Oil surges like a damp firework

Despite some very good reasons why it should rise in price, the oil price is slumping again, and some are forecasting much bigger falls to follow.

Article updated: 26 September 2019 2:00pm Author: Michael Baxter

When news of the drone attack on the Saudi Arabian oil sites broke, there was an expectation of a surge in the oil price. The US seemed determined to find a reason to go to war with Iran, in normal circumstances this would be classic conditions for an oil bull market.

A week or so on, the oil price is down. Brent Crude oil is at $62.30 a barrel as at 7.01am BST 26 September. It’s down around $7 since the attack, it is some $12 off the 2019 peak set in April. It is only slightly over half the price seen in 2011, and much less than the peak price in 2008. Look at West Texas crude oil, and it’s a similar story.

To add salt into the wound — the wound from the point of view of oil investors — recently, IHT Markit put out a report predicting that the price of natural gas was set to fall to its lowest level since the mid 1990s, and after allowing for inflation, the lowest level since the mid 1970s.

Usually, the oil cycle is a good forecaster of when the economy might turn. Normally, the oil price is a key driver of the economy. When oil is cheap, the economy booms. A booming economy forces the oil price up, once the oil price reaches a certain level, households are hit, they rein in spending and the economy either slows or falls into recession.

The fact that oil moved close to $150 pre the 2008 crash is an often forgotten partial cause of that crash — high oil prices hit household finances, US house prices fell, mortgage debt proved unsustainable.

But ever since the mid years of this decade when the oil price fell, things have looked different. During the period from 2015 to the end of 2018, the global economy seemed strong, but the oil price remained subdued.

Now the economy is slowing. Even the measure that has remained upbeat throughout all the turmoil of last year, US consumer confidence, has seen a big drop — the Conference Board measure is down from 134.2 in August to 125.1.

The superficial reason for oil’s refusal to rise is not difficult to find. Shale gas has introduced a new dynamic, keeping a lid on the oil price.

But climate change is the thing to watch. Greta Thunberg continues to make friends and enemies — I really don’t understand the antagonism to her, now the evidence of human made climate change is overwhelming, deniers (or delayers) should be hanging their heads in shame. Instead they find every reason possible to discredit her. The latest attempt is to ask why she doesn’t criticise China. Such simplistic nonsense. China is perhaps the world’s biggest investor in renewables, and while an inevitable result of China’s catchup with the West has been high consumption of carbon fuels, truth is, when you compare the cumulative contribution made by China to total carbon dioxide emissions worldwide with the Western contribution, it is small.

In the US, Democrat Alexandria Ocasio-Cortes pushes the green new deal, an idea that has support from most, if not all, democrats running for nomination to be the party’s candidate for the office of US President.

Surveys show that most Americans disagree with President Trump’s approach to climate change. And as the reality of climate change hits home, popular pressure for governments to act will grow.

In the UK, hopefully, this country will soon come to its senses, and set aside divisions over Brexit, the majority of which leverage off lies, and worry about things that really do matter, like the future of our species.

Given this, I don’t see how the oil industry in any form that remotely resembles its present strength has much time left.

We may see one more big spike in the oil cycle, before the oil industry becomes a minor sideshow, but I doubt it will even manage that.

PS. I was asked to explain recent comments I made about supercapacitors. The two big problems with lithium ion batteries are that it takes time to charge them up, and limited longevity. Supercapacitors can be charged up almost instantaneously and can, or so I understand, be re-charged an almost unlimited number of times. But they have poor storage. The storage capacity is a function of the supercapacitors’s surface area to mass. Graphene has the potential to be a superb supercapacitor and one gram has the same surface area as a tennis court. I can foresee hybrid electric cars consisting of a lithium ion battery and a graphene based supercapacitor. The supercapacitor could be recharged from smart roads, while it is waiting at traffic lights, for example, and would be sufficient for all shorter journey. Most car journeys are indeed over shorter distances — say 25 miles or less. The lithium ion would takeover for longer journeys. Such a hybrid would, in my view, give an electric car a much longer lifetime. Remember, electric cars have less moving parts than petrol cars, it’s the lithium ion battery which limits the electric car’s lifetime. Such a hybrid would be transformative, greatly reducing the lifetime cost of an electric car and its cumulative carbon footprint.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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