Culture Matters – Oil Curse Edition

The concept of the so-called Oil Curse is that countries that have an abundance of oil tend to be basket cases – undemocratic, kleptocratic, and poorly developed.  The Oil Curse is a special case of of what is sometimes called the Resource Curse. Of course, not every country rich in oil has suffered from the […]

The Outsized Impact of the Fall in Commodity Prices on Global Trade

Brad Setser:

The Outsized Impact of the Fall in Commodity Prices on Global Trade: Global trade has not grown since the start of 2015.
Emerging market imports appear to be running somewhat below their 2014 levels.
Creeping protectionism? Perhaps.
But for now the underlying national data points to much more prosaic explanation.
The “turning” point in trade came just after oil prices fell. ...

Still Living in a Fossil Fuel World

Tim Taylor:

Still Living in a Fossil Fuel World: An enormous number of pixels are spent on renewable energy, but when one looks at actual numbers, we are still living in a fossil fuel world. Here are some illustrative charts from the most recent annual BP Statistical Review of World Energy, released June 2016.
Here's a breakdown of world energy consumption. The big slices are all fossil fuels: green is oil; red is natural gas; grey is coal. The little slices are carbon-free sources of energy: nuclear is light orange, hydroelectric is blue, and renewables are darker orange. As the report notes: "Oil remains the world’s dominant fuel and gained global market share for the first time since 1999, while coal’s market share fell to the lowest level since 2005. Renewables in power generation accounted for a record 2.8% of global primary energy consumption."

Reserves of fossil fuels are not running down. Here are figures showing the years remaining of reserves of oil, natural gas, and coal. The figures show a breakdown by region, which isn't especially relevant given that energy can be shipped between regions. Instead, focus on the gray line showing reserves at the world level. Reserves of oil and natural gas, as measured by years remaining, are not declining over time. Reserves of coal are declining, but there is more than century of reserves remaining. It may seem obvious that reserves must decline over time, but technological change doesn't just work with renewables like solar and wind. It also finds new sources of fossil fuels and new methods of extraction.

In short, if your environmental goals involve a reduction in the use of fossil fuels over time, this goal is unlikely to happen because the world starts running low on fossil fuels. Instead, it's more likely to require some significant policy changes to discourage the use fossil fuels. For a more detailed version of this argument, along with a complementary argument that technological progress by itself is unlikely to drive a smooth shift over to renewable energy sources, a nice starting point is the article by Thomas Covert, Michael Greenstone, and Christopher R. Knittel, "Will We Ever Stop Using Fossil Fuels?" in the Winter 2016 issue of the Journal of Economic Perspectives.  (Full disclosure: I've worked as Managing Editor of JEP since the first issue back in 1987.)

ConocoPhillips – Cash Flow Neutral Isn’t Bullish

ConocoPhillips reported a large Q1 loss, but the market was impressed with the earnings beat.  The independent E&P is still struggling towards reaching cash flow neutral as the debt load soars.  The company lacks a credible plan for lower oil prices with a focus on flat production and keeping a dividend.  My last article remained neutral on ConocoPhillips (NYSE:COP) from a prior bearish

‚Oil Prices and the Global Economy: It’s Complicated‘

Maurice Obstfeld, Gian Maria Milesi-Ferretti, and Rabah Arezki::

Oil Prices and the Global Economy: It’s Complicated: Oil prices have been persistently low for well over a year and a half now, but as the April 2016 World Economic Outlook will document, the widely anticipated “shot in the arm” for the global economy has yet to materialize. We argue that, paradoxically, global benefits from low prices will likely appear only after prices have recovered somewhat, and advanced economies have made more progress surmounting the current low interest rate environment. ...
This outcome has puzzled many observers including us at the Fund, who had believed that oil-price declines would be a net plus for the world economy, obviously hurting exporters but delivering more-than-offsetting gains to importers. The key assumption behind that belief is a specific difference in saving behavior between oil importers and oil exporters: consumers in oil importing regions such as Europe have a higher marginal propensity to consume out of income than those in exporters such as Saudi Arabia. ...
To address this question, the forthcoming April 2016 World Economic Outlook compares 2015 domestic demand growth in oil importers and oil exporters to what we expected in April 2015—after the first substantial decline in oil prices. The lion’s share of the downward revision for global demand comes from oil exporters—despite their relatively small share of global GDP (about 12 percent). But domestic demand in oil importers was also no better than we had forecast, despite a fall in oil prices that was bigger than anticipated. ...

Skipping forward to the final paragraph:

Persistently low oil prices complicate the conduct of monetary policy, risking further inroads by unanchored inflation expectations. What is more, the current episode of historically low oil prices could ignite a variety of dislocations including corporate and sovereign defaults, dislocations that can feed back into already jittery financial markets. The possibility of such negative feedback loops makes demand support by the global community—along with a range of country-specific structural and financial-sector reforms—all the more urgent.

Chevron – Another Missed Opportunity

Chevron affirmed production goals and updated capital spending targets for 2017 and 2018. The company missed an opportunity to set production targets reflective of the current market reality. The plan to cover dividends in 2017 from cash flows remains in doubt. With Analyst Day today, Chevron (NYSE:CVX) had another opportunity to take a step forward by making production cuts or at least

Occidental Will Survive, For Now

Occidental continues to hold up well due to a strong balance sheet. The company still needs to work on improving cash flows to ensure the dividend can survive the current oil price slump. The stock has more downside risk with cash flows in the current negative position. With the cutting of the dividend by ConocoPhillips (NYSE:COP), all of the major oil companies are under extra

Occidental: Still Producing Too Much Oil

Though oil continues plunging, the oil giants continue producing more. For Q4, Occidental Petroleum (OXY) had roughly flat production. The worst part is that OXY plans to grow production by 2% to 4% in 2016. The stock has held up somewhat strong, but the inability to turn off the spigot remains troubling. Disclosure: No positions mentioned. Please review the disclaimer page for more details

‚Can Lower Oil Prices Cause a Recession?‘

Jim Hamilton:

Can lower oil prices cause a recession?: ...A drop in oil prices means less money in the hands of oil producers but more money in the hands of oil consumers. Currently the U.S. is importing about 5.1 million barrels a day more than we’re exporting of crude oil and petroleum products. At $100 a barrel, that had been a net drain on the U.S. economy of $190 billion each year. That drain that will now be cut by more than half by falling oil prices.
We usually see consumers spend their extra income right away, whereas it takes more time for producers to alter their spending plans. As a result, even if the U.S. was not a net importer of oil, we might still expect to see a short-run positive stimulus from dropping oil prices. ... The conclusion I draw ... is that each consumer spent more than they would have if oil prices had not fallen, but that there were other macro headwinds at the same time that were offsetting some of the positive stimulus of falling oil prices.
In any case, we’ve now had plenty of time for cuts in spending by U.S. oil producers to start to have an economic effect of their own. If there’s an increase in spending by consumers of $1 and a decrease in spending by producers of $1, it’s not really a net wash for the economy. The reason is that the consumers are spending their money in different places and on different items than the producers are cutting. There is a lot of specialized labor and capital that’s involved in oil extraction that can’t move costlessly to some other sector when the oil patch goes sour. ...
And of course we’re talking here not just about the people who work in the oil industry itself but all the other industries and services that sell to the oil sector and more in turn who sell to these suppliers. ...
There are thus some reasons why a decrease in oil prices would be a boost to the U.S. economy and other reasons why it could even be a drag. A number of studies have looked at the effects of oil price decreases and concluded that these have little or no net positive effect on U.S. real GDP growth...
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