Peak Oil, the Pandemic and Western Geopolitics


INSIGHT


  • PEAK OIL AFFECTS GLOBAL ENERGY MARKETS. THE LIMITED AVAILABILITY OF EASILY PROCURABLE OIL STOCKS INCREASES PRICE VOLATILITY.

  • PEAK OIL WILL LEAD TO HIGHER COMMODITY PRICE INFLATION. PEAK OIL WILL IMPACT THE ENTIRE ECONOMY. COMMODITY PRICE INFLATION WILL RIPPLE THROUGH THE ECONOMY, REDUCING PROSPERITY AND WEALTH.

  • THE PANDEMIC HAS AFFECTED THE ECONOMY; UPSTREAM AND DOWNSTREAM, SO TO SPEAK. THE PANDEMIC HAS AFFECTED NOT ONLY PRICES, BUT ALSO NATIONAL INCOME AND, MORE IMPORTANTLY, PRODUCTIVITY. TRADE DISRUPTIONS WERE THE THIRD VIOLIN IN THE EQUATION.

  • ALL THIS LEADS TO A SHORTAGE OF MATERIAL INPUTS AND DECLINING PRODUCTIVITY. BUT BOTH ARE THE INGREDIENTS FOR FUTURE VALUE CREATION. THIS MEANS THAT LESS VALUE IS BEING CREATED.

  • AS A RESULT, WE WILL SEE SIGNIFICANT ECONOMIC DISLOCATION THIS DECADE.



1. Why Peak Oil Matters (for the West).


We have most likely passed the Peak Oil Midpoint. This is the midpoint on the bell curve as we roll down the hill to the end of the distribution curve. It is as if we are charging down an alpine pass. It was a steep climb and it will be a bumpy descent. Peak oil, the moment when we have used half of all conventional oil reserves, is followed by a period when we still have half of the oil in the ground. The oil we are extracting is much more expensive than the oil we have extracted precious. That’s due to a whole host of reasons, some of which have to do with the difficulty of getting that oil out of the ground. Now other aspects are coming to the fore, such as the capital outlay required to set up new operations. 

I. It is this combination of operating and capital costs that is driving up the price of oil.

II. Rising commodity prices lower the savings rate of the population to buy goods and services. This restricts the purchase of goods and services in the long term.

III. It also puts a cap on the investments that will be made. Not to put too fine a point on it, but peak oil will limit growth in living standards – for most of us.

Peak oil is reverberating loud and clear through the West, shaking the foundation on which economic growth rests. Peak Oil is penetrating every node and crevice of society and Western geopolitics. Indeed, peak oil will have a profound impact on the nature of the West. All by itself, peak oil will lead to higher prices in oil markets and fuel inflation in a wide range of goods. Thus, consumer goods, housing, and health care inflation will be affected.

We have already seen the first signs of this with a significant increase in the prices of construction materials. More will follow, as not only real estate and stock prices are affected, but also economic inputs. That’s because oil is the raw material from which all sorts of gadgets and gizmos are created to meet our needs for travel, food and shelter. 

What makes Tight Oil (shale) stand out in all of this….

Let’s look at this further. Yes, American shale is important for the West. Shale rock is the source of recent market turbulence and explains much of the rise in global oil prices. Competition made it possible. But credit financing and taxation also played their part in the overall story. 

But shale or tight oil should be viewed in its proper context. More than a decade ago, the United States embarked on a collosal endeavor. The development of petroleum resources not only changed the fortunes of American oil producers, but also reshaped American industry. Too often, the industrial rebirth of the United States has been attributed to trade.

America owes its manufacturing longevity to its perpetual growth engine, which has been churning and murning for more than a century. What is this engine? What is its foundation? This foundation has been America’s effective energy markets and energy wealth. This stands in stark contrast to Europe’s chequered energy markets. You have to go back quite a while to find a Europe that competes on equal footing with the American energy giants. There are a variety of reasons for this. But the main reason is that European coal has lost its luster.

What has changed is the fuel we use to power the engine’s growth. Coal expanded the supply of fuels in European energy markets. Since that day, everything in the West has revolved around coal. Coal and more coal.

Coal prevailed. Then it was hit by the equivalent of an astroite: oil. Since the West switched from coal to oil, the U.S. has dominated energy markets. The U.S. position as the world leader in energy production and distribution has remained unchanged since then. The USA owes this to its wealth of hydrocarbon resources. This resource wealth allowed the U.S. to remain unchallenged throughout the period. This wealth of resources includes domestic coal deposits in the U.S., which have helped America’s energy producers grow in scale. And because America was the Saudi Arabia of hydrocarbons in the first half of the 20th century, the economy flourished. 

American energy wealth has always been the key…

And it was precisely this energy wealth that enabled American energy producers to rise again. The cost of producing goods for the American market has gradually declined. As energy costs fell, America’s prosperity grew and its manufacturers thrived. The last 10 years have been a remarkable success for U.S. energy producers. Compared to the East Asian market, manufacturing in America has become more economically attractive. But energy, as an industry, is like a slow container ship, and it takes time for the ship to sail out of the Suez Canal.

But that’s only part of the story….

Labor costs are just one aspect of many that heavy industry considers when choosing a location. The fact is that American customers are once again buying regionally sourced, American-made steel.

Before tight oil became an issue, much of America’s steel production had already moved overseas. But since the arrival of tight oil, American steel production has seen a dramatic increase in production levels. America became an energy exporter. Who could deny that this has not affected the production costs of American manufacturers? Most importantly, it has helped U.S. heavy industry recover from its earlier lows in the 2000s. 


2. The pandemic has struck. Industrial production cut back.


It is difficult to put into words the dramatic impact the pandemic had on production. Certainly, the European Union is a good starting point to examine the impact of the pandemic on production.  The coronavirus began to affect the European Union in the first quarter of 2021. It affected southern Europe before reaching northern Europe. Producers south of the Alps will be affected by the economic devastation for far longer than their counterparts in the north. 

The coronavirus has shaken Europe’s already weak economic foundations. Much more so than in the USA.

The limited availability of liquidity & falling sales hit small and medium-sized enterprises hard. Small and medium enterprises are more affected. This will change as global supply chains are severed. High oil prices and supply chain disruption can, when you get right down to it, benefit small, local producers in your region.

So things are changing; favoring new entrants to the market….

We saw the first signs of this disruption with the container ship stuck in the Suez Canal. Within hours, this paralyzed shipping on the trade and transport arteries from Europe to Asia. It was unexpected. It was equally unprecedented in its scale. Although it has to be said that this logistical bottleneck was resolved relatively quickly.

What is likely to happen…

The more significant such events are, the more likely businesses are to respond. This leads to a self-reinforcing cycle that undermines international trade. It’s always one more step in a new direction. What would be the impact of shortages much larger than this? Most likely, insurance premiums would rise significantly to cover the costs. Most likely, insurers are factoring in the rising cost of traffic they expect in the future.

This would have a very strong impact on the logistics. Transportation costs will increase because a higher premium will have to be paid by carriers. Prices will ripple through the economy and affect business activity. Higher logistics costs will cut into profits. This will undermine the business models of online retailers and multinationals as well as global exporters. This is a real disaster for international trade. Yet trade remains at the heart of the German economy, even if the U.S. will be far less affected.


3. PUTTING IT ALL TOGETHER: The pandemic reinforces the reality of peak oil that cannot be overlooked.


What impact does oil have on Western geopolitics? Certainly each country has, as commonly understood, its own geopolitical foundations and demarcations. But there are underlying trends worth exploring. Peak oil, in combination with the pandemic, has played its role in accentuating trends.


These trends preceded the outbreak of the pandemic in the first quarter of 2020.

The coronavirus was like the corkscrew that helped release bubbly champagne.


Financial stability rests on the foundations that make up an economy: The availability of natural resources such as oil and the abundance of labor – productivity – in all its forms gives shape to the economy. The system uses productivity to produce something of value that people are willing to pay for.

Peak oil, the pandemic, and economic volatility are fueling the downward trend. At the same time, unforeseen opportunities are emerging…they all interact and are part of a much bigger picture.

It takes time to create something of value from these raw material inputs. This means gratification is deferred into the future. In a large, complex system that requires a degree of trust among participants, productivity is enhanced by the use of credit. But not every interaction warrants the same level of trust. Interest is, in a sense, deferred gratification and trust in someone’s ability to create something of value. This means that the recipient has sufficient means (to repay).

At the base of this pyramid are the raw material inputs. Commodities are dependent on the availability of natural resources. During the coronavirus pandemic, raw material inputs were affected. But productivity was also affected. This means that the two most important parts that drive our economy were affected.

Because of the long duration of the coronavirus pandemic, we are likely to experience a protracted period of economic decline.

This makes the pandemic more eventful than previous crises with the exception of the Great Depression. The current crisis touches the very foundations of economic prosperity. Every commodity needs time to recover and reach previous levels of economic output.

To put this into context: Many upstream operations require huge upfront investments. Tax cuts may encourage miners to invest, but they cannot increase the physical resource base of metal ores and energy resources in the earth’s soil. With the reduced availability of credit and the shortened investment horizon, this could mean that we can never get these resources at such low prices again – for a very, very long time due to peak oil. The only caveat is that there are amazing innovations in nano research.

Many of these resource streams, logistics and mining operations that we lost to the corona are difficult to revive. And we have to take into account the fact that oil will always be at the center of the extraction industry, because oil is the basis for everything else that moves and crawls in our modern economy. As for the economy as a whole, many of these trends were already in motion before the coronavirus pandemic occurred. The coronavirus has merely quickened trends that were already underway. These trends continue to shape our modern economy.


4. Conclusion


  • The pandemic and logistic disruption are impacting production. Companies will develop new strategies to get the resources they need to produce the goods their customers want to buy. Dependence on international trade has been a boon for German companies because it has lowered prices and reduced inventories. But dependence on international trade is quickly becoming a burden for many companies, including U.S. online retailers.

  • Peak oil leads to volatile commodity markets. Companies need to adapt to changing circumstances as market volatility increases. This means that companies hold back liquidity, while the investment horizon shortens and long-term planning becomes more difficult.

  • The pandemic leads to a relocalization – of infrastructure projects. This may benefit some regions, the United States being a prime example. In Europe, it will be more difficult to accumulate the resources that companies desperately need to maintain ongoing production and ensure productivity. This happens at a time when overseas markets are distancing themselves from foreign competition.


5. References


Deffeyes, K S 2006, Beyond Oil: The view from Hubbert’s Peak, Hill and Wang, ISBN 0-8090-2957-X, United States.


Many thanks for the shared interest in the energy world!



This article is meant to inform the reader of recent developments in the energy industry at large. We take great pride in our work. Despite all this, we would like to point out that we do not guarantee the reliability of the content on this website.

Please note that this presentation reflects the opinion / views of the author himself. No relationship to companies, institutions or organizations can be inferred from these texts and presentations in any way.

The contents are not to be understood as business advice in any form. The author does not put forth investment recommendations. This article should not be taken as investment advice and the author cannot be held to account for investments made. For more information, please refer to the Legal Disclosure and Privacy Policy, which you can click on or find at the top of this page in the menu bar. 

Email (case-based consultation and support): 

support@boegelsackenergy.com


Whether advice can be provided depends on the specifics and particular subject matter of each individual case.

Please scroll to the end of this page to sign up for our newsletter. The newsletter focuses on energy companies and new trends in the energy sector. We look forward to welcoming you!



 

Leave a Reply

Your email address will not be published.