If economics is the dismal science, then reporting on economic issues is in contention for the title of second most dismal science.
Take, for instance, stories about oil prices and where they might go.
There’s one from The Star and a new one this sunny Wednesday from cbc.ca. Both take quotes from different people all of whom suggest oil prices will zoom back up to 2008 levels and beyond in very short order.
You get this kind of stuff from the Star’s reporter, for example:
All of this means that when global demand comes roaring back – as it will in China, India and other emerging economies –and returns to its pre-recession levels in mature economies in North America and Europe, the needed additional supply won't be there to satisfy the resurgent demand except at exorbitant prices.
Lack of exploration will supposedly mean tight supplies at a time of supposedly high demand on top of that and all that will mean stratospherically high prices. The cbc.ca story is in a similar vein and both take as part of their story the recent jump in oil prices into the US$60 a barrel range for West Texas Intermediate.
But hang on a second.
The most recent spike has been caused by declines in the value of the American dollar which are themselves tied to uncertainty about the future of North American car manufacturers.
Beyond that, it’s a little bit much to take the word of the Saudi oil minister or a guy – T.Boone Pickens – both of whom, it should have been noted, have a vested interested in seeing oil prices shoot up to $200 a barrel.
The major problem with these two stories is that they disconnect the connected and then reconnect them in a way which is dubious, at best.
Take The Star for example, which blames the drop in exploration on falling oil prices and then adds that “[t]he worldwide credit scarcity didn't help.”
These two things aren’t unrelated.
Oil prices dropped as the credit market crashed which itself took all the energy out of what was driving heightened American demand. All of that economic boom stuff business writers were drooling over right up to mid-2008 was fuelled by an artificially inflated supply of easy credit. When the cash left, so did all the growth. Not surprisingly, we’ve seen almost unprecedented drops across the board in the economy around the world.
Demand is not going to come “zooming back”, as The Star claims, when the American economy is still struggling and cash is tight. If oil does shoot up in price for understandable reasons – security concerns, refining issues etc – then that will only prolong the recession.
People with only so much cash to spend will be re-thinking their plans if the cost of transportation shoots up again. It doesn’t matter if the people we are talking about are individuals or companies. Demand isn’t inelastic, as cbc.ca suggests, for plant expansions or cross-country road trips. That’s pretty much optional, especially if you don’t have the cash.
The other thing they miss-connect is price and exploration.
The local oil patch is a good indicator of how some of this works. Exploring offshore Newfoundland and Labrador is costly. We saw a growth in exploration here in years when oil prices were well below US$60 a barrel and no one in their right mind was forecasting $100 a barrel let alone $150 by 2008 and $200 by 2010-2012.
The Hebron project - already discovered but very costly to develop - suddenly found life when oil was around US$25 a barrel and, as we’ve noted before, only people about to be pumped full of Thorazine (r)were screaming about paying 10 times that for oil within five or 10 years.
When it comes to exploration, we can take Chevron’s 2009 capital plan as a good indicator as well of how the major oil companies tie this stuff together. Chevron’s 2009 expenditures announced in January were the same as 2008.
They aren’t lower. They are the same.
In fact, the major oil companies have announced plans to continue their capex programs. The ones slashing are smaller, for the most part. In the case of the oil sands, companies are lopping off spending on very costly projects which have a consistently low rate of return. In other words, the projects that cost the most to produce and return relatively less profit are going into mothballs at a time when the cash needed to build the things is tightening.
Makes perfect sense.
And, at the same time, oil companies are continuing to bring new production on stream and are exploring for new conventional oil supplies because they know they can make money at it even at US$50 a barrel or less.
Deep water offshore oil might be a technological stretch today but in a couple of years time, technology will allow that to be produced far more efficiently than oil sands. After all, what’s down there a few miles below the sea floor is basically the same oil that comes out of wells much closer to the surface. You just need more pipes to reach the reservoir.
Part of what we are seeing in these reports is an echo of the basic problem we noted some time ago. Forecasts tend to travel in packs and those packs tend to carry around the same set of assumptions. When oil was US$35 a barrel, everyone forecast oil at those prices into the future. As oil prices went up and didn’t come back down, the new forecast norm kept getting reset higher and higher.
All you can really see in The Star and cbc.ca is just a confirmation there are still people out there who – for one reason or another - are still using the first half of 2008 as their frame of reference without allowing that the arse fell out of it all in the second half of the year.
Put another way, the “fundamentals” all these people like to talk about were the old fundamentals. They just haven’t figured out what the new fundamentals are. They have to reset their assumptions for the mid- to long-term.
And when it comes to peak oil and the end of cheap oil and all that stuff, people just have to recall the same sort of thinking from the mid-1970s. Lots of people forecast the end of the world and super-high oil prices back then and those predictions didn’t come true.
That’s basically because the world hit the end of $5 oil but the doom-sayers never noticed all the stuff out there that was viable at $10 and $20 or even $50. In the current context there’s still lots of oil out there viable at those prices.
We don’t have to go to $100 a barrel simply because the supply is there. And over on the demand side of the equation? Well, let’s just say that the things which drove demand before June 2008 just aren’t there any more.
The global economy still hasn’t found its new “fundamentals” yet, but one thing is a good bet: they won’t be the same ones we had before the Great Crash of 2008.
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