Motherboard - Nafeez Ahmed
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| Skimming oil in the Gulf of Mexico during the Deepwater Horizon oil spill. Image: NOAA/Flickr |
The future is not good for oil, no matter which way you look at it.
A
new OPEC deal designed to return the global oil industry to
profitability will fail to prevent its ongoing march toward trillion
dollar debt defaults, according to a new
report published by a Washington group of senior global banking executives.
But
the report also warns that the rise of renewable energy and climate
policy agreements will rapidly make oil obsolete, whatever OPEC does in
efforts to prolong its market share.
The six-month supply deal brokered with non-OPEC members, including Russia, could
slash global oil stockpiles
by 139 million barrels. The move is a transparent effort to kick prices
back up in a weakening oil market where low prices have led industry
profits to haemorrhage.
The Organization of Petroleum Exporting
Countries (OPEC), whose members include major producers from Saudi
Arabia to Venezuela, have been hit particularly badly by the weak oil
market. In 2014, OPEC had a collective surplus of $238 billion. By 2015,
as prices continued to plummet, so did profits, and OPEC faced a
deficit of $100 billion.
The immediate impact of the deal was a 4
percent price rally that saw Brent crude (the benchmark price for
worldwide oil prices) rise to $56.64, its highest since mid-July. But
according to Michael Bradshaw, Professor of Global Energy at Warwick
Business School, a price hike would not solve OPEC’s deeper problems. In
fact, it could speed up the transition away from oil.
As oil gets more expensive again, there is more incentive to use alternative, cheaper forms of energy.
“The
current agreement is only for 6 months and decisions about investment
in oil and gas are based on a 20 to 30 year view of future demand,”
Bradshaw told me. “On that time scale, none of the uncertainties are
addressed by the current agreement and oil exporting states need a
strategy beyond achieving a short-term agreement on production—they need
to start preparing for a world after fossil fuels.”
As oil gets
more expensive again, there is more incentive to use alternative,
cheaper forms of energy—like solar photovoltaics, which can now
generate more energy than oil for every unit of energy invested.
“They
will also incentivise more unconventional oil production that will
challenge OPEC production. Clearly there is a balance to be struck and
it is not a return to $100 a barrel,” Bradshaw said.
He warns
that higher prices might kick-start US tight oil production, which would
increase competition with OPEC, making the production cut agreement
moot. They also might add “inflationary pressures in the economy” that
could prolong sluggish economic growth. Both factors could end up
keeping prices lower than OPEC wants.
“We are not in a business as
usual world,” Bradshaw said. “Higher prices for oil and gas will drive
investment in efficiency and demand reduction and also substitution, so
they may actually promote structural demand destruction.”
It’s not just OPEC that needs to be prepared. A
report
published in October by the Group of 30 (G30), a Washington DC-based
financial advisory group run by executives of the world’s biggest banks,
warns investors that the entire global oil industry has expanded on the
basis of an unsustainable debt bubble.
The oil industry’s long-term debts now total over $2 trillion.
G30’s
leadership includes heads and former chiefs of the European Central
Bank, JP Morgan Chase International, and the Bank for International
Settlements.
The industry’s long-term debts now total over $2
trillion, the report concludes, half of which “will never be repaid
because the issuing firms comprehend neither how dramatically their
industry has changed nor how these changes threaten to soon engulf
them.”
The report is authored by Philip Verleger, a former
economic advisor to President Ford who went on to head up the US
Treasury’s Office of Energy Policy under President Carter, and Abdalatif
al-Hamad, Director General of the Arab Fund for Economic and Social
Development.
Its main finding is that permanent shifts in global
energy markets will inevitably overwhelm oil companies, along with all
economies which depend primarily on fossil fuel production. The attempt
to rally prices, the report confirms, is a somewhat futile effort to
avoid a major debt crisis by lifting revenues.
But it won’t work
because the global oil industry is in denial about the bigger trends
disrupting energy markets as we know them. Oil majors, the report says,
are holding on to a number of fatal delusions.
They believe that
the oil price decline is “transitory”; that oil consumption will grow
despite ongoing economic stagnation; that the industry will be magically
immune to public and policy demands to reduce greenhouse gas emissions;
that technological progress will never be able to “displace fossil
fuels such as oil”; and, finally, that fracking will not produce enough
supply to undermine OPEC’s market monopoly.
Oil majors, the report says, are holding on to a number of fatal delusions.
But
if these assumptions are wrong: “They represent an ossified industry
that will gradually fade away [and] hundreds of billions if not
trillions in debt issued by these firms and countries may never be
repaid.”
So what’s the alternative? Instead of tinkering with
production quotas, Bradshaw said: “They [oil producing countries] should
also be promoting greater energy efficiency and renewable energy in
their domestic economies to preserve their exportable surplus as some
will struggle otherwise due to rapidly increasing domestic demand.”
To its credit Saudi Arabia’s Vision 2030 plan is a step toward this. But a
HSBC research note in May found that the plan would not do enough to avoid the kingdom entering “a protracted period of marked economic decline.”
In
the meantime, a trillion dollar collapse in the oil market is coming
because oil simply cannot compete with new energy technologies. If
Bradshaw is right, then OPEC’s efforts to 'shock' the markets into
boosting prices are only going to prolong the fossil fuel pain.
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