Column: Can we now stop worrying about oil prices?

Published: December 2, 2014 3:04:49 AM

The petroleum era, which began in the 1970s, seems to be ending; it is a natural victim of evolving technology

Many years ago, as a young hippie manqué in New York, I found myself at a United Nations Environment Program conference where I was labelled a Luddite by one of the conveners for spouting off some “save the earth” stuff. I had no idea what that meant so I looked it up—this is years before Wikipedia—and learned (slowly) that Ned Ludd was a textile worker in the early 19th century Holland (I think) who tried to sabotage weaving machines by throwing his wooden shoes into the warp of the mechanised looms. He inspired several followers—the Luddites—who were, in short order, led away in chains and tears.

Technology won and, as so ably described by my friend Gopal in a recent article, it always does. The victory may take time but, once the genie is out of the bottle, there’s no turning back. The big trick, though, is to ensure a fair balance between who pays the costs and who gets the benefits of any new technology. This, of course, is about politics, which is why there is so much money influencing politics all over the world.

These thoughts were triggered by last week’s continuing—and possibly accelerating—collapse in the price of oil after the Organisation of the Petroleum Exporting Countries (OPEC) voted to keep production levels unchanged. It appears that the large oil producers have taken a strategic call to suffer the pain of lower prices to try and force the Johnny-come-latelys—the shale oil/gas producers in the US—to their knees. The thinking is that several shale oil deposits will be unprofitable to exploit at $70 a barrel; a much larger number will fail at $50 a barrel; and if the price stayed at or around that level for long enough—how long?—it would result in sharply reduced investment in these alternative exploration initiatives, ultimately leading to lower supply and higher prices.

It all sounds pretty far-fetched to me. First, nobody knows exactly how market prices move. Second, even fewer people know how long is long enough or what price is low enough—let’s also remember that money is almost free these days. In other words, as the old adage goes: markets can remain irrational a lot longer than anyone (including OPEC) can stay solvent.

And solvency is an increasingly critical issue. Non-OPEC Russia, for instance, is already in emergency mode, with the sharply lower oil price exacerbating the pressures created by Putin’s adventurism. Additionally, most large oil producers (including Saudi Arabia) need oil to be north of $100 to balance their budgets. In fact, $50 or $60 oil for, say, three or four years, would play havoc with their budgets, leading to impossible-to-call outcomes.

Perhaps the most important is that sooner or later Saudi/Wahhabi adventurism will have to take a cut, boding wonderfully well for a new Islam that has been trying to express itself ever since the Arab Spring. Oil prices at the time were around $120; and while it may be arcane to find a link between the two, I firmly believe there is. Indeed, a year ago (a more Islamic world—November 2013), I had forecast that “…oil over the next ten years will be lower—and possibly much lower—than the average price over the past ten years, which (Brent) was under $80 a barrel…”
Of course, I have no idea how much lower oil prices will go or for how long they will stay subdued. And the nature of markets ensures that there will be corrections.

However, the nature of technology ensures that this downward pressure will not ease up. Almost by definition, technology constantly evolves, improving itself—recall Moore’s law. Thus, it would seem natural that shale oil extraction technologies, too, will keep improving efficiencies to where they can survive even lower oil prices.

Other technologies, too, are on a tear. For instance, in the US, wind energy already provides nearly 5% of US electricity demand and, according to the National Renewable Energy Laboratory, the contiguous United States has the potential to generate onshore wind power that is nine times larger—you read that correctly—than current US total electricity consumption. Solar, while growing more slowly, is another important alternative. And then there are hydrogen-powered cars, the Tesla (which is already a reality) and who knows what other techno-wonders, all of which will continue to structurally reduce demand for oil.

More and more it appears that the petroleum era, which began in the 1970s and during which oil prices drove a lot of thinking, seems to be ending, a natural victim of evolving technology.
Allahu Akbar!

By Jamal Mecklai
The author is CEO of Mecklai Financial

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