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Oil Crisis In 2012

Commodities / Crude Oil Dec 26, 2011 - 12:20 PM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleWill we have a massive oil crisis in 2012 ? If it happened, what would it do to the struggling global economy ?

One other question is easier to answer: can we compare this almost certain coming crisis with the Hunt for the Quark, snark or Higgs boson ? Defenders of the claim the Higgs boson exists only have their research budgets and scientific kudos to worry about, but defenders of the present de facto claim that global oil supply is secure "because of high oil prices" face a much more complex challenge.


With higher stakes for all of us: even with falling economic growth in Asia, recession in Europe and near recession in the US the global economy still needs about 89 million barrels of oil each day.  Any sharp recovery of the global economy will drive up oil demand and radically drive up prices. Any sharp cutoff in supply will be as devastating as the 1979-classic of Paul Erdman "The Crash of 79".

In fact, physical supply cuts are in 2012 more possible or rational than at any time for the last 15-20 years, and perhaps even since 1973. Taking only a 15-20 year horizon, but looking the other way, the next 15-20 years will massively change world oil supply, and not for political reasons. Probably by 2017 if there is any recovery of the global economy, world oil supply will certainly "Peak Out". Like physicists trying to find Higgs bosons we can't give an exact number for the final and absolute peak: it might possibly be 95 million barrels a day, or about 6% - 7% above current production. Total's CEO Christophe de Margerie has gone on record saying he thinks even sustaining 90 Mbd is not possible under the best of scenarios - no supply cuts, no major stress in large producer countries, continued high investment in oil E&P at rates similar to the most recent record year of 2007 when $400 billion was spent - and so on. Without recession, world oil demand would have easily hit 90 Mbd in 2012.

Getting an idea on how prices might move even with "moderate only" economic recovery and no supply cuts, more than 3 months back (on Sept 15) Goldman Sachs set a price of $130 a barrel as likely in 2012, with the famous spread or premium for Brent against WTI shrunk to almost nothing. The reason is this: Oil supply is short in both hemispheres. Any large outage of supply will destroy the price mechanism and physical rationing will be the only possible end result.

Despite Libya coming back fast towards its pre-war output of 1.5 million barrels a day, the Arab world outlook is sombre - the Jasmine revolution and semi peaceful sit-ins were a long way back. Civil war is now the operating mode in the Arab revolt, and this makes worst-case scenarios possible. Revolt in the Middle East presently focusing Syria's civil war, the long simmering Iran nuclear crisis, rising sunni-shia struggle in Iraq now that the US has quit, and the latent threats to Saudi and other Gulf Arab producers are all able to impact oil supply security. Even the rising threats to Putin's total power in his version of "democratic" Russia, with fast rising potentials for long-winded internal power struggles, can affect Russian gas and oil production, supply policies and pricing action.

THE GREEN ENERGY WILD CARD
More than anecdotal evidence says that both Russia and Saudi Arabia take green energy transition plans, as in Germany, as a serious threat because these plans could in theory cut oil demand to nearly zero - in about 40 years - and leave them with a low priced Sunset Commodity. Placed on a much shorter countdown than 40 years, Mikhail Gorbachev's Climate Change Task Force (within the ultra powerful Club of Madrid) calls for a 50% cut in global CO2 emissions - logically implying a 50% cut in oil consumption - by about 2020.

The experience of supplying a Sunset Commodity is an experience they already had in the past, through 1985-2000, and did not like. Making sure it does not happen a second time around is almost-official policy in both countries, the world's No 1 and No 2 oil exporters.  Talking up green energy to talk down oil prices is of course fair game, but any weakening of prices far below $100 a barrel will likely trigger fast action.  The national budget and finance needs of Russia and KSA, and the strong need to keep the wheels of power greased at a time of internal political challenge have upped the minimum barrel price they want. This is a flexible and controversial "threshold price", but is likely as high as $85 - $90 a barrel. Production cuts could be quicker acting and more certain today, than previously, if prices slumped below $80 a barrel. And to be sure, under civil strife conditions, unplanned cuts of output with slow recovery can occur.

Under either scenario we get higher oil prices.

Green energy and climate change are however a far lower real world threat to oil prices than global economic recession, but as we know, any sharp and large rise in oil prices - say to $130 a barrel - could itself help trigger that recession. This is unlike the Higgs boson story because if we try to imagine there is symmetry before oil prices rose, and afterwards, we will fail. In fact the global economy changes. Under present conditions the most likely possible change, if oil prices suddenly racked up, would be a deep slump hard landing - lack of symmetry would be guaranteed.

The collapse of fossil energy consumption that Mikhail Gorbachev and his Club of Madrid allies want, or say they want,  is then possible within about 8 years with a year-in year-out fall in global oil demand of around 5%, but the economic collateral damage is off the wall and total. Also unlike the Higgs boson story where we have to imagine the Universe is symmetrical at least in time - but we cant prove it - we might find that 2012 is the year that symmetry broke in world oil.

NOT LIKE BEFORE
Homely examples of economic change are used to claim that a repeat of the 1970s oil shocks would only ripple the economy, not rip it apart and that when the complete and entire Middle East was under new management, like the Kremlin, we would move back to almost normal working. The theory says the global economy would only stall when deprived of oil, even if quite small percentage cuts will do harm, and will easily rebound when oil supplies are restored.

The threat is that recovery is to a state that is not exactly like before, in fact extremely different.

Physicists call this phenomenon spontaneous symmetry breaking, because the initially equal and symmetric status of all directions in almost empty deep cold space spontaneously crumbles. Afterwards, one direction gets chosen as special, a phenomenon we know really well, called magnetism. Adding reality-tracking nuance to an analogy with world oil and the global economy, repeated cycling in and out of symmetrical states generates a one-way trend, call it global expansion for the Universe, and call it growth for the global economy. The bottom line is simple: the past and future are not the same.    

The global macroeconomic analogies can go further. One reason why scientists predicted the existence of the Higgs boson was that something-from-nothing phenomenae exist with plenty of homely things like magnets and "rather big" magnet-type things like neutron stars and black holes. What is suspected by physicists can be feared by global macro analysts: oil shock in 2012 will cause spontaneous total breakdown of economic symmetry.

We can easily see this by looking at "the world after 1973", after the first oil shock. The mix was of subcritical factors - oil prices - and the real phase changer, physical deprivation of oil. These two things (prices, physical supply) have always been mixed together and confused in the minds of political and corporate deciders, and the general public. They are not at all the same.

RANDOM CHANGE
We can surely take the role of random change seriously - Taleb's "Black Swan" - and random change is one basic fundamental concept of quantum physics. A great example is photons, which we could analogize to "economic agents" or individual consumers and workers: photons in empty space have no mass or spin and no anti-particle, but this lack of mass is closely related to the ability of magnetic fields to penetrate matter and extend over long distances, including stellar distances. When we expose superconductors to photons at super-low temperatures, these photons suddenly acquire mass. The underlying physical basis for the Higgs boson theory resides here: photons hitting superconductor substances near absolute zero temperature encounter an "engulfing substance" which transforms energy to matter under normal conditions for the Universe (the Universe's average temperature is presently defined as "acceptably 3 degKelvin" or minus 269 degC, according to NASA) http://imagine.gsfc.nasa.gov/docs/teachers/elements/imagine/BoardGame/phenom_cards.pdf

The absolute zero for the global economy is firstly a phase change pushing it towards total disappearance and secondly contraction rates for local or regional economies in high double digit annual rates for several years. As we know, in some specially exposed sectors like real estate, this is what is happening right now in the PIIGS countries. Our model is the global economy engulfed by the "black matter" of oil - disappearing oil.

Forgetting the details, we can say that superconductivity clearly shows how photons with no mass can suddenly switch to having mass. Their "free play" - like free playing market forces and economic agents of the fantasy-type Neoliberal economy - hits a new engulfing force field. We can call the engulfing substance of black oil shortage a Reality Wall which the economy will interact with very strongly. Without oil we have phase change for the simple reason we were never previously so dependent on oil as today - whatever the claims made to the contrary - shown by really simple facts like the world needing 25 Mbd more in 2011 than in 1979. In no way is it possible to have 25 Mbd more oil and in every way it is possible to have 25 Mbd less. Welcome to the crisis !

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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