The world jockeys for oil. From Tom Luongo at tomluongo.me:
Energy Dominance should be the catchphrase of the day. It’s on the minds of every political figure, and the focus of every economy.
This is especially true of those vulnerable to a change in the status quo, namely Saudi Arabia.
While some continue to believe the gyrations of the oil market over the past few months are evidence of our running up against the limit of the petroleum based global economy, I disagree.
The world is awash in decades of easily-extracted oil and gas. The supply of it has been kept off the market due to its centrality in the grand game of geopolitics. But, it has nothing to do with the amount of oil and gas out there.
Peak oil has become a religion among its adherents. Decrying the U.S. shale boom, rightly, for its profligacy has more to do with it being a consequence of disastrous central bank inflation rather than some grand plan of the ‘cabal’ because we passed peak EROEI some time ago.
When you drop interest rates to zero and flood the world with liquidity that can only find a home in equity markets, the natural result is malinvestment into unsustainable business practices.
The first wave of the shale boom in the U.S. occurred during this period and created the dynamic we have today. It’s groundwork was laid when oil prices spiked during Greenspan’s post-9/11 reflation and the Iraq War took a lot of marginal supply off the table.
That sparked a gold rush mentality and a huge boom occurred as oil prices kept rising after “Bernanke saved the world” with trillions in liquidity and multiple rounds of QE.
Properties were bought based on sky-high valuations which were the result of searching for yield in a yield-free world.
Does anyone think fracking would have happened post-2008 with the 10 year at 6%? If so, then you are, frankly, a religious fanatic.
Once the financial juice runs out the bust occurs. Financing costs are always the story with the pigs at the easy money trough. But, that’s the same in any industry. It doesn’t mean the oil isn’t there or extractable at prices which are relevant.
But, much of the second wave of fracking has removed a lot of that financial froth. Liquidation of the first wave means a lot a the unconventional wells in Eagle Ford and the Permian are being fracked profitably at $35 to $45 per barrel or, in some cases, lower.
Sure, there are still plenty that are not. But, no new well goes into production today without using plug and perf, which results in more oil over a longer period of time with a much lower initial rate.
Multhusians come in many forms, including adherents to Peak Oil. It’s nothing new. It’s simply people who falsely apply linear models to cyclical processes that the market understands implicitly and compensates for through investment in new technologies.
So, the Peak Oil crowd kept thinking it was rising EROEI and the world would crash because of it. But oil prices cannot be analyzed in the vacuum of the Gibbs Free Energy Equation. I wish it could be.
Oil is political. And artificial restrictions on supply are part and parcel of what we euphemistically call foreign policy.
That’s why everyone is playing the Energy Dominance game. Russia and Germany are playing it over Nordstream 2, the pipeline that will guarantee German industry cheap gas and Germany some secondary political leverage to countries defying her edicts within the EU, namely Poland.
Poland is playing that game by trying to stop Nordstream 2, cozy up to the U.S. and Donald Trump (who loves the flattery) while refusing to negotiate with Russia.
The Saudis continue to try and wriggle out of the trap of their own devising, by trying to sell bigger, better OPEC to Russia while trading an alliance with Israel for long-term protection from the U.S.
India and Turkey dance around U.S. sanctions by defying the U.S. over Iranian sanctions and horse-trading for other concessions.
Even eastern Europe realizes that they have to play their part in this game if they are going to survive. Bulgaria just green-lighted a spur off the Turkstream pipeline which crosses Serbia. Serbia is ready to begin construction next month.
Hungary is also part of that discussion while they actively court Exxon-Mobil to develop assets in the Black Sea off the Romanian coast.
Trump’s Energy Dominance plan is predicated on keeping control of the flow and pricing of oil around the world. This is why he’s meddling around in Venezuela, a project more than twenty years in the making by the U.S. but which he philosophically agrees with.
He has no ability to stop the drive within our government to keep the Middle East a powder keg because Israel acts as if peace is an existential threat.
But none of that will change the trend that now dominates, which is that the U.S., despite Trump’s spastic flailing about, is losing control of the world’s oil pricing. From the petroyuan contract in Shanghai to the strong relationships Russia is building across Europe and Asia there is little the U.S. can do that it already hasn’t done to alter this trend.
Every day we see small instances of defiance. From Iran creating a gold-backed cryptocurrency to transact oil business outside of the U.S. dominated SWIFT system to the EU’s flawed but symbolic INSTEX vehicle to keep trade relations between Europe and Iran open.
But, the biggest slap to Trump is Germany’s insistence on the Nordstream 2 pipeline. Under Angela Merkel Nordstream 2 is a purely EU-centric project, designed to strengthen Germany and weaken the rest of Europe by bypassing Ukraine.
But in the larger picture it is the watershed moment where Germany begins throwing off the yoke of the post-WWII institutional order created and maintained by the United States and the U.K.
Nordstream 2 will likely outlive the European Union and maybe even the U.S. itself. It will certainly outlast Trump. And the energy it provides will be the means by which Europe will make the choice between its neighbors to the east or its overlords to the west.
For 2019, oil will be trapped between the political flux of Europe, the paralysis of Washington D.C. and the comeuppance of putting off the effects of the 2008 financial crisis for eleven years.
With the Fed punting on normalizing rates to placate the market you can expect the shale drillers to go right back to the trough of low debt and low equity cost of capital. It won’t do them any good in the long run but it’ll keep their personal ponzi schemes running a little while longer.
But that too will come to a bad end as the political promises of the past two generations catches up with the reality of what they actually cost. And then we’ll find out who truly dominates the energy markets.