Ragnarok for oil sellers – and you thought the mayhem is over

All those interested in Norse mythology (I am sure there are some Thor fans out there) will have a clue on what happens when Ragnarok hits us. It is a series of events that eventually destroys most of everything we know and even many of the gods die. The world reboots on a new setting.

Many religions have their renewal cycle mysteries (look at the Hindu Trimurti as another example) but not many are as violent and as all-encompassing as the Ragnarok. What does it all have to do with oil?

Last year this time, sellers of hydrocarbon products were still flying high when in fact the signs of a market collapse have been on the horizon for years.

Some still believe that oil prices are just taking a short dip and will return to 2013 levels or slightly below that. I beg to look beyond the spreadsheet as there is massive evidence that this lower price world (remember, this is still not dirt cheap) is about to stay for long enough to force sellers to fundamentally rework their position.

Let’s pick the various elements and drivers apart – one after the other – starting with the most important one.

Poppin bubbles ...

Poppin bubbles …

China, the growth hope of the world, is living in a bubble of unprecedented proportions and it has created this bubble over a pretty long time. This bubble needs urgent deflation. No one knows how that can be done safely and it is not easy to say but the Chinese government adds insult to injury by further throwing cheap money at just about anything that promises to keep growth rates above the stratosphere.

It’s time for China to pause and tackle its more fundamental problems of stalling markets, mass joblessness for migrant labor in the hinterland, a grossly inflated state sector that refuses steadfastly to reform and a voracious military that sucks the balance sheet dry.

Cheap energy and a much more balanced labor market in North America have drawn lots of manufacturing this side of the Pacific Ocean and Chinese labor is not exactly the cheapest on the planet anymore. Others have taken over that slot. On the other side, China does not really convince as an incubator for innovation and Chinese design does not really gets customer’s saliva flowing or undies wet.

China tried to mask its woes for years further fueling the fire that inflates the bubble beyond anything seen so far. China needs to take care of its burgeoning population and it also starts to age and mature as a society. It needs to cool down urgently and will hence consume much less energy than the world had anticipated so far.

And to make it all worse for oil sellers – China starts to pursue its own shale strategy not so much because it wants to curb energy imports. That’s important too but shale is a mighty job creation machine and it needs to put its migrant laborers somewhere.

However, the entire planet is still in a process that would have the world economy contract as a whole. For far too long we have confounded the financial economy with the real thing. Financial tricksters can only and always be no more than a meta-layer piggybacking on the real bricks and mortar economy. It needs the real thing as underlying collateral in order to do its Casino business. But the real thing can live nicely without the financial component. We have revered the wrong gods.

For way too long, the numbers jugglers were the all-stars and were met with awe and reverence. This starts to change. The world is still not through the so-called financial crisis, it just cuts into another paradigm of it. There is still much cleaning up to do and this is not going to inflate energy consumption. Besides, the world needs cheaper oil if it wants to get any healthier.

Europe, one more large economic bloc shows strong signs of Japanese disease. Many European countries have exploding debt coupled with aging populations and super-expensive and rigid social systems weighing down on their very weak economies.

It just seems as there is no quick fix to this and many European countries will linger in a state of slow but inexorable decline for more than a decade just as Japan did and still does. Debt is economic growth borrowed from the future. Now it’s adjustment time.

Lets get real again ...

Let’s get real again …

There is still business on the continent but it’s much more different than just 5 years ago. The golden years are over and there is a feeling of gloom that will not easily go away and also does nothing to spur consumption.

Finally on the macroeconomic side, North America has basically disappeared as a buyer of energy and certain commodities will soon be exported in vast numbers to the rest of the world. This gives North America cheap energy to bolster its economies and also profits from exports on top.

You might say now, “but the shale revolution will ebb off as those low oil prices make shale unprofitable”. Saying this means ignoring the fundamental nature of the shale revolution.

Shale is the result of entrepreneurs taking risks and cutting costs to the point where the development of a shale gas or oil well today costs a fraction of what it had cost 10 years ago. And costs will no doubt fall further not least because of the availability of relatively cheap energy for powering those rigs.

The genie is firmly out of the bottle. Just 10 years ago it was considered that high oil prices are unavoidable as the conventional reserves had all peaked and there was a feeling that supply would be finite. Now there is a feeling that supply is infinite and peak oil has been transferred where it always belonged – to the dustbin of dumb ideas.

But if sellers of energy are in for hard times, how coping with that? In the end, they have been pampered like spoilt children for a long time now and still expect that would be buyers kiss the very soil they are walking on. High oil prices have stopped all reform in those countries making them less competitive and most of them are hopelessly dependent on oil income.

Russia, when Putin took over showed healthy signs for a non-oil economy rearing its head and mushrooming. Under Putin, they have gone away and the country seems to have lost its ability to produce anything else than what they can scrape out of their soil that others are willing to pay a buck for. Instead of getting less oil dependent, Russia has become vastly more oil dependent with all the nasty side-effects.

Besides, almost all oil producers base their budget projections on the assumed development of the oil price which means that they plan to spend money according to what they expect to make from their oil sales.

Now the oil price is lower and they are spending vastly more than they earn putting them in a dilemma. Many have bought social peace with copious dollops of money for the people. Take those payments out and there is unrest. They cannot quickly reduce their spending as they are dominated by hope that the price might rise again taking all their problems away. Their problem is that they have no idea why the price might rise again, or stay low and this scares the heck out of them.

It just won’t happen – at least not quickly.

The world does not need some of the oil that is being produced right now and sellers of it should think of other ways to get income. This is no quick fix though and will bring pain and in some cases strive.

It’s already too late. You can only soothe your pain with short-term measures. It won’t take away the fundamental problem of your oil addiction and a world that has clothes that are too big for its own good.

At the end of the Ragnarok, some gods that have survived in the mythical trees will repopulate the earth with two human survivors and the world is set on another cycle. Energy Ragnarok is upon us one of its side effects will be Methanopolis. But this is for another post.

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