrels for $2000, and buys 95 barrels, with $5 left over.
Fast forward a month. Prices have gone up by $1 for all months oil. It will sell 95 barrels for $22 ($2090, plus the prior month's leftover $5) and buy 91 barrels for $23, with $2 left over.
Fast forward another month. Let's say you owned the entire fund and decided to liquidate it. Prices for your contract have gone up another $1, so you sell your 91 barrels for $24, receiving $2184, and adding the extra $2 in cash you had gives you $2186. That's a 9.3% return in two months.
Compare that to the price of oil as reported in the news - it's the front month contract, so on the face of it, oil has gone from $20 to $24 (20% increase) while you've only made 9.3%.
The numbers are somewhat exaggerated here, and it can work the other way (current month more expensive than forward month) but is uncommon. This is why USO has historically been a bad long-term proxy for the price of oil.
Good for humanity, bad for O&G industries.
EDIT: I'm fairly confident this is the start of the end. The US Congress extended the production tax credit for renewables for 5 years, along with Tesla's Gigafactory ramping up production, which means we're going to be awash in renewable-generated power and have the capacity to store it (in cars, and in stationary storage).
Keep in mind: China economy cooling off, fuel efficiency standards, shifting demographics (older populations drive less).
We reached peak oil, it just wasn't supply. It was demand.
Nifty redefinition, but I take this to confirm that the Peak Oil aficionados were kooks, just as they seemed to be. They and Paul Ehrlich will eventually be joined by many others in my "confirmed kook" bucket, but so far my "strongly suspected kook" bucket seems pretty accurate too.
Yes, all the major banks (Goldman, JP Morgan) have models for this kind of thing.
http://www.forbes.com/sites/michaellynch/2015/09/14/goldman-...
http://247wallst.com/energy-economy/2015/11/09/jpmorgan-slig...
Eventually the price will stabilize, somewhere in the $35 - $65 range, probably.
That's very hard to analyze because the issue is not just how oil is sourced and used, it is how people on average expect it to be sourced and used.
On the supply side, while producers like the Saudis are trying to undercut fracking with low prices now, they can't make people forget about fracking. If the Saudis try to raise prices again, then fracking becomes a viable competitor again.
On the demand site, the world is not going to forget about global warming. Population growth will keep slowing. Infrastructure will keep getting built and keep getting smarter.
At some point the supply and demand sides will diverge enough to knock oil from its privileged position as THE key resource for the economy. This is similar to earlier essential resources like food, clothing, water, shelter, mining, etc. We still spend a lot of money on these things, but there is no expectation that they are guaranteed growth industries.
I suspect if prices rise again, those test wells may have proved to be profitable. However, the oil companies came through and leased tons of acreage already and spent lots of money on the leases. Even if prices come back, many of the leases would have either expired or the gas companies would have to pay for their extension provisions. Given the state of the companies that started leasing (CHK: down 86% since they leased my father-in-laws old farm property), I don't think they have the money to do that. Even if the original leaser sold the leases off, which happened in many cases, the new owner would still have to pony up the extension and then start drilling again, exposing themselves to OPEC under-cutting them again.
I think its about equally likely that the end game is that the price of oil (ultimately driven by energy to extract each unit) goes up until other things that are known are more cost effective for most uses; this doesn't make it "lose its value" -- the use value remains the same and the market clearing cost per unit is high -- but it shrinks the size of the market (there may be some uses for which it is still cost effective, but not as many) and is still bad for the oil & gas industry.
And, with the cost of renewables continuing to drop, along with government incentives, I don't ever see the cost of electricity going back up. Ever.
On the other hand, Texas has so much wind power locally that they can't ship out of the state yet that some utilities give power away for free at night:
http://www.nytimes.com/2015/11/09/business/energy-environmen...
As more renewables come online (and they will, I assure you), this will further drive down the per kwh cost.
This is definitely a buying opportunity for those with the money to make such investments.
I don't think there's much risk of bankruptcy for high-cap MLPs, and for low-cap ones the risk is priced into the stock (and then some). The price of oil has to recover sooner or later; the Saudis don't have an economy unless they have high oil prices, and they're the ones behind the current glut. Kuwait is already negotiating with OPEC and non-OPEC producers to raise oil prices again...
now, if this tone was struck at an article in US News or Time, then yes, surely you could accuse the writer of "shortsightedness"
Also, the southern hemisphere will have no such recourse.
And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
Your answer to food riots is don't worry, they'll starve to death soon enough?
> And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
We can grow enough food for everybody. We can put the food on trucks. We can put the trucks on roads.
Somebody still has to pay for the food and the trucks and the roads. And that's going to be significantly more expensive than locally grown food. For people who have no money to begin with.
We could, but the people where the food (and associated economic security) is may object to that.
Refugees often aren't all that well received, and economic refugees (as opposed to political refugees who are politically aligned with the receiving state, which is opposed to the regime from which they are fleeing) -- external and, often, internal -- often are the worst received.
Depends on the food and the transportation method. Is growing tomatoes in a green house during winter months in a northern country more or less efficient than shipping them from the southern hemisphere?
Food riots usually happen well before mass starvation, and usually are over quickly because one of four things happens:
(a) The government accedes to the demands of the rioters, or
(b) The government distracts the rioters, often with a manufactured external crisis, or
(c) The government convinces the rioters that continuing the riot will lead to more pain than whatever provoked the riot and no positive results (often, by fairly direct demonstration of this),
(d) The riots escalate to outright rebellion, and the government is toppled and replaced (often resulting in [a], but sometimes this becomes a distraction along the lines of [b]; this often follows an attempt by the government at [c].)
> And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
Even granting that, manifestly people do go hungry, particularly in nations that don't generate enough domestically to feed their people and would have to rely on imports to do so (though, even in the most developed countries that are also net food exporters, some still go hungry.)
Climate change, even before considering increased variability, changes which countries political deficiencies produce major food distribution problems and the accompanying pressures, which, historically, have led to mass violence, both internal and interstate. That its a political and not technical problem might be emotionally satisfying, especially when the problem is mostly in distant countries, but it doesn't actually magically make the problem go away.
Arable farmland and access to fresh water have been a fairly common thing for people to kill each other over historically, including in the modern era. To the extent we aren't, its because many countries have reached settled states with their neighbors that are stable given a relatively stable distribution of those resources.
Major shifts would leave large existing populations without support and others newly prosperous, giving the former little to lose and the latter something quite valuable to defend.
No, they aren't. The US will be one of the losers, Canada one of the winners (again, ignoring effects of variability, etc.) And lots of the relative winning/losing pairs are going to be immediate neighbors.
> Not really in a position to fight, especially as they're starving.
There'll be a whole long period where the losses will be to established economic position rather than mass starvation. Its not going to be "breadbasket today, wasteland tomorrow". There'll be a long period where declining economic position, rising food prices, and less food security (and similar effects with water in place of food) will be evident and starvation visible down the road before mass starvation -- and its in that period that there will be strong pressures on governments to reverse that position by any means at their disposal.
Russia will hardly 'win'. If severe warming happens, all the permafrost in Siberia will turn that tundra into one big swamp.
Not to mention simultaneous methane release, which some people are really worried about.
Coffee is one worrying example. It originates from Ethiopia and Sudan, in the mountains, at particular altitudes (temperatures). As temperatures rise, it grows higher — but we soon run out of soil on the mountain, or run out of mountain altogether.
http://www.kew.org/science-conservation/plants-fungi/environ...
Even if we ignore the effects of increased variability (which makes investing in production anywhere less secure) and just consider, as you do, the averages, this is problem for people as long as countries and borders are a thing, because shifting where its possible for humans to support themselves has some pretty drastic consequences.
Canada will be fine, they have a long history of cooperating with the US.
Now, Russia on the other hand...with China right next to it? I smell trouble ahead.
One other interesting thing to consider, we really are not even using a good percentage of land that could grow food. There are many parts of the world that because of conflict do not fully use the lands they have and in many western nations the majority of land is held by government and not open to use.
So the dramatics will need to wait another day
Did we read the same article? There are many consequences for the oil crash. The article doesn't claim to rank all consequences - it just reports on a BofA study about the size of the wealth transfer. It also cites an increase in Chinese SUV purchases. Since when is reporting on facts equivalent to "celebrating" them?
Here's where my rage came from: (i) we cannot go on like this. We as a western society started with baby steps towards a future with a smaller ecological footprint. This was obviously also triggered by the last oil shock. (ii) we know that we cannot go on like this, yet many of our decisions are made considering only a single proxy of societal well-being, money.
The analyst states correctly "that's where money can be made, BMW will profit!". Yet for global society, it's a disastrous direction.
Please. Give me an SUV.
The next question is how to deal with troughs in production due to the weather, and for that I really do hope we get back in the business of reactor innovation, because nuclear is the only option that provides the reliability of fuel-based power with 0 carbon output.
The principle is simple: build a hydroelectric dam and run it in reverse. Of course, this can't be done everywhere; you need a lot of peak solar production, a lot of water, and an easily-dammed valley, and you don't often see all three together... But it does get used to store power, and solar plus pumped hydro represent a kinda-sorta alternative to nuclear.
Ecological, space, and financial efficiency are more variable.
http://energystorage.org/energy-storage/technologies/pumped-...
You're skimming over the important question: will it be ready soon enough?
Already, the answer is "probably not," and if the price of oil consumption keeps falling, the answer will pretty quickly become "definitely not."
That environment may or may not change dramatically(1), and humans and animals and plants as they exist now may not exist in the future, but I would guess that life in some form will survive, and if you define the environment to be "earth and its atmosphere," it will survive as well. It just may not have humans or animals or plants in it. Who knows.
(1) I'm not a climate scientist, but it seems like dramatic changes in our environment may well be guaranteed already. That said, I don't know for sure, so I'm being careful with my language.
What I'm saying is that it in the long run, humanity may well be doomed for the things we've put into play in the environment. That would be bad. I don't think that we'll kill off ALL living organisms. Earth will definitely survive, and I think that life on Earth will also likely survive. That life may well only be single celled organisms. Who knows.
Having said that, like you, I think that people get extremely hung up on global warming without pragmatically looking at the environmental cost will be if it keeps going for another 50 years. Warming over the last 18 years has been minimal, and if we have similar warming for another 50 years, that would provide enough time for solar to become economical and efficient without pushing the second and third world back into poverty -- because let's face it: at this point in history, limiting carbon generation also limits the productive capacity of an economy, and lowers the standard of living for everyone involved.
Yes, we might have to move our farmland a bit north, lose a bit of coastal land area, and reduce biodiversity a bit. If this is the price to save millions of human lives through better nutrition, better medical care, better transportation, better housing, etc ... then in the short term, I think we need to proceed with any far-reaching carbon regulation with extreme caution.
Right now, I think that the most pragmatic and practical thing to do is research, improve, and build out nuclear power. Unfortunately, many of the same people who are staunchly anti-combustion (I can't say 'anti-fuel', since technically radioactive material is also fuel) are also anti-nuclear. To those people, living in this world, with the primitive energy storage tech that we have today -- without a hard dose of pragmatism you'd be living in the cold and dark during a Michigan winter, and I can tell you that -10f is COLD :( (we don't get a lot of sun and wind here during this time of the year)
This would be a wise economically point of view if there were no externalities. With externalities it is a pretty bad idea.
As far as times without production, how about using the over-production to lift really really large weights or pump water up a hill?
They doubled in the years leading to 2008, and since then have plunged three-quarters.
If Saudi Arabia's bet pays off, and they manage to choke all the alternative suppliers of oil, perhaps the price will bounce all the way back up in another 8 years?
Or perhaps they won't. But then if they don't, maybe Saudi Arabia collapses or has to be propped up with US money.
Who wants to bet their energy supply on that?
I get that low oil prices mean bad days for energy companies, many "emerging" countries, and the financial markets, to whom any news is bad news.
But in the "developed" countries, this makes literally everything else cheaper. In the short and medium term, yay. And when the Saudis have made their point, they'll drop production, prices will go back up, everything will return to normal, more or less.
So why is everyone worried?
I mean, the markets are down, but that's just a "quickly grab a chair now that the music's stopped" situation isn't it? Or alternatively, regression to the mean?
Someone please correct me if I'm grossly misunderstanding here. As you may be able to tell I'm no expert, to put it mildly.
--
J.P. Morgan Builds Loss Reserves for the First Time in Six Years
http://www.wsj.com/articles/turning-point-j-p-morgan-adds-to...
More Banks Take Hits on Energy Loans
http://www.wsj.com/articles/more-banks-take-hits-on-energy-l...
RBS: Sell everything except high quality bonds.
http://www.telegraph.co.uk/finance/economics/12093807/RBS-cr...
J.P. Morgan: We believe the regime has transitioned to one of selling any rally.
http://www.marketwatch.com/story/bearish-jp-morgan-says-sell...
Citi: The cumulative probability of U.S. recession reaches 65 percent [this] year.
http://www.reuters.com/article/us-global-economy-idUSKBN0TL1...
George Soros Sees Crisis in Global Markets That Echoes 2008
http://www.bloomberg.com/news/articles/2016-01-07/global-mar...
2) It's difficult to quantify the impact the oil and gas boom had as a percentage of global GDP growth and therefore what the impact will be in its absence.
Those fracking/oil shale companies were leveraged up the wazoo. Remember 2008?
>But in the "developed" countries, this makes literally everything else cheaper.
Yup. This has the potential to turn into a deflationary spiral.
The deflationary spiral bit I do not get. By itself, a cheaper resource should increase consumption because now everything is cheaper and you have as much money you can spend on stuff as you used to. Externalities aside, this kind of deflation is not what's called a "deflationary spiral", is it? A deflationary spiral is when consumption goes down because people don't have money to buy stuff, and then producers lower prices, profits fall, people are fired, consumption drops further, prices fall even lower, etc. But cheap resource availability is different, theoretically, because then consumption should rise instead of drop, not? (Also it'd be a bit strange if say finding large new deposits of some resource were a guaranteed economic disaster; one would think it should make things better.)
OPEC seems to be dead - and that means we're getting real competition in the oil business.
The Saudis tried petro-power politics by driving prices up through cutting production, but other OPEC members immediately increased production for the additional lucrative revenue.
OPEC has been dead for a while -- why? It was a cartel that survived on the basis of raising and lowering production in unison, and now it is a race to the bottom. The Saudis were betrayed and this is their revenge.
The oil flood is as much about punishing other OPEC members as it is about killing potential Iranian oil revenue.
At 100$/barrel people would just switch to something else. At 100-40-120-60-200, people are going to keep buying low mileage gas powered cars in massive numbers, building car infrastructure, and living in the suburbs.
PS: Don't forget you can manufacture oil for ~100$ per barrel, but if your factory folds when prices drop under 90$ it's a poor bet at those prices. It takes huge investments to create an alternative over decades, but you can kill them off with a few lean years.
The solar energy cat is out of the bag[1], it will forever loom over oil.
[1] http://www.treehugger.com/renewable-energy/striking-chart-sh...
On the one hand, there is such thing as supply destruction, oil producers that are marginally profitable and that go out of business if price collapses, taking tons of hard capital (not financial, but equipment, personnel know how, etc). The Saudis are pressumably aware of this and very much doing it on purpose.
The problem is that there also exist demand destruction. Companies that consume energy in large quantities to produce economically useful but expensive goods and services. This guys conversely go out of business when oil price spikes (there was some statistic going around in 2008 about how 5 out of the last 6 recesions in the US where correlated with high energy prices), which is the intended effect of Saudi strategy.
So, eventually, when the noise signal introduced in oil prices gets absorbed by the market negative feedback loops, the economy we go back to will likely be smaller than the economy we started with. We could debate wether this is a good thing or a bad thing, but many actors are nervous because this is a game of musical chairs, and very few can say they will have a guarrantied place at the table by the time the rubble stops bouncing.
Doesn't that equipment get sold? If not immediately, then eventually, modulo the odd pipe that gets bent or rusted in storage.
And those people are largely available for the jobs they're experienced at when jobs are available, so they aren't "destroyed" either, they're just idled. Some will move on, some won't.
A lot of it, no. A lot of equipment is built on site and would have to be destructively disassembled to be moved, but just leaving it there without using or maintaining it will cause it to rust or be damaged by the elements. And even the equipment that can be resold and still physically exists would have to be transported back to the site at significant expense. A lot of the sites are in remote locations.
> And those people are largely available for the jobs they're experienced at when jobs are available, so they aren't "destroyed" either, they're just idled. Some will move on, some won't.
The "some will move on" being the trouble. You have somebody who knows how to do a specific thing not many people know how to do, you lay them off and they go find some other job doing something else that pays about as well, move house, put their kids into new schools, now you want them back. Good luck with that.
Assests are not abstract. They are deployed to one particular site, and a big part of the cost goes to install them in that site. That's why all producers are basically operating at a cost right now.
You may reopen a closed oil ring (assuming you did nothing destructive to maximize your short term wins, which fraking companies are, AFAIK).
The personnel question is a tricky one. People need to eat, so if they face a downturn, many will be discouraged and move to different careers. Some will return, if the market picks up enough to pay way above average wages, but some just definitively won't. You will have to make up the difference by training a fresh crop of young crew members.
And I find it amusing to see that a subset of the HN audience can have such a hard time to grasp that other industries might have their own talent acquisition problems.
http://www.theatlantic.com/business/archive/2015/06/north-da...
The Nash equilibrium is everybody low or everybody high.
It is a Stag Hunt, and everyone is taking home Hares.
The Saudis are not so much chasing hares as cockroaches.
http://www.tradingeconomics.com/saudi-arabia/crude-oil-produ...
It is the massive liquidation of sovereign wealth funds that is causing markets to move lower. When someone is forced to sell, what happens to the price? It tanks. There is no floor. Technicals take over. This coupled with expected negative earnings outlook creates a vicious cycle of downward trajectory.
That's kinda my point: what negative earnings outlook? Lower oil prices means lower costs for every industry but energy. "Developed" markets are mostly oil-importers, and are still (as far as I know) the source of most industries' profits.
The Saudis will certainly "survive". They might put many other production areas out of business in the short term, and that is bad for current investors. It's good for alternate fuels, however, and it only keeps other areas out of production for as long as the price stays down. The internal contradictions of the Saudi state will eventually dictate a price rise...
Assuming this isn't a joke, why is that ?
> And when the Saudis have made their point, they'll drop production, prices will go back up, everything will return to normal, more or less.
Something will happen, but I think the cat's out of the bag: Even if prices rise significantly, the US has proven to itself that it is/came become very quickly self supplying in oil. This significantly decreases the Saudi's leverage in world politics which changes some balances in the middle east and beyond quite significantly.
Similar things are true for Europe (especially in the east) with regard to Russia. Russia's medium-sized stick has been the threat to cut off gas to its western neighbours, and it gets really cold there in the winter.
Depends on why oil prices are low. If aggregate demand has dropped then it means another recession may be coming. If it is simply an over supply, then you're right. Everything I have read says over supply, but people are worried that China is really slowing down and the numbers are cooked to hide that fact.
So while high oil prices seem bad, they indicate huge demand and high economic activity.
When Saudis drop production, they stop acting against fracking. In that case, normal means about $60-$70 per barrel. It's the point where fracking starts making financial sense.
LOL. In Canada, the drop of oil prices dropped the loonie, and now grocery prices are through the freaking roof. It's harder to eat healthy when a cauliflower is $13.
Not necessarily. Take a look at Canada. With the Canadian dollar tanking, the price of everything imported is going up (because it's imported from the US and the USD-CAD exchange rate is lopsided).
Maybe what you really mean by "developed" countries is "just for people in the US."
Additionally, the lower oil prices wrecked the income of a number of state and national governments that just assumed the price would stay that way for the foreseeable future.
As oil prices drop, less and less money is being transferred from (EU+Japan+AU+China) to (Middle East + Russia).
A significant portion of the world in terms of area and population derive virtually all their earning power from oil. When oil ceases to be valuable one must consider the consequences. Look at Nigeria which recently requested $3.5 billion dollars in emergency aid from the World Bank[0], like yesterday, to fill their budget gap. This will get worse not only due to current market conditions but let's look past those to utopia: a world with no need for fossil fuels. These economies are completely dependent on fossil fuels - for everything - what would that utopia look like for them?
If you adhere to the school of jobs and economy equates to less terrorism then the environmental panacea that awaits us in a world of free renewable energy will be paradoxically diminished by terrorism and human tragedy.
Discuss.
[0] http://www.ft.com/cms/s/0/f3f2f140-c8f0-11e5-be0b-b7ece4e953...
E.g. Norway v. Canada.
The question is how to enable politicians to take the long view.
A skillful king is better than a democracy: but the downside of a monarchy is much much worse than a democracy, which is why we prefer democracy.
A few locals are already voicing concerns on that, e.g.: https://www.youtube.com/watch?v=GvvvomANbRo
http://atlas.media.mit.edu/en/profile/country/nor/#Exports
Edit: yeah Norway is definitely going to go to the shatter unless they invest in high tech right now. Compare this with Canada for example.
http://atlas.media.mit.edu/en/profile/country/can/#Exports
Nor: >50% of exports are crude and petroleum based products Can: ~25% of exports are crude and petroleum based products
Canada: Imports $437 B Exports $438 B
Norway: Imports $92 B Exports $147 BIn US alone, going from $4/gallon to $2/gallon gives $400B/year (oil and food) more spending money in the pockets of consumers. Oil industries favor relatively a few, but lower prices favor everyone.
On the flip side, the decade which includes heavy Iran sanctions and the Iraq war, Saudi's foreign reserve increased by almost $700B, in contrast the decade prior increased only by almost $20B.
The price crash triggered by Saudis wanting to make Iran a less interesting investment after Obama's Iran Deal (with a huge cash reserve, the thinking is they can last a lot longer) and the market prospect of more oil flooding the markets after Iran's sanctions were removed.
OT: How many know Saudis are the largest shareholders of Fox News outside of Murdoch family [0]?
[0] http://www.sec.gov/Archives/edgar/data/1308161/0001193125133...
If I used to pay you a big pile of money, and now I pay you a smaller pile of money, that isn't a shift of money from you to me.
If electricity suddenly drops in cost by 50%, then money you expected to spend on electricity is now being left in your accounts. There's been no actual shift, but the expected movement of money has been altered.
It is important in this example, that I assume the original deal is not unfair, which is not always the case. Price of oil as well as price of labour has other dimensions; if it weren't so, there would be much less war and revolution, respectively.
Now that we are back to near $30/barrel, those charges are still there.
The oil producers are mostly going to be selling all that oil at a profit, so they aren't expending any wealth. The Saudi's are foregoing holding onto a bunch of wealth by selling oil at low prices instead of cutting production, but they aren't transferring wealth to oil consumers, they are spending their wealth on the national budget there. Other producers seem a lot more inclined to cut production, so they aren't really transferring wealth either.
To pay for it they are slashing spending and liquidating non-oil assets. Their foreign reserves have gone down over $100bn from their peak and is down to four years at current spending levels. Who wins? Whoever was buying their oil.
If there was an extrinsic way to say that the value of oil in that ground is higher than the price they are charging for it, then it would clearly be a wealth transfer. Short of that, I don't think it is so clear, it can just be sensible trade.
A dumb insulting analogy: I build you a dresser (pump oil) and use the money you give me to pay for part of a car (I spend the proceeds locally, but also spend more than the proceeds).
If the price for the dresser is fair, I'm obviously not transferring wealth to you.
I can transfer my wealth to you either by just giving it to you, or I can transfer my wealth to you slowly over time by not being able to invest in wealth generation at the same rate as you while my base investments depreciate.
This is a good point. The Saudi's are rethinking many parts of their economy and attempting to get off of their own dependency on oil by making drastic changes:
The role of foreign investors in the economy has always been a controversial issue in Saudi Arabia, which follows an austere version of Sunni Islam. Yet as oil prices plummet to around $30 a barrel, authorities are racing to find alternatives to revenue from crude exports to finance a budget deficit about 15 percent of economic output.
The slump in oil prices has already pushed Saudi authorities to cut spending, issue more debt and draw down the kingdom’s foreign-currency reserves. Officials are also weighing plans to sell stakes in state-owned entities from hospitals to airports and even Saudi Arabian Oil Co., the kingdom’s biggest oil company, known as Aramco.
There's talk that in 5 years the Saudi's could burn through all of their foreign currency reserves at the current rate.
>Every morning at nine o'clock, [acting treasury secretary] Morgenthau; Jesse Jones, the head of the RFC; and George Warren would meet with the president over his breakfast of soft-boiled eggs, to determine the price of gold for that day. They began at $31.36 an ounce. The next morning this increased to $31.54, then $31.76 and $31.82. No one had a clue how they went about setting the price, although everyone presumed that some subtle analyses of the world bullion and foreign exchange markets went into the calculations. In fact, the choice of price was completely random. All they were trying to do was to push the price a little higher than the day before. The exercise brought out the juvenile in Roosevelt. One day he picked an increase of 21 cents, and when asked why, replied that it was a lucky number, three times seven.
Source: "Lords of Finance"
I get, that if oil/gas goes down, there is an incentive that I drive more with my car.
But I don't make a car buying decision depending on oil/gas prices. When I buy a car, I buy it for use for the next 3 years. But I will not know the oil/gas price in the next 3 years. So my decision depends more on the car price itself and not on the oil/gas price.
There is a market for SUVs, and they are sensitive to oil prices. Specially because when oil prices go up, other necesities go up as well at the same time. On the other hand, price go down, and they will act on the aspirations they already had of owning a SUV. They see prices going down as an opportunity.
There is also a market for small cars. Whether they do it because they are frugal, or because they are green, or because they drive in down town and need a vehicle that will navigate the traffic efficiently and is easy to park in tight spots, they won't buy SUVs no matter how much the oil price goes down, or the SUVs price goes down I'd say. Many will see buying such product as going too strongly against their individual or tribal identities!
So selling it cheap transfers that wealth to the people that use it. The global economy seemed functional enough at $60 oil, so the decision to keep the pumps flying when the price is below that is a little bit of a wealth transfer.
Seems like a reasonable description to me.
Oil price = $100/bbl Gas = $4/gal I spend $400 per month on gas.
Oil price = $25/bbl Gas = $2/gal I spend $200 per month on gas.
The extra $200 I have each month used to go to the oil producer.
Oil prices are down due to massive overproduction over recent years, due to high oil prices, and opec sitting quietly on vast reserves that weren't on the market.
The cause isn't important, though - what is is the effect. Over recent years petro companies have invested in getting at fuels based on high prices - deep drilling, fracking, tar sands, all are really expensive. This means that they've invested in stuff that has eaten at their bottom line and they can't currently use as it's not economically viable.
Bp's earnings statement today illustrates this impact, and it's early days yet - if the price remains suppressed, which it likely will, there will be insolvencies, which will then be bailed out or bring down leveraged up to the eyeballs banks and investors with them.
Once that happens, supply will fall again, prices will rise, and we'll have another, even more violent cycle - except maybe we won't, as industry won't tolerate a wildly unpredictable energy price and will look to other more reliable sources.
Anyway. I reckon that we'll see the energy industry turned on its head before this chapter closes.
This is terrible news for renewable energy causes.
However, the bump in economic activity should be a wake up call to everyone that the current recession/malaise isn't about interest rates or fiat currencies, its about a lack of circulation of capital, not enough is getting back to the consumers to support economic activity (or at least that is what seems to be shown by giving people a bit more disposable income by reducing the drain from one of the 'must spend' sources[1].
[1] Typically food, housing, energy, and of late communications.
Also, I wonder how does all this factor in with regard to other renewables (just solar and wind, no fusion since that's a crap shoot either way). Any ideas where that may lead?
Besides, if we in the developed world have learned anything in 30+ years, it's that falling commodity prices fail to provide a sustainable higher standard of living when incomes stagnate and housing costs rise. I would hardly call that a wealth transfer, more like a temporary bonus - and a weak one at that.
For the first time, there was an inverse correlation between oil prices and the US stock market.
http://energyfuse.org/wp-content/uploads/2015/08/crude-oil-p...
They made millions but you are getting $10-$40 a month back.
Plus as a result we will get more war and extremism out of the middle-east and Russia as they start clawing back all kinds of perks.
The Saudis are trying to sweat out the more expensive production methods,(tar sands, bitumen, shale) as part of a long term play to get the price of a barrel of oil to where they want it ~80-100/bbl. I don't think they anticipated that US and other producers would just make up for the lost revenue by producing more(again, something that goes back to the beginnings of the oil business). The government is at risk of making themselves insolvent in the next 5 years or so if they continue this policy[1] and Im not really sure why they(or any producer) are making such short sighted decisions. Its not going to get better until the reduce the supply side glut[2]. Most producers are reactionary to this type of volatility and cancel well completions which take many months to bring online. Once we have reduced the over supply look for another swing as consumption overtakes available of supply until new wells can be brought back up to speed. From the information I have being in the business, that will take about 2-3 years or more, which may cause some pretty catastrophic financial crashes as Saudi Arabia, Nigeria, and other producers run out of money, which is already happening.[3]
keeping oil in the 50-100 dollar range is probably best for the world economy, but keeping everyone honest enough to produce the amount needed to get oil prices there is the problem. IMO, the blip in SUV sales isn't going to significantly impact the environment. Even SUVs are getting 20mpg hwy in real world driving now. This is easily 25-50% better than the last time oil was cheap 10-15 years ago. Government standards are still mandating better CAFE scores, and everyone will be producing electric cars in the next 5-10 years. Some of the supply glut could be blamed on the fact that most cars are more efficient now and are using less oil.
[1]https://www.rt.com/business/319465-saudi-bankrupt-projection... [2]https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W... [3]http://www.businessinsider.com/nigeria-is-running-out-of-gas...