Monday, January 18, 2016

Oil Gluttony

As I’m not a commodities trader (shocker!), I have not been in the habit of following the daily ups and downs of the price of oil.

Except that, lately, you’d have to be living under a rock not to know that the price of Brent crude and West Texas Intermediate have collapsed, breaching the $30-level and hitting a 12-year-low.

Of course, the weakness in the oil market has already been big news for months now, as prices nosedived from around 60-70 dollars just seven months ago.

In this new year, however, cheap oil has become THE economic story. The price seems to be heading ever lower ($28 today), and nerves are getting frayed over the ramifications for the global economy at large. Things will only get worse for oil now that sanctions against Iran have been lifted, allowing that nation to openly add its considerable oil production to the glut.

Naturally – unless you are in the oil business, and many people are – you might see crude at $30, or even lower, as a net positive. Gasoline prices in the US have dipped below two dollars a gallon, almost half of the price 18 months ago, creating a windfall for American drivers. Gas in Finland is also relatively cheap now, around $6 a gallon, compared to the more normal $9. (I remember that when I worked at my father’s service station back in high school, and before the 1973 oil shock, gas was a mere 0.29¢ a gallon.)

Strangely, Obama’s critics, so eager to blame him when gas was almost $4, seem to be withholding their praise for him for making gas so cheap now perhaps suddenly realizing that presidents don’t have much to do with the price of gas.  Funny how that works.

For American families trying to live on a tight budget, cheap gas brings welcome relief, of course. On the downside, however, I worry that cheaper gas just gives road-happy Americans even less incentive to alter their wasteful lifestyles. The privilege of pumping carbon into the air just got a lot cheaper, so why hold back? Drive, baby drive!

Still, where cheaper oil is a having a not-so-positive effect is with the producers, especially those countries that depend too much for their own good on drilling deep into the ground and pumping petroleum to the surface.

Oil-producing nations, most prominently Saudi Arabia and Venezuela, have been in the media spotlight as the current glut exposes how their over-dependence on exploiting fossil fuels threatens to unbalance their economies. Finland’s neighbor Russia is also certainly one of those nations that has gotten a lot of media attention as a country facing tougher times if the oil glut continues. The reports are often bleak.

A friend on Facebook recently wondered why you don’t hear similarly dire news about some less-known oil producers, especially another Finnish neighbor, Norway.

That got me wondering, as well:  what exactly is Norway’s situation, and how does it compare to Russia’s own much more publicized dire straits.

In some ways, Norway and Russia are in the same boat. Petroleum makes up between 66-70% of Russia’s exports, a significant enough share. Norway relies less on hydrocarbons, but only by a little, something like 64% of its exports. Both are largely one-trick ponies and both are seriously affected by the downturn in oil.

There is a nifty measurement, the Economic Complexity Index, that expresses how complex a nation’s economy is, based in large part on the diversity of the country’s exports. Both Norway (in 33rd place) and Russia (50th) are ranked well below more economically balanced nations, such as the US (14th) and Germany (2nd). I was a bit surprised to see that Finland ranks a very respectable 8th. Good for Suomi.

So, both Russia and Norway are similarly disadvantaged by having too many of their eggs, so to speak, in the same basket. There seem to be big differences, however, in how well each country might be able to cope if that basket of eggs is upended.

Reuters has reported that the budget for the Russian government is projecting a 3% deficit for this year – based on oil at $50. If oil stays at $30, the deficit will grow to 5%. That’s not necessarily a huge deficit, mind you. Still, oil at $20 or less, as some analysts have predicted, will put even more strain on government finances.

Making up for the shortfall might force Russia to inflict additional economic pain on its citizens, who are already dealing with a recession. This would involve cutting spending and raising taxes, measures that have already sparked some strikes by protesting truck drivers.

Another tack would be to dip into the country’s “rainy day” funds, two sovereign wealth funds that contain some $130 billion. Those accounts have already been depleted by $50 billion since 2014. According to an analyst quoted by Reuters, resorting to using those funds to plug the budget gap would drain them dry in a little over a year, if oil stays low that long.

By contrast, Norway is in a much better situation. It is not in a recession and has no deficit. Yet. In 2014, it still enjoyed a budget surplus of 9% even after a downward trend over the last few years.

Still, the oil glut has certainly hit the Norwegian economy, and there are reports the country may be forced, for the first time ever, to withdraw from its own “rainy day” fund. I find it somewhat amazing, that this fund contains a whopping $856 billion, more than five-times that of Russia’s.

Little Norway, it seems, has done a comparatively much better job managing its oil wealth. Norway is also not under the kind sanctions that are hampering Russia’s economy, though losing the Russian market for its third biggest export, salmon and other seafood, due to a retaliatory ban imposed by Russia in reaction to those sanctions has no doubt been problematic for Norway.

In short, it seems that the depressed oil market isn’t a likely to trigger in Norway the same kind of economic turmoil – and potential political instability – that Russia might be facing.

There’s been much talk about how Vladimir Putin’s reelection in 2018 depends on maintaining an economy healthy enough to keep the Russian people happy. Presumably, keeping the electorate happy in Norway, often rated as one of the happiest countries on Earth, is a much easier task.

In all seriousness, though, I don’t think anyone would think the geopolitical effects of the oil glut on Norway, a small, stable, prosperous country, are anywhere as worrisome as what the bottom falling out of the oil market could mean for a large, somewhat hard-pressed nation like Russia.

Interestingly enough, Finnish TV has recently started broadcasting a miniseries from Norway called Okkupert (“Occupied”).

The premise of this political thriller is that Norway, having developed the technology to harness an unlimited amount of power from a fictional element called Torium (named after Thor!), intends to unilaterally shut down its North Sea oil rigs and share the new technology with the world, all in the name of a future free of fossil fuels. This doesn’t sit well, however, with the powers that be within the EU, which shockingly enlists Russia to do the dirty work of invading and occupying Norway in order to keep the crude flowing.

It's farfetched, as thrillers often are. Only the second episode has aired so far, so we don’t yet know whether the forces of green energy or black energy will prevail in the end. 

Meanwhile, it’s safe to say that the oil glut crisis in the real world, though harsh enough on some economies, will not likely lead to high drama worthy of a thriller. Well, not in Norway anyway.  


  1. It's hard to say where this will end up. A moot point, perhaps, considering what fossil fuels have done to Mother Earth.

    I talk to people who know far more than I about oil prices. Some say it will soon regain most of the ground it has lost. Others have pointed out that many consumerist economies are moving swiftly away from hydrocarbons and into renewable energy.

    We'll see.

    1. I think T. Boone Pickens was predicting the other day that oil will be back to a 100 dollars before the end of the year. And Warren Buffet is said to be heavily buying oil stocks. So, maybe it will rebound after all. Who can say.

    2. Let's hope it doesn't. Cheap oil isn't a good thing, but although cheap energy blocks investment into reneables, etc. it also makes the production of fossil fuels less profitable and stops new production and we know they would invariably be dirtier and more hazardous than the current ones. It could also give some political room for dropping subsidies and thus somewhat paradoxically increase investment for other sources of energy.

  2. Norway is basically doing the right thing with it's oil profits and simply saving most of them. If you let it dominate your public budget, not only do you have a very nasty dependency all the time and end up crowding out your other sources of income, but you're in deep trouble when the oil starts running out, market dries up, etc.

    Thorium is actually far from fictional and has a great promise for nuclear fission, which would help the world get rid of fossil fuels. You really should read up on it. Along with breeder reactors it'd be a game-changer (and certain so-called environmentalists stopped opposing it). Not a revolution, mind you, but still worth doing to get rid of fossil fules. The rest is bunk, though, and to think that restarting oilwells would put the thorium genie back in the bottle... yeah, right.

    I just can't be bothered with a ridiculous premise like that. I'm grateful I read Dan Simmons' sorry Flashback so I have the good sense to be more discriminating in the future. That book has idiotic and preachy stance on things and, more importantly, it presents such a ridiculous history, with impossible dynamics and basic lack of clue in terms of economy, environment and physics, as a premise, that it gave a great inoculation against that sort of thing. The ending was incredibly naïve as well. Now that I know how misguided he is, I don't think I'll be reading any more books from the author. An author's lack of basic facts doesn't necessarily hinder a book, but after that experience, I no longer have the confidence he has the sense to steer clear of parading it.