GWPF | 17 Dec 2014
The collapsing oil price that is reshaping the global economy could derail the green energy revolution by making renewable power sources prohibitively bad value, experts have warned. A new “era of cheap oil” would be good news for consumers and motorists – but analysts say the consequences for politics, industry and the climate could be even more radical. The ripple effects could help the Conservatives to remain in power at next year’s general election by making voters feel richer as bills fall – while hurting Scotland’s oil-reliant economy and setting back its campaign for independence. –Tim Bawden, The Independent, 12 December 2014
The biggest threat posed by falling oil and gas prices – in the UK and globally – is to the renewable energy industry dominated by wind-, solar- and hydro-power, experts say. “Renewable energy subsidies have been mostly sold to the public on the basis of the economic benefits,” said Peter Atherton, an energy analyst with Liberum Capital. “But the economic arguments hinged on the idea that fossil fuel prices would get more expensive, while expensive renewable subsidies would be able to come down over time. That’s looking doubtful now.” –Tim Bawden, The Independent, 12 December 2014
1) New Era Of Cheap Oil ‘Will Destroy Green Energy Revolution’ – The Independent, 12 December 2014
2) Russia Risks Soviet-Style Collapse As Rouble Defence Fails – The Daily Telegraph, 16 December 2014
3) John Hulsman: Putin’s Disaster Economy Now Faces A Perfect Storm – City A.M., 17 December 2014
4) Putin’s Pyrrhic Victory: Chevron Pulls Out Of Shale Project In War-Torn Ukraine – Financial Times, 15 October 2014
5) This Little History Lesson Should Terrify Vladimir Putin – Yegor Gaidar, The Soviet Collapse, AEI 13 November 2006
6) Winners And Losers Of The Oil Price Plunge – Financial Times, 16 December 2014
The world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production, a leading energy economist has warned. Dr Fatih Birol, the chief economist at the respected International Energy Agency (IEA) in Paris, said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated. –Steve Connor, The Independent, 3 August 2009
Suddenly the world is awash with oil. A surprise surge in production and weaker than expected global demand for crude have sent oil reserves soaring and prices tumbling. The scale of the current oil shock is difficult to exaggerate. While financial markets and commentators were obsessed by rising geopolitical tensions and the latest twists in central banks’ policies in the US, Europe and Japan, even larger forces in oil markets went largely unnoticed. –Chris Giles, Financial Times, 16 December 2014
Russia has lost control of its economy and may be forced to impose Soviet-style exchange controls after “shock and awe” action by the central bank failed to stem the collapse of the rouble. “The situation is critical,” said the central bank’s vice-chairman, Sergei Shvetsov. “What is happening is a nightmare that we could not even have imagined a year ago.” –Ambrose Evans-Pritchard, The Daily Telegraph, 16 December 2014
Vladimir Putin is surely receiving his long-awaited comeuppance, as his country struggles to deal with a full-blown currency rout, driven by plunging oil prices. For if the US and Saudi Arabia are indeed in cahoots to drive down the price of oil to smite their Russian enemy, one must admit they are good; very, very, good. But the Saudis – economically powerful as they are – could not put the squeeze on the Kremlin alone. America’s shale revolution has given the US yet another geopolitical weapon. By the end of November 2014, US oil production had expanded to 9.08m barrels per day, the fastest rate the country has seen since 1983, at the height of the Reagan boom. By coming from nowhere to emerge as a co-equal of the Saudis in terms of production, the Americans have triggered the saturation of the oil market, just as the Saudis have refused to mitigate these effects. It is this one-two punch that now threatens the very survival of the Kremlin. –John Hulsman, City A.M., 17 December 2014
US energy giant Chevron has told Ukraine that it will pull out of a $10bn shale gas exploration project agreed last year, officials said, in a further blow to the country’s war-torn economy and its hopes for an alternative to Russian gas imports. The cancellation comes months after Royal Dutch Shell, which also signed a multibillion-dollar production sharing agreement last year, froze shale gas exploration in eastern Ukraine amid fighting between government forces and Russian-backed separatists. The cancellation of the shale gas projects is “darkening an already dark picture,” said Ukrainian economist Andriy Novak. –Roman Olearchyk, Financial Times, 15 October 2014
The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms. As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive. –Yegor Gaidar, Russia’s former Prime Minister, AEI, 13 November 2006
1) New Era Of Cheap Oil ‘Will Destroy Green Energy Revolution’ The Independent, 12 December 2014
Tim Bawden
The collapsing oil price that is reshaping the global economy could derail the green energy revolution by making renewable power sources prohibitively bad value, experts have warned.
Oil tumbled below $60 a barrel for the first time in more than five years yesterday – a fall of 44 per cent since June. It is forecast to fall further.
A new “era of cheap oil” would be good news for consumers and motorists – but analysts say the consequences for politics, industry and the climate could be even more radical.
The ripple effects could help the Conservatives to remain in power at next year’s general election by making voters feel richer as bills fall – while hurting Scotland’s oil-reliant economy and setting back its campaign for independence.
The falling prices could damage the North Sea and fledgling fracking industries and make it harder for the UK to hit its legally binding targets to cut carbon emissions. But the biggest threat posed by falling oil and gas prices – in the UK and globally – is to the renewable energy industry dominated by wind-, solar- and hydro-power, experts say.
“Renewable energy subsidies have been mostly sold to the public on the basis of the economic benefits,” said Peter Atherton, an energy analyst with Liberum Capital. “But the economic arguments hinged on the idea that fossil fuel prices would get more expensive, while expensive renewable subsidies would be able to come down over time. That’s looking doubtful now.”
Anne Robinson, director of consumer policy at the uSwitch price comparison website, said: “More subsidies are likely to be needed [for green power] as the gap between the cost of fossil fuel power and renewable power gets bigger.” The extra subsidies would be borne by households in the form of higher energy bills.
Green energy technologies such as solar and wind had been banking on sharp increases in fossil fuel prices to make them increasingly competitive and help to attract the huge amount of investment required to build renewable power plants. But that “economic case” is now in danger of being lost, with the environmental argument seen by many as being insufficient to drive through high levels of green energy investment.
Full story
2) Russia Risks Soviet-Style Collapse As Rouble Defence Fails The Daily Telegraph, 16 December 2014
Ambrose Evans-Pritchard
Russia has lost control of its economy and may be forced to impose Soviet-style exchange controls after “shock and awe” action by the central bank failed to stem the collapse of the rouble.
“The situation is critical,” said the central bank’s vice-chairman, Sergei Shvetsov. “What is happening is a nightmare that we could not even have imagined a year ago.”
The currency crashed to 100 against the euro in the biggest one-day drop since the default crisis in 1998 as capital flight gathered pace, despite a drastic rise in interest rates to 17pc intended to crush speculators and show resolve.
Yields on two-year Russian bonds spiralled to 15.36pc, while credit default swaps are pricing in a one-third chance of a sovereign default. The shares of Russia’s biggest lender, Sberbank, fell 18pc.
Neil Shearing, from Capital Economics, said the spectacular failure of the rate shock may bring matters to a head. “If a rise of 650 basis points won’t do the job, we are near the end. That means stringent capital controls,” he said.
Michal Dybula, from BNP Paribas, said the rouble’s plunge risks setting off a systemic bank run. “A large-scale run on deposits, once under way, would make capital controls pretty much unavoidable,” he said, adding that the authorities may start by forcing state-controlled companies to sell foreign assets and repatriate funds.
In Washington, the White House said it had no intention of easing pressure on Russia to halt the freefall. “It is president Vladimir Putin’s decision to make. The aim is to sharpen the choice that he faces,” it said.
Full story
3) John Hulsman: Putin’s Disaster Economy Now Faces A Perfect Storm
City A.M., 17 December 2014
VLADIMIR Putin is surely receiving his long-awaited comeuppance, as his country struggles to deal with a full-blown currency rout, driven by plunging oil prices. For if the US and Saudi Arabia are indeed in cahoots to drive down the price of oil to smite their Russian enemy, as I have previously posited, one must admit they are good; very, very, good. Certainly, the Saudis seem content to let the price of Brent crude fall off the map without propping it up. Yesterday, it slid to $58.91 a barrel, putting it below $59 for the first time since May 2009. Since June of this year, oil prices have tumbled by nearly half, with the oil weapon wreaking havoc.
While others, like terminally mismanaged Venezuela, are also feeling the pain from this precipitous decline, the first and most vulnerable target is Moscow. Putin is wearing a bull’s eye around his neck, as far as the Saudis and Americans are concerned, due to his annexation of Crimea, brutal adventurism in Ukraine, and steadfast support for the murderous Assad regime in Syria. And by allowing oil to slide, at last his adversaries have handed the seemingly untouchable Russian President a butcher bill for his actions.
Even before the present rouble crisis, Russian finance minister Anton Siluanov forthrightly stated that western economic sanctions – imposed over Ukraine – would cost the economy around $40bn per year, with the falling oil price accounting for another $100bn loss. And Putin only recently signed the Russian Federal budget for the next three years, basing his spending plans on an oil price of around $100 a barrel. The Russian Central Bank estimates that the economy as a whole stands to shrink by up to 4.7 per cent next year if the oil price remains at $60. As oil and gas account for an overwhelming 70 per cent of the country’s exports, this truly is the golden stake aimed straight at the Russian vampire’s heart. And if oil falls as low as $40 per barrel, as the United Arab Emirates’ energy minister recently suggested could happen, the results could be truly calamitous for Russia.
But the Saudis – economically powerful as they are – could not put the squeeze on the Kremlin alone. America’s shale revolution has given the US yet another geopolitical weapon. By the end of November 2014, US oil production had expanded to 9.08m barrels per day, the fastest rate the country has seen since 1983, at the height of the Reagan boom. By coming from nowhere to emerge as a co-equal of the Saudis in terms of production, the Americans have triggered the saturation of the oil market, just as the Saudis have refused to mitigate these effects. It is this one-two punch that now threatens the very survival of the Kremlin.
For things are moving quickly. At the minimum, the Saudi-American cabal – when tied to the West’s in-the-end forceful enough sanctions – have exposed Russia to a world of hurt.
Full post
4) Putin’s Pyrrhic Victory: Chevron Pulls Out Of Shale Project In War-Torn Ukraine Financial Times, 15 October 2014
Roman Olearchyk
US energy giant Chevron has told Ukraine that it will pull out of a $10bn shale gas exploration project agreed last year, officials said, in a further blow to the country’s war-torn economy and its hopes for an alternative to Russian gas imports.
Valery Chaly, deputy head of Ukraine’s presidential administration, on Monday said he had received “signals” the company wanted to withdraw from the strategically important project.
While Mr Chaly stressed that Kiev was keen to continue negotiations, Chevron said in a statement that it was “premature for us to comment,” adding “we have just delivered to the government of Ukraine our response”.
The cancellation comes months after Royal Dutch Shell, which also signed a multibillion-dollar production sharing agreement last year, froze shale gas exploration in eastern Ukraine amid fighting between government forces and Russian-backed separatists.
The agreements with Shell and Chevron were hailed as game-changing opportunities to unlock Ukraine’s potentially large shale gas reserves and break Kiev’s dependence on costly Russian fuel imports.
Ukraine had also been hoping to attract western investment and knowhow to explore potentially large untapped hydrocarbon reserves off the coast of Crimea before Russia annexed the peninsula in April.
“With oil prices falling, not so great geological findings in nearby countries coming in and Ukraine country risk surging with the war as well as economic instability, it is clear now that the much hoped for shale gas boom and associated multi-billion-dollar investments will not materialise,” said Ukrainian energy analyst Dmytro Marunich.
Chevron lost interest in the western Ukraine shale exploration project after findings in nearby Poland and Lithuania with similar geology showed worse than expected reserves, said a person with knowledge of the situation. Unresolved tax issues also played a role.
The person said Shell was likely to continue “preparations” for its project but exploration would not proceed until fighting in the breakaway regions of eastern Ukraine had stopped and there was clarity over their future status.
Chevron’s decision is another blow for a Ukrainian leadership that rose to power through last winter’s Maidan revolution on promises to break from Moscow and integrate more closely with the EU.
The cancellation of the shale gas projects is “darkening an already dark picture,” said Ukrainian economist Andriy Novak.
Full story
5) This Little History Lesson Should Terrify Vladimir Putin Yegor Gaidar, The Soviet Collapse, AEI 13 November 2006
[…] The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms. As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive.
The Soviet leadership was confronted with a difficult decision on how to adjust….Instead of implementing actual reforms, the Soviet Union started to borrow money from abroad while its international credit rating was still strong. It borrowed heavily from 1985 to 1988, but in 1989 the Soviet economy stalled completely. The money was suddenly gone. The Soviet Union tried to create a consortium of 300 banks to provide a large loan for the Soviet Union in 1989, but was informed that only five of them would participate and, as a result, the loan would be twenty times smaller than needed.
The Soviet Union then received a final warning from the Deutsche Bank and from its international partners that the funds would never come from commercial sources. Instead, if the Soviet Union urgently needed the money, it would have to start negotiations directly with Western governments about so-called politically motivated credits. In 1985 the idea that the Soviet Union would begin bargaining for money in exchange for political concessions would have sounded absolutely preposterous to the Soviet leadership. In 1989 it became a reality, and Gorbachev understood the need for at least $100 billion from the West to prop up the oil-dependent Soviet economy.
….Government-to-government loans were bound to come with a number of rigid conditions. For instance, if the Soviet military crushed Solidarity Party demonstrations in Warsaw, the Soviet Union would not have received the desperately needed $100 billion from the West….The only option left for the Soviet elites was to begin immediate negotiations about the conditions of surrender. Gorbachev did not have to inform President George H. W. Bush at the Malta Summit in 1989 that the threat of force to support the communist regimes in Eastern Europe would not be employed. This was already evident at the time. Six weeks after the talks, no communist regime in Eastern Europe remained.
6) Winners And Losers Of The Oil Price Plunge Financial Times, 16 December 2014
Chris Giles
Suddenly the world is awash with oil. A surprise surge in production and weaker than expected global demand for crude have sent oil reserves soaring and prices tumbling.
The 40 per cent drop in the oil price to around $60 a barrel since June is by far the biggest shock for the global economy this year. Similar episodes in the past tell us the consequences are likely to be both profound and long lasting. Normally, economists would add “positive” to this list, but doubts are surfacing as never before.
The scale of the current oil shock is difficult to exaggerate. While financial markets and commentators were obsessed by rising geopolitical tensions and the latest twists in central banks’ policies in the US, Europe and Japan, even larger forces in oil markets went largely unnoticed. As late as October, a “key concern ” of the International Monetary Fund was the risk of an oil price spike caused by geopolitical tensions. Instead, rising production and weaker demand growth have left suppliers competing to find willing customers.
Rich country stocks of crude oil have defied the onset of the northern hemisphere winter and risen to their highest level in two years, according to the International Energy Agency. West Texas Intermediate crude oil prices dropped from more than $100 a barrel in June to less than $60, with the European Brent oil prices following the same downward path. Even a slight uptick yesterday cannot disguise the downward trajectory of the price.
Rather than geopolitical tensions in Ukraine and Iraq causing an oil shortage and price spike, as foreseen in the IMF scenario, the causality is flowing from economics to politics. The plunge in oil prices now threatens Russia’s living standards and public finances to the point where it will start 2015 as a devalued and belligerent nation with nuclear weapons. In the Middle East, the funds to finance vicious conflicts in Iraq and Syria face greater pressures, which promise to stretch all sides. And the US is less likely to want to play global policeman now that it can satisfy almost 90 per cent of its energy needs from domestic sources, up from 70 per cent as recently as 2005.
In normal times, the broad effects of the oil price drop on the global economy are well known. It should act as an international stimulus that will nevertheless redistribute heavily from oil producing countries to consumers and the longer the new prices endure, the more profound will be the effects on the structure of industries across the world.
But this time, economists are actively debating whether the world has changed and other moving parts — such as falling inflation levels and the strong dollar — will throw sand into the works of the usual economic relationships.
But when oil prices fall, there is no iron law that enhances global economic growth. The main effect is a huge redistribution from oil producers, who receive less for the effort of extracting the black gold, to consumers who benefit from cheaper transportation and energy, enabling them to spend more money on other goods and services or to save their windfall.
Full story
