20200503-Game Over for OIl, The Economy is Next
Crypto Viewing (Oil and the price of bitcoin):
Game Over for Oil, The Economy is next
Prices have collapsed and storage is nearly full. The only option for many producers is to shut in their wells. That means no income. Most have considerable debt so bankruptcy is next.
Coronavirus has changed everything. The longer it lasts, the less the future will look anything like the past.
Most people, policy makers and economists are energy blind and cannot, therefore, fully grasp the gravity or the consequences of what is happening.
Energy is the economy and oil is the most important and productive portion of energy. As goes oil, so goes the economy…down.
It’s Really Bad
Here is a chart that tracks the demand for oil:
Figure 1. 2020 global oil demand may average 20 million barrels per day lower than in 2019.
Source: OPEC, IEA, Vitol, Trafigura, Goldman Sachs and Labyrinth Consulting Services, Inc.
Demand fell off the cliff as coronavirus caused lockdown to begin. We see supply went off the cliff followed the demand.
We are in a global depression. Unemployment will remain high and consumers will be damaged from lack of income over the months of quarantine. The truth is that I doubt that demand will ever recover.
Economies will re-start slowly. A useful analogy is being at a traffic light behind 25 stopped cars. The light will change from green to red before your car begins to move. It may take several light changes before you get to the other side of the intersection.
U.S. consumption has fallen about 30% from 20 mmb/d in January to 14 mmb/d in April. Refinery intakes are falling and will continue to fall. The refinery will close.
Most U.S. refineries require intermediate and heavy crude oil that must be imported. Few U.S. grades of oil can be used to produce diesel without blending them with imported oil. That is because they are too light to contain the organic compounds need to make diesel. Redesigning refineries will not change this.
The world’s natural resource mining, shipping and distribution system relies on diesel. As refineries close and less diesel is produced, there will be lower levels of natural resource extraction, less manufacturing and less buying of goods.
Diesel cannot be produced without first producing gasoline. The U.S. has had a gasoline surplus since late 2014 and the current surplus is the highest in 5 years (Figure 2).
Figure 2. U.S. gasoline comparative inventory has increased 30 million barrels since March 20 to a record level of 28.4 million barrels more than the five-year average. Source: EIA and Labyrinth Consulting Services, Inc.
What will happen to the excess produced gasoline if storage is full? Will it be burned? If you don’t produce gasoline, you can’t produce diesel.
Those who see an opportunity for renewable energy in the demise of oil need to think again. The manufacture of solar panels, wind turbines and electric cars can’t not be installed and shipped without diesel.
Shale oil is also known as “tight oil”. The graph below shows the trajectory of tight oil. It’s going down.
Figure 3. Thought experiment based on rig count through April 2020 and 12-month lagged production.
Source: Baker Hughes, EIA DPR, Drilling Info and Labyrinth Consulting Services, Inc.
Energy is the Economy
Gross domestic product (GDP) is proportional to oil consumption (Figure 4). That’s because oil is the economy. You don’t have good GDP without using a lot of oil. Every aspect of production and use of goods and services requires burning fossil energy. There are approximately 4.5 years of human labor in a barrel of oil.
Figure 4. Gross domestic product (GDP) is proportional to oil consumption
Source: EIA, World Bank and Labyrinth Consulting Services, Inc.
Those who believe that the world will function the same on lower energy density sources like wind and solar should review their old physics text books. You cannot fit 4.5 years of work from sunlight or wind into the 5.6 cubic feet space of a barrel of oil.
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In this graph, based on 17 investment analysts, the US GDP expects to decline 35% in 2020. That is worse than the Great Depression (The Global GDP decline -26.7%) of 1930’s.
Large segments of the U.S. oil industry will have to be nationalized before the year is over. The price of oil is too low to justify the cost of extraction even if storage were available. The value of a barrel of oil, however, is 4.5 man-years of work and that productivity multiplier will be essential if the U.S. economy is to avoid collapse or for it to recover if collapse is unavoidable.
The game is over for oil. We should place all of our attention on saving the economy.
Where is the big money going to go? Stock markets are a fantasy. Oil price is in the pit. Gold and Silver are hard to find and buy. They are hard to store and transfer as people already know. Crypto is probably the next logical place to go.
I know oil price down and lack of consume of oil is bad to economy, but still, i did not expect its wide range of impact. I think no one can image... as everything is related.
ReplyDeleteMe neither! Most people do not grasp the scope and the depth of its huge impact to the economy. And I didn't know that the energy of a barrel of oil equals to 4.3 years' worth of a man's manual work! So the amount of good and services are directly proportional to the availability of oil. It's scary to hear the analysts' forecast of 35% drop of US GDP - even greater than the Great Depression :(
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