How will debt-addled governments deal with an oil price boom? Not very well

A fascinating article was forwarded to me recently (thank you KG). Some wise guy I’d never heard of (Louis-Vincent Gave of Hong Kong-based advisory firm Gavekal) gave a startling brilliant interview. I’m not sure what made it so great, but it had a clarity, purposefulness, and vision seldom seen elsewhere. By me anyway. Howard Marks and Warren Buffett, we can’t count on those guys forever; the cherry Cokes and hamburgers will up someday, sadly. So it is great to see fresh, new brilliant voices. 

Mr. Gave’s comments poked around a critical economic circumstance currently unfolding, that almost no global decision maker seems to be contemplating, one that could upset central bank apple carts everywhere. He speculates that we will soon see a large increase in oil prices, with those prices settling in the $60-80 range eventually – a former happy-spot that kept OPEC/Saudi Arabia solvent, and incentivized enough exploration activity to keep the world fed with its favourite tonic – oil. 

Those projections aren’t hard to find these days; his analysis goes deeper though than the obvious implications of higher prices. What will those prices do, if they materialize, to global economies?

There is good reason to ask the question. If one pays any attention to the media, the message could not be any more stark – oil is pretty much finished, because governments around the world are funnelling vast sums of money into renewables. 

That money is indeed being funnelled into renewables, but the evidence so far indicates that hydrocarbons are far, far from being a spent force. Any honest ‘carbon neutral by 2050’ forecast will include a massive global reliance on hydrocarbons at that date (the International Energy Agency, an organization that has found renewable religion in a big way in the past two years (presumably with a pretty big metaphorical shotgun pointed at the back of their head), in their ultra-aggressive Sustainable Development scenario, still sees global oil demand at 65 million b/d in 2050). 

What would a massive price spike do to the world? Well, it would accelerate certain trends in renewables adoption; people are likely to embrace more fuel efficient vehicles and EVs, and consumption will fall as it often does when prices spike. But that will only hasten a global energy transition so much; even the IEA points out that the electrical grid will be the biggest impediment to a faster energy transition (for example, from 2009-2019, about 9 million kilometres of new electrical transmission line were built globally; to meet a modest transition pace (as in, not carbon neutral 2050) another 16 million will need to be built in the next decade – and NIMBYism is growing faster than emissions (such as, the Sierra Club protesting a new 240 km power line being built to transport hydroelectric (!) power).

The biggest impact, by far, would be on global economies though. Higher energy prices are like a tax on everything. Energy costs are going up because of carbon taxes and highly subsidized renewable power schemes. A spike in oil prices would send the cost of basic energy through the roof as well. 

Governments, as Gave points out, are in a pathetically weak position to deal with such an event as high oil prices. Interest rates have been pushed into negative territory in much of the industrialized world, in order to kickstart growth, which is not really working. All that extra money is flowing into bizarre things like Bitcoin ($600 billion and counting by the minute), Tesla stock (headed for a $1 trillion valuation), and art work (imagine shelling out $450 million for a painting, like some Saudi prince did). 

The world is still consuming oil hand over fist, while exploration capital has all but disappeared around the globe. US shale won’t save us next time. Think of it this way. The world’s governments want to go to renewables. The world’s governments needs oil. They need natural gas even more. But they won’t say it, and they won’t plan for it.

Where will the hydrocarbons come from, what will it cost, and what will be the repercussions? It’s going to be a fascinating decade, even without Trump. If he comes back, somehow, in some form, well, it’s going to be nirvana for circus fans.

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5 Comments

  1. Greg Alberta says:

    https://www.theguardian.com/news/2020/dec/08/the-curse-of-white-oil-electric-vehicles-dirty-secret-lithium

    Wait till this madness come to light amongst the moderate greenies.

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  2. John Chittick says:

    Aside from the green theological piety that more expensive fossil fuels make mythical green energy more attractive, governments haven’t shown much concern over runaway fiscal incontinence in recent years. We are in late stage mass sovereign debt madness. What’s a little more energy poverty in a world where unrepayable debt, central bank monetization, destruction of currencies along with wealth denominated therein is all within the foreseeable future. We’ll likely see a general commodities boom along with petroleum as increasing money supply velocity brings us to the next crisis event. I’m looking forward to the FANGS and Tesla crashing as investments move back to the O&G sector.

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    • Rand West says:

      Moderate, stable energy pricing would benefit everyone. It would adequately compensate good oil and gas companies, pay for decommissioning as fields decline, and discourage profligate waste.

      What about all the debt for the relief money they handed out? Except for the wealthy few still flying to Hawaii, most of it got spent inside Canada, or at least not on tequila and tanning. The government can tax it back once the economy recovers.

      And Tesla stock? It’s not as if a half trillion was invested, either they’ll make a profit to justify the valuation, or the bubble pops. It doesn’t matter whether the speculators were bidding up Tesla stock or pork bellies. Except for the initial stock issues, they’re biying and selling from each other. Possibly in the next few weeks, some panic selling.

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  3. Rand West says:

    What will debt-addled governments do? Increase taxes and enforcement. Probably they’ll focus on coal, gas, and oil, probably at the mine / wellhead / refinery level, but some, like Canada, will use retail carbon taxes.

    Any sustained increase to international oil prices is going to be driven by transportation and by trade, which it can also stifle.

    Where will all that oil come from? At $80, there will be more oil available, at $120, there will be less demand, as customers start to do without. At $400, there will be a reduction in demand back to the essentials, and rapid adoption of substitutes and synthetics.

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  1. […] Governments are losing the plot at a remarkable pace. They want to go to renewables, but they need oil. They need natural gas even more. They won’t admit it, and are completely unprepared for a looming price shock. Read on… […]

    Liked by 1 person

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