Blogs & Comment

Uh oh, oil already on the rebound

Wow. That didn’t take long. After the price of oil crashed with the onset of the Great Recession, the price of crude is already back up to US$60. Gasoline prices are already on the rise, and thats worrying.
A rising price of gasoline couldnt be worse for a struggling stock market. The TSX crashed more than 300 points yesterday on brutal retail sales in the U.S. Imagine how much worse those sales are going to be if the price of oil keeps on rising.
Bu then the U.S. economy is at a unique point these days. Domestic production of oil in the U.S. peaked in 1970 and has been in decline since. Yet it has ramped up its consumption to the point that it now uses one quarter of the oil pumped in the world each day, or some 20 million barrels out of a daily flow of 86 million.
Most of that oil comes from offshore now, not from the heartland, and that has left the American economy ever more susceptible to rises in the price of oil.
Think about it. Whereas in the ’60s and ’70s when the price of oil rose, the money would go to American corporations and American governments (through royalties); now when the price of gasoline rises the money goes offshore to oil producers like Venezuela, Iran, Saudi Arabia and Russia.
The effect of the current state of American energy is even worse. Nowadays when the price of oil rises consumer spending shifts from mortgages, malls and auto sales (all the things the Americans still make) to overseas oil producers.
Since American oil production peaked, the United States has seen a rise in a massive load of consumer debt. The personal savings rate has plunged, and the amount loaned to Americans rose as a result of securitization.
This papered over the hollowing out of America for a generation. But now that it looks like peak oil is here, America is now going through a massive adjustment, from an economy where consumers no longer produce what they consume, to something more balanced.
The collapse of the banks and the auto industry was the opening chapter in what is now coming. And considering the amazing dependence on oil (with just three percent of the worlds population the U.S. manages to suck up one quarter of daily oil production), were in for a hell of a ride.
Ive been talking about the idea that western economies (And therefore stock markets) are hemmed in by the new ceiling on oil production. Now that supply can no longer grow, neither can economies that are heavily linked to oil. The only way out now is big change.
I had an interesting interview with Jeff Rubin last Friday for the purpose of a feature running in the next issue of Canadian Business.
Rubin, of course, has just quit his job as chief economist of CIBC World Markets to go on tour with his new book warning of the impending economic chaos around peaking oil. One of the things he said in the interview was that Peak Oil can mean Peak GDP if we dont de-link our economies, a notion now finding confirmation in current events.
Rubin is warning of real increases in the price of gas in the years ahead, and lets hope people listen to his warning. If there are these kinds of rises, were going to see lots more pain in the economy.
The U.S. Fed just subjected the U.S. banks to stress tests. And while most passed, you cant overlook one of the conclusions of the test, which was that if the economy gets worse the banks are going to be sitting on more than $500 billion in further losses.
If the price of gasoline heads much higher, you have to think those losses are going to start registering. Yet, here we see mainstream brokerages like Raymond James out of Houston, issuing reports claiming that oil peaked in the last quarter of 2008 and that were now on the backside of Hubberts curve. That is, we’re at the end of expansion of oil and gas age and into the era of contraction, which suggests that the stock market recovery is not real.
It is amazing how fast peak oil has moved from the fringes of the oil industry and into more mainstream acceptance.
On a more worrying note, Norway, the worlds fourth largest crude exporter, announced Monday that its oil production fell 7% in the month of April. Production fell from 1.99 million barrels to 2.15 million, which is a substantial drop for one month.
Low prices would have something to do with that. It’s hard to pay for new development costs if there is no money around. But it is also the case that the North Sea, where much of Norways production is, is rapidly giving up the ghost.
As a major exporter, that means less oil going into the world market. Couple that with ongoing declines in Mexico, and you really have to wonder if the oil market isnt now pricing in the emergence of peak oil as an accepted fact.
This will be good for oil companies like Canadian oilsands producers, but you have to wonder what it all means for investing in general. This could really mess things up in markets.
I keep thinking of a comment that appeared in the Globe and Mailmonths ago. If it was true that we are at peak, and that oil-based economic development (the deep source of modernity in that it brought us cars, air travel and plastic) is done. Peak oil means that capitalism is broken, suggested the commentator.
There is something to that notion. Rubin doesnt think it has to be that way. Markets will be the thing that will temper behaviour. Peak oil could mean peak GDP, but it doesnt have to. We have to de-link our economies from oil.
But thats going to take a while. For now its about getting through the turbulence to come. And it looks like there is going to be lots of that yet.