Friday, 28 November 2014

The winter bugs return and oil prices slide - who wins who loses?

I have been laid low by a second attack by one of those ghastly winter bugs. This time it was bad enough to merit a doctor visit and that resulted in a course of antibiotics which killed off the bacteria that had snuck in, taking advantage of a compromised immune system. (see below for a plug for the British National Health Service)


Enough of that. The big big news is that oil prices continue to plummet. My theory, and I have no evidence whatsoever, is that it is a concerted plan on the part of the top oil producers and their close allies. Objective: provide a boost for friendly economies around the world and attack and destroy three groups of competitors:

  • First, the producers of alternative energies - wind, nuclear, solar, shale gas etc
  • Second, oil producers with significantly higher marginal costs of oil extraction and excessive government expenditure that has been funded by good oil revenues
  • Third, oil exploration companies
Reuters has just published the following table of marginal costs for producing oil:

Marginal cost of producing one new barrel of oil
 Regions                      Dollars per barrel ($/bbl)
 Arctic                                 115-122
 Brazil Ethanol                          63-69
 Central and South America               29-35
 Deepwater Offshore                      54-60
 EU Biodiesel                           106-113
 EU Ethanol                             98-105
 Middle East Onshore                     10-17
 North Sea                               46-53
 Oil Sands                               89-96
 Former Soviet Union Onshore             18-25
 Russia Onshore                          15-21
 US Ethanol                              80-87
 US Shale Oil                            70-77
 WAF Offshore                            38-44
 (Reporting by Rowena Caine in London; Editing by Christopher
Johnson and Dale Hudson)

With Brent Crude prices at $73 we can see that only three areas are not already in serious trouble: the Middle East which is mainly Saudi Arabia and the Gulf States; the former Soviet Union and Russia; and Central and South America. 

Even some oil producers with low extraction costs are in trouble because their national budgets have been set on the assumption that they will be earning high excess revenues from good oil prices. Russia is included in this group of countries vulnerable to the effect of low oil prices. In 2010 46% of the government's revenues came from oil. The 40% fall in oil prices in the past six months will have had a devastating effect.

The strategy of driving down prices by the oil producers' big guns has a terrific logic. They have allowed their competitors to spend on research and development, almost always, funded by government subsidies only to come in at a crucial moment and show who really is boss: cheap oil. 

Just wait. The climate change warriors will be shut out of the debate on future energy because the cost differential between their pet projects and cheap oil will be too great. No more wind farms, and the scourge of ugly solar panel will be over.

On the plus side cheap oil will help to keep the battered economies of the west afloat and China's cost base will be lowered. With luck the stock market will be buoyed by this unexpected cost saving bonus - better ditch those oil shares, especially exploration companies, and pile into aviation stocks.

UK Health

As an aside for my American readers I would like you to know that the treatment I received at the hands of my doctor was prompt and delivered partly by phone and partly in the doctor's surgery by a qualified practice nurse who was warm, caring and conscientious. I did not have to pay a penny for the service or for the medication. It had been prepaid by my lifetime of paying taxes. And my contributions go to providing equally good services everyone who needs them. This high quality of care costs us just 9.4% of our GDP in the UK. In the US you guys spend 17.9% of your GDP on health and according to Gallup over 13% of  adults remain uninsured. It's hard to measure outcomes of healthcare spending but a crude measure is life expectancy which is 80.4 in the UK and 78.9 in the US. I think we get a better bang for our buck.

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