Posts tagged “economics”
While U.S. benchmark (WTI) crude-oil futures were up 4.6% since the start of 2013, the futures prices of the global benchmark Brent was down. Analysts suggest that the investment demand for exposure to oil prices was supporting these numbers, not physical demand growth. So what information content is behind oil prices, and how do we parse reality from the hype?
Introducing Markets and Routes
Greetings — I’m Jennifer Warren, the latest columnist for Energy Trends Insider.
My space involves financial aspects and economics of energy resources and markets. The areas of natural resources, the environment and sustainability are also of importance to me. Dissecting global trends that criss-cross these subject areas are fair game, when appropriate. Much of my prior work has a research-based orientation or underpinning, with the goal of delivering actionable insights or context for decision making.
An overall theme in my work is understanding how complex systems interact — with energy being a vast subject to analyze. And incidentally, energy producers and innovators surround me in Dallas. The many wind, natural gas and oil producers here have influenced my thinking, with my most trusted sources graciously spending countless hours of interview time with me.
But first, a little about how I got involved in energy.
In 2002, my work with an academic institution led to the creation of a faculty research website, where the finance department produced outsized amounts of research. My work in energy began then. I realized energy was the most global industry sector that existed, with players spanning from the most sophisticated to the true-grit entrepreneurs to the brilliant financial economists I had the privilege of interviewing. Here was a field that one could spend their lifetime exploring. Being exposed to cutting edge research has definitely given me the impetus and curiosity to apply this line of thinking to the world of energy.
Most energy projects never get beyond the development process. There are many reasons for this, but failure to obtain financing has derailed an increasing number of projects over the past few years. The most common reason is the fundamental economics of the project do not provide confidence in an adequate return being paid to investors. There is effectively no hope for obtaining financing for any energy project if the project developer cannot demonstrate sound economic fundamentals to a potential investor.
Mike DellaGala and Jonathan McClelland’s recent article in AOL energy does a great job laying out the building blocks for financing a solar project. While some of the specifics of a solar development don’t apply universally (for example, solar trading credits and the solar resource are uniquely relevant to solar), the broad principles cover the key aspects of the basic economic story for an energy project.
More challenging to understand than failed economic fundamentals is why some projects do not get funded even where a developer can demonstrate solid financial fundamentals and the potential for returns that appear to reflect the investment risk. Over the past three years there has been consistent talk of how much “money is sitting on the sidelines” looking for good energy projects. Energy investors are commonly heard to say “if the project is really that good, it will get financed,” yet some projects that appear to be good, or even to be very good, don’t ever find financing.
It seems that no matter what financial series you look at, there’s a similar pattern of ups and downs over the last few years. I was curious to get a quick quantitative impression of how much of a contribution aggregate factors have been making to recent movements in the price of oil.
A Complex Issue
A couple of months ago, Robert Rapier, Sam Avro, and I had an interesting debate about the resource curse in the context of a Tom Friedman column about how countries that aren’t blessed with natural resources succeed because they are forced to invest in their people. I believe, as my post (Oil – Easy to Produce, but Not Easy to Buy) said, that countries blessed with natural resources like oil “don’t have to learn how to build factories” because they can sell oil to the world instead. Robert and Sam cited countries like Norway, the U.S., and the U.K. as examples of countries that have thrived even with resources.
The new edition of The New York Review of Books features an article, “What Makes Countries Rich or Poor?” written by Jared Diamond that is a review of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson. This is another book to add to my ever-growing list of ‘must-reads’ – but Diamond’s review gave some interesting points that are very relevant to our previous discussion about the resources curse and what causes countries to grow or fail. The truth, as shown by the article, is complicated: there are many determinants to growth, and it is difficult to separate out individual causes.
The Steep Cost of Sudden Price Spikes One of my recent essays discussed the relationship between high oil prices and recession. Consumers who suddenly find themselves paying more for fuel are hit with the equivalent of a stealth tax, leaving less money available to fuel domestic growth through purchases or investments. Thus, unsurprisingly, there is a strong historical link between escalating oil prices and economic recessions. But despite the financial pain (in fact, because of it) there is a major upside to higher oil prices. Consumers do respond to the price signal, and this response can provide some protection against further price spikes. In this essay, I point out how we can mitigate against the effects of sudden price spikes,… Continue»
A theme that I commonly discuss in articles and presentations is the problem of economic recovery when oil prices are high. If the market is well-supplied and there is ample excess oil production capacity, oil prices tend to be moderate and stable, and economic growth can proceed without much headwind. However, the world has now had essentially flat oil production for several years in the face of historically high prices. This implies — and I believe it is true — that there are serious supply constraints within the system. I believe that some countries do still possess spare capacity, but that the overall amount isn’t large. I think if there was much excess capacity, we would see countries taking advantage… Continue»
I am no economist, but bear with me while I try to explain why I think we are in for a very long and difficult economic period. My thesis for The Long Recession goes something like this: Historically, when oil prices rose quickly and remained high the economy struggled. High oil prices lead to recessions and depressions, because they suck so much money out of the economy. A person whose energy bills go up by $100 or $200 per month has that much less to spend on other things. It is essentially like a tax applied to everyone that uses energy — with a large chunk of the money exiting the U.S. and contributing to our trade deficit. Historically after… Continue»
Signs of Recovery While it will only be with years of hindsight that we can determine the total environmental impact of the Macondo blowout in the Gulf of Mexico, there are encouraging signs that the environmental devastation will be less severe than many had feared. Today a reader sent me this encouraging story: Oil spill area coming back to life More than a dozen scientists interviewed by The Associated Press say the marsh here and across the Louisiana coast is healing itself, giving them hope delicate wetlands might weather the worst offshore spill in US history better than they had feared. Some marshland could be lost, but the amount appears to be small compared with what the coast loses every… Continue»
One of the themes I have been hitting during my recent presentations concerns the oil price risk hanging over our heads. My hypothesis goes something like this. The days of huge supply excesses in the oil production world are over. Those 5 million barrel per day supply cushions of 10 years ago kept oil prices low, and fairly stable. As the excesses shrank we began to see increasing volatility and prices steadily climbing. Higher oil prices have historically caused recessions. We are currently in a recession, albeit one in which high oil prices weren’t the primary cause. (More on that at the end). But, oil supplies were already tight prior to the recession. The recession has lowered demand, and at… Continue»