Published On: Tue, Oct 28th, 2014

A half-truth is a whole lie

Jacob Gelt DekkerYou may still be paying a record price at the gas pump, but oil has dropped about 27% since June, down to about US $80. per barrel and a further drop of US $ 10 is expected.

Why the drop? Will it last? What are the short and long-term effects?

Why?

The hope of the Western green-elite is a global increase of renewables. Some hastily claimed that the recent drop in oil prices was the direct effect of their efforts. Their half-truth, though, was a whole lie.

Global oil demand increased steadily, and consumption reached an all time record of 94 million barrels per day in 2014. In spite of the new demand, a production glut from the shale oil boom in the USA caused an oversupply with prices plummeting from a record of US $ 115.06 Pb on June 23rd to almost US $ 80. Three energy policies coincided in the global and US-market; fracking shale oil in USA and Canada, a dramatic increase in natural gas production and consumption, and reactivation of old wells in the USA under new regulations. These three new production schemes opened oil faucets like never before.

Will it last?

World quantity-demand for oil is projected to increase 21%, by 2030 to 104 million barrels per day, from 86 million barrels in 2007. The increase is mostly due to ever growing demand in the transportation sector of the new economies in Asia-Pacific.

Whereas consumption in the USA and Western Europe dropped about 10%, in the fast growing economies of China and India the thirst for gasoline nearly doubled over the last few years. So, the slack in today’s markets is expected to disappear after a while. The growth rate of the Asia-Pacific regions will determine the time lag. You at the pump better enjoy the discount as long as it will last.

What are the short and long-term effects?

• In the short term, you, as consumer, may get a little break at the gas pump.

• The balance of trade of the USA will improve dramatically and so will its economy by adding millions of new jobs. The era of oil dependency of the USA is nearing its end. Last quarter, the USA overtook Saudi Arabia as the largest oil producer in the world. The USA will be a net energy exporter by the end of 2015.

• Countries with national budgets depending on oil income, like Venezuela and Russia, will be hurting badly with the present discount. Their income plunge may cause further erosion of power structures and consequently put their markets in turmoil.

• The heavy investment in fracking technology in the USA and Canada is now amortized over a few years, based on a break-even of US $ 70 Pb. That financial depreciation regime may have to change to sunk cost, or otherwise a longer stretch. Either way, it will effect the market price of the investment vehicles.

• Renewable energy development already disappointed investors. Competing cheap oil may discourage new investments even further. Last month, Der Spiegel in Germany trumpeted the green defeat with, “Investments in renewable energy were supposed to be a sure thing, with wind park operators promising annual returns of up to 20 percent. More often than not, however, such pledges have been illusory -- and many investors have lost their principal to boot.”

Yes, renewables made a little progress in the USA and Western Europe, but the other part of the story is a dramatic increase in the Asia-Pacific of fossil fuels consumption.

A half-truth is a whole lie!

By Jacob Gelt Dekker - Opinion Columnist for Curaçao Chronicle

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