On a bright, warm autumn day in 1973, after long and serious marital deliberations, my father approached our shiny, little family car to glue a ‘Monday’ sticker to its windscreen.
Mum and dad had decided that this was the day when our car would stay at home. Every car in Austria had to have a sticker like this, designating the day of the week when it could not be used. Arab countries, enraged by the US support for Israel in the Yom Kippur War, had decided to use their oil as a weapon and as a consequence, all over Austria gas stations were running short of petrol, and the government therefore had to ration fuel consumption.
The oil embargo, aimed mainly against the US, the UK and Canada, was wreaking havoc on all, punishing uninvolved countries, like my native Austria, regardless. The crisis had put to an end decades of ever-growing prosperity, castigating households with rampant inflation, job losses and shrinking income. It proved, against scholarly wisdom, that stagnation AND inflation could menacingly coexist. A quadrupling oil price had cars run dry and the stock markets crash – 45 per cent in the US and 73 per cent in the UK. Christmas lights had to come down to save energy.
The world has changed significantly since then, and rising oil prices seem less of threat these days. Upstream technology has improved to levels which make it look very unlikely to ever run out of crude. We do not speak of ‘peak supply’ anymore, but of ‘peak demand’, meaning that the capacity of supply will outpace diminishing consumption – a consequence of our battle against climate change. Cars have become much more fuel-efficient, houses are increasingly better insulated, alternative sources of energy like wind and solar are in the ascent and transport could soon be predominantly based on electricity.
OPEC, the once mighty cartel of oil producing countries, is today – more than 40 years later – shaken by feuds and conflict, pitting Saudi Arabia against Iran and Qatar. Technological advancements have propelled the US to the forefront of oil extracting countries. The natural decline of aging deposits in the North Sea, Russia and China has been easily compensated for by new finds and technological prowess, aided by artificial intelligence. Wars in Libya, Yemen and Syria have thus hardly dented worldwide crude output, and not even super-producer Venezuela, descending into political anarchy and economically in free fall with oil output reduced by more than a third, had much of an impact.
And yet: a barrel of oil, priced at almost $75 in the last few weeks, has become three times dearer in just three years. Effects on economic growth and inflation could soon become a reason to worry.
Americans at the bottom of the income distribution, who had been given a pitiful, symbolic tax relief just a few months ago, have seen these miserable gains all but wiped out when filling up their cars to drive to work. Their alleged spokesman, Donald Trump, was quick to put twitter-blame on Russia and Saudi Arabia, which had agreed – and successfully maintained over the last 18 months – stringent output curbs.
Are OPEC and its partners making a painful comeback? Will we yet again have to pick a day when our cars have to stay in the driveway?
When the economy snaps, opening the oil tabs full throttle will be too late
New strains are indeed surfacing in the economy. It is not just car drivers who are starting to feel the pain, but refiners and the petro-chemical industry too, producing anything from plastics to cosmetics and rubber. While most US corporations could report soaring income in the first quarter of 2018, tire maker Goodyear suffered a 53 per cent drop in profits, due to price rises of oil-based raw materials. Prodigious gains in US oil drilling are not coming to the rescue: transport and refining prove a bottleneck.
It would be tempting to advise retail investors like you and me to reposition our portfolios towards Big Oil now, despite the fact we all may have valid ethical or even long-term financial doubts about the viability of the industry. The likes of Chevron, Total, Shell, Exxon Mobil and even BP could report bumper earnings in the first quarter of the year after all, based on years of radical cost cutting, reduced investment programmes and the rapidly rising oil price.
Yet caution is asked for. While rising oil prices might be good for oil companies (and their US workers, earning for instance $100,000 just for driving oil trucks in Texas and North Dakota), oil at $100 per barrel will torpedo the economy. Once the US – and the world – goes into recession, even Big Oil will lose out. When the economy snaps, opening the oil tabs full throttle will be too late.
This could be the reason why the markets have reacted rather cautiously to the good news of soaring oil profits: oil shares are only moderately up. Unlike Trump and his finger-pointing tweets, I do not think that OPEC has regained enough market power to dictate oil prices to the world, even when cooperating with Russia, one of the Leviathans of crude production. They have tried to pull this off in the past and have always failed. OPEC members have violated their allotted quotas on a regular basis wherever they could, and would happily continue to do so.
A more plausible reason for ever dearer oil prices is the rise of political risks emanating from the US. Trade currents become unpredictable when trade wars loom against China or Germany and ever more unpredictable embargoes against Russia.
The risks of real war can easily materialise, with the US taking sides against Iran, which may not only hamper Iran’s oil output but may endanger Saudi Arabia’s oil terminals and other Gulf States’ export capabilities as well. Rocket attacks, so far limited to the hapless Yemeni rebels, may become much more threatening, augmented by suicide bombers inflicting serious damage to the Gulf’s oil logistics.
The US will hope in vain to avoid pain through its newly gained oil producing riches. Markets are intrinsically connected and prices are global. Yet this will mean little solace to all of us when markets come crashing down.
In such Armageddon, Big Oil will not win. When prices shoot through the roof there will few consumers left willing to pay up. Revenues will suffer. In a world brought down by Lighthizer, Navarro and Bolton, it will be only arms manufactures which will carry the day.
As a small-scale investor I am simply not cynical enough to be persuaded to share their profits.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.