The Paradigm Shift
Business news provider Bloomberg, November 14, cited a Tass interview in which Vladimir Putin says that Russia is prepared for “catastrophic falls” of world oil prices and export revenues – on a day when Nymex oil market players and manipultors engineered a classic “sucker’s rally” with a one-day 2.5% jump in Brent and WTI prices! Putin is unlikely to be fooled by that rally and Russia, like China has been making very large gold purchases as an insurance policy on likely or probable major currency upheavals, in Russia’s case including intensified attacks in the present “war on the ruble” to punish its support for rebels in eastern Ukraine.
To be sure, lower oil prices and export revenues will also cut petrodollar inflows to Saudi Arabia at the same time, hindering the Wahabite Kingdom’s previously reliable funding of rebels fighting in the Syrian war slaughterhouse, but depriving Russia of oil revenues is now a major goal of several OECD-country leaders. The OECD’s “oil watchdog agency”, the IEA has to reflect the goal of its masters but the IEA’s delayed response after 30% of the dollars fell off the barrel price in the past 3 months was surprising. The Agency has been forced to temporarily shelve its constant forecasting of “oil at $150 a barrel” and readers of its Oil Market reviews and world energy summaries may temporarily see a little less of the Agency’s creative writing output designed to bolster oil prices.
When it was founded as the “OECD oil watchdog” immediately after the 1973-1974 Oil Shock’s 350% price hike, on an “initative” or rather kneejerk reaction by Nixon and Kissinger, the IEA’s official mission was to bring prices back to the $2 a barrel range they were pegged at before 1973. That was the Nixon-Kissinger led, official OECD-wide reaction to the oil shock, but anticipating it in 1972, the same pair of US politicians secretly set the petrodollar recycling deal, only with Saudi Arabia, that still spills ink today. And the $2 peg has moved on a little – or a lot. Today, media coverage of the slump in oil prices features a supposed $80 a barrel “price peg” for Brent as a newsworthy feature spurring the question if or whether market minders and manipulators can push it back above $80 ? Compared to gold’s massive price slump since 2011, oil is trailing by a large margin. We can conjecture what Mr Putin means by “catastrophic” falls in oil prices.
IEA Doctrine of High Priced Oil
The IEA mutated into an outrigh shill for high=priced oil as far back as 2009, or even before. We can presume it found that overpriced oil fits well with its general paradigm shift to Global Warming Doom, claiming that the consumption of all fossil fuels, of all kinds, must be set on a tightly planned international schedule for total elimination “by the end of the century”. Or even before that – some of its publications say it should be wiped out by around 2075, with absolute zero growth of fossil energy demand by at latest 2040..Conversely and very recently, the IEA has become “shale friendly”, treating shale gas and oil as as a “bridging fuel”, and to a slight extent has toned down its fantastic bias in favor of nuclear power.
The IEA doesn’t tell us what the oil price would or might be at that time, around 2075-2099 but since world oil demand would finally be zero we could suggest the right price will be zero US cents per barrel! Before that, the IEA fairy story goes on, higher oil prices will grease the wheels of massive and carefully chosen market-led investment in non-fossil energy.
Riding on Overpriced Oil
As we know, the low carbon energy investment plays of “the market”, in the past decade, have very often been disastrous – for example the global boom-slump in solar PV production, which for the moment and provisionally has been won by China but at fantastic cost to the state in bailouts and forced restructuring of non-performing enterprises. The IEA’s flimsy energy transition goals will never be met by this asset playing game, with or without $150 oil.
Asset creation and inflation, for and in the oil sector and by spillover in a range of niche parts of the energy space is a long way behind the exact same process operating since 2008-2009 for Apple, Amazon, Facebook, Whats App and other stars of delirious asset over-valuation, but high priced oil was (or is) a major player in the playtime future economy which does not exist. One of the biggest spillovers has been, and is the outright dependence of revenues from overpriced oil to prop the finances of the state of almost any major producer country. Kick away that prop, and we can say goodbye to G-20 chatter about “two percent extra growth”. In the case of oil, keeping its price sky high is openly described by the IEA as helping permit and enable so much energy investment, good or bad or neiher, that its goal of eliminating all fossil energy becomes vaguely credible.
The Agency’s publications carefully steer away from the debt-based financial hole which the US natural gas sector has dug for itself – and prefers to talk about the technological triumph of shale gas instead of its financial disaster of greed, confusion and self-delusion. The outright financial (as well as national security) disaster of nuclear power never darkens a page of any IEA report or study. In the case of US shale gas, though you would never know this from any IEA publication, for at least the past 4 years gas producers live with the hope that oil prices can go on growing and by strange magnetic influence, this will pull up US domestic gas prices. They also are totally dependent on “free finance” at extreme low interest rates, enabling them to use debt to produce even more gas – and drive the gas price lower! Never mind that in fact the USA’s oil and gas markets are almost firewall-separate and different gambling arenas. For years, higher oil prices was the no brainer easy bet, while lower US domestic gas prices was the same easy bet.
Proving there is no such thing as a “global energy market”, even for oil but especially for gas, overpriced natural gas in Europe and Asia made it seem a nice idea to bet on extreme high-priced assets in LNG. The Australian LNG boom-bust is a useful cautionary tale. The now vastly overheated Mozambique and Tanzania gas plays could go the same way, all of them based on the fundamental cargo cult belief that world gas prices would move up to European-Asian levels, and would never move down twards US doestic price levels.
Using the IEA as a surrogate or outlet for OECD leadership thinking (if we can use that word) on energy transition, climate change, oil prices, and relations with oil exporter countries we are forced to accept that $150 oil is totally acceptable or even sought after by these leaders. This in itself is a revolution – the 1991 Kuwait liberation war against Iraq was steamrolled through the press and media as needed because oil prices had reached “as high as $45 a barrel”.
Today, massaging oil prices towards the joint goal of Goldman Sachs and the IEA – $150 oil – looks like it has been shelved, but I suggest this is only temporary. To be sure, the timeframe for getting over and through a “downward blip” in prices, needed to sort out Vladimir Putin even if it harms Saudi Arabia, may be a few months or even a few years but Goldman Sachs, Bloomberg, and the financial “community” in general is in favor of renewable energy, urban bicycle paths, driverless cars and low carbon limousines, all of them needing overpriced oil to rationlize and justify an epic spending spree ob “energy transition”. Much more prosaically and right now, nearly all major (and some minor) oil exporter countries need $100 oil to prevent a debt spiral engulfing their economies. One wished-for example is Russia, and one unwanted example is Iraq.
Conspiracy theorists will have no problem explaining the recent oil price crunch to the number of Russian armored columns entering eastern Ukraine, for example. The apparent major logistic, military and political problems for doing anything serious about the ISIS or ISIL cancer in the Middle East and North Africa, can when wanted be tied to the Islamic terrorists selling their stolen oil at $33 to $40 a barrel, supplying fantastic profits for the upstream operators of this scam.
However the big picture is that for several decades, not one-only, oil has been slipping as a provider of world energy and will soon be overtaken by coal as No 1 – and this isn’t difficult to link with oil being usually overpriced as well as etxremely volatile-priced. The surprise is thereore that the OECD developed countries continue to treat oil as such an exciting and dangerous plaything for justifying extreme spending on everything from military security to low carbon living. When this elite fantasy cracks, we can expect and forecast real major changes in word energy nnd the economy.
By Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author ‘The Doomsday Machine’, Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
© 2014 Copyright Andrew McKillop – All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.