Oil: The last hurrah

I still remember the oil shocks of the Iran-Iraq war, and of course, the US-Iraq War (which saw peak oil/Hubbert's peak and $147/barrel). And I remember the terror as we contemplated a future without oil and how our lives would change if we had to scrape the bottom of the barrel. There are desperate co-ordinated attempts to create the same kind of panic this time. The spread between Brent and WTI, a kind of 'fear premium' that indicated the state of geopolitics (mostly Middle Eastern politics), is now at historic highs. This spread was supposed to represent how much Asia and Europe would be paying extra over the actual 'economic' price of oil (as represented by the 'strategically comfortable' US). The obvious motive right now is to recoup the $1.4 trillion of bank lending that had gone into shale oil during its boom-capex years (2013 to 2017). All this has come good. Now for fresh lending to happen, you need a three-year forward curve (which, right now, is already in backwardation to the extent of 9 per cent in the first year itself). Given that the shale-oil cost curve is now estimated to be under $48 and is going to $35, the incremental supply possible is very large (which explains the stubborn refusal to invest in Big Oil capex any more). So there are many votaries of higher oil prices and they are all very powerful people. But there are two natural forces that will weigh on oil prices, like the proverbial elephant in the room. One is that only 40-60 per cent

This article was originally published on July 06, 2018.