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Uncertainty in the oil price war

 

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By Ed Crooks: JULY 15. 2016

“War is the realm of uncertainty,” wrote the great Prussian military theorist Carl von Clausewitz. “Three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty.”

That applies to price wars every much as it does to the real kind. Almost from the moment crude began falling in 2014, news outlets started running confident-sounding claims that one side or another was winning the battle often depicted as a struggle between Saudi Arabia on one side and US shale producers on the other.

Like many conflicts, the oil price war has gone on for longer than most people expected when it began, and its eventual outcome is still shrouded in von Clausewitz’s fog of uncertainty. This week, the reports from the front have been as inconclusive as ever. Bloomberg pointed out that oil production from the Middle East has hit a record while US output is in decline, describing it as “a sign that OPEC’s strategy of defending market share is succeeding.”

An FT editorial observed that oil-consuming countries were locked in a co-dependent relationship with producers in the Middle East that was very difficult to break, and said consumers needed to work out how to live with that addiction.

On the other hand, the research company Wood Mackenzie published research suggesting that most of the world’s potential new oil production that could profitably be brought on at $60 per barrel was in US shale. The relatively low costs and greater flexibility of shale production mean that oil companies are reluctant to commit to new large projects, particularly for the higher-cost resources such as deepwater fields.

Liam Denning at Bloomberg Gadfly highlighted Wood Mac’s prediction that US shale would not by itself be able to meet rising oil demand, and higher-cost deepwater production would eventually be needed.

A year on from Iran’s agreement to a deal to lift sanctions over its nuclear programme, it has been successful in raising oil production and exports, but the benefits to its economy have been smaller than some had hoped. The former lead sanctions expert for the US team negotiating with Iran explained some of the reasons why results so far have been disappointing.

Investment in renewables and other “clean” energy was 23 per cent lower in the first half of this year than in the equivalent period of 2015, according to Bloomberg New Energy Finance. The slowdown, driven in part by declines in China and the Asia-Pacific region, means that investment in 2016 as a whole is very likely to fall short of last year’s record total.

Oil was up and then down again during the week, with Brent crude starting Friday at about $47 per barrel, as huge excess stocks of refined products weigh on prices.

Theresa May, Britain’s new prime minister, abolished the separate Department of Energy and Climate Change as she formed her first government, merging into the business ministry. Some environmental campaigners were furious, but Roger Harrabin at the BBC argued that it was really too soon to tell what the implications for the UK’s climate policies would be. Andrea Leadsom, the unsuccessful challenger to Mrs May for the party leadership, has been made environment secretary, and has made it clear that she backs action to cut Britain’s greenhouse gas emissions.

China is expected to suspend construction of any new coal-fired power plants until the start of 2018, as the utilisation rate of its existing coal plants has been dropping. The new policy follows concerns highlighted by Greenpeace over the rapid rate of coal plant construction in China, following a “permitting binge” in 2015.

There was more bad news for coal from the US: coal-fired generation is expected to drop by 9 per cent this year, as gas-fired power reaches a new record high.

The most entertaining read of the week was a great Bloomberg BusinessWeek piece about a $100m biofuels scam. If Hollywood has made a movie about mortgage-backed securities, surely it could do the same for Renewable Identification Numbers.

Quote of the week

“The big takeaway for me is that this has cost us $62bn. We have learned a huge amount, and we are still here. There are not many companies that could take that $62bn charge, and still be around.” – Brian Gilvary, chief financial officer of BP, speaking after the company drew a line under the costs of the 2010 Deepwater Horizon disaster, setting the final bill at about $61.6bn.

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