Today, I’m going to hold an exceptional conference about the end of oil. This conference is part of the topic about finance because of the future consequences on the economy.
The rapprochement between Exxon and the Kremlin is a symptom of the physical limits to growth.
According to the International Energy Agency and HSBC, it is necessary that the prices of the barrel go up, and quickly, if not the peak oil is likely to be imminent.
But can oil prices rise quickly?
Donald Trump claimed to appoint at the head of the American diplomacy the boss of the oil giant Exxon, Rex Tillerson. It’s not sure that the Senate validated this appointment, while the CIA and the NSA claimed that Vladimir Putin, a key partner of Exxon, managed to influence the US presidential campaign in favor of Trump.
"Tillerson Rex", by TOad
This choice of the new American president, whatever happens, is symptomatic of the question discussed here: are we fighting against the physical limits to economic growth?
The Kremlin as well as Exxon have their backs to the wall facing this issue, and consider each other as emergency exits.
Exxon first. The growth of the American firm is eaten from the inside by the physical limits of its oil fields.
Exxon's oil production has declined slowly but steadily over the past ten years, although in the meantime the biggest oil firm has doubled its productive investments.
Doubling the fertilizer for a crop that decreases: there is a problem in the soil.
Exxon's crude oil extractions were 2,221 million barrels per day (Mb / d) in the third quarter of 2016, down 17% from a historical peak of 2.681 million barrels a day in 2006.
Since 2015, the fall in oil prices has caused the investments of Exxon - as in the entire crude industry - to collapse, which does not bode well for the future production.
The roots of evil are deeper than the fall in prices. From 2011, when the barrel was worth more than $ 100 (compared to about $ 58 today), the billions spent to sustain production have continuously increased the free cash flow of 'Exxon
2011 is the date when Rex Tillerson imposed a sensational and perilous change on Exxon, partnering with Vladimir Putin. The goal is to develop - with hundreds of billions of potential investments over the next few decades - the two ultimate major targets on Earth for the petroleum industry, of which the real potential remains unknown: the Russian Arctic and the oil shale of Western Siberia.
Russia now. Russian oil production was maintained despite the fall in oil prices (to the surprise of all observers). But the conventional oil fields of Western Siberia are old and many are depleted. The total production of Russian oil is doomed to a long decline, repeated for several years the International Energy Agency, which insists in its latest annual report that “neither the future potential of the Arctic nor the Russian resources In shale oil are enough to compensate for the decline".
The Kremlin has an urgent and massive need for foreign capital and expertise, whose access remains hampered by the sanctions imposed by the Obama administration following the Ukrainian crisis.
The International Energy Agency (IEA), in the politically correct language of its latest annual report published in November, is insisting on certain points more openly than ever. Here are some of the most significant warnings:
- more than 50% of the world's oil fields have reached their production peaks, and will decline in the future;
- investments in the development of hydrocarbon production are expected to fall to 450 billion dollars in 2016, against a record amount of more than 700 billion before the prices fell;
- the annual discoveries are at their lowest level in 70 years;
- by 2025, a lack of 16 million barrels per day is expected, the equivalent of the production of Saudi Arabia and Iran, to fill the gap between the expected level of output and the decline in current production (94,5 Mb/d in 2015);
- this gap can be filled by new resources, provided that the investments quickly rise to more than 700 billion $, their record before the fall in oil prices (hypothesis of the "New Policies Scenario", see below) ;
More alarmist, the bank HSBC (which had already shown its concern about peak oil), highlighted the following facts in a September report entitled "Will the decline of mature fields lead to the next oil crisis? "
- at least 64% of world production is declining;
- by 2040 it will be necessary to develop more than 40 Mb/d of new resources (nearly half of the world production, or the equivalent of four Saudi Arabia) only to maintain the production at its Current level;
- small oil fields generally decline 2 times faster than large ones, and the world production of crude oil is increasingly dependent on small fields;
- "significant improvements in the production and efficiency of drilling in response to falling prices have masked the underlying decline rates experienced by many companies, but the degree to which these improvements can continue is becoming limited ".
It is necessary that the prices of the barrel go up, and quickly, in order to boost investments, otherwise the peak oil is likely to be imminent, warned the IEA and HSBC.
IEA Executive Director Fatih Birol has been reiterating (for the last two years) that his main fear is that "investments may collapse, which could have major implications for security of supply in the years to come ".
An observation confirmed since September by eminent industry actors such as Saudi energy minister Khalid al-Falih ("If we do not plan enough investment, the world will pay a huge price in the form of shortages of oil "), or Total's CEO, Patrick Pouyanné (" if we do not invest enough ... In 2020, the offer will be insufficient ").
But can the prices of the barrel go up quickly enough?
Despite the cuts in production that OPEC members and several other producing countries, notably Russia, have committed to implement in the coming months, no major source of analysis anticipates a return of the crude oil at around $ 100 a barrel, the level that prevailed when investment was at its highest.
On the demand side, the evolution of the world economic situation leaves little room for anticipating a sharp increase in the prices of the barrel.
"Globalization" seems to be slowing down, despite historically low interest rates, judging by the evolution of international trade:
The growth of world trade is historically closely linked to overall economic growth.
By far the main engine of this global growth, China's economy, highly dependent on its exports, is particularly threatened by the slowdown in international trade.
Chinese President Xi Jinping is ready to abandon the minimum target of 6.5% annual growth so far sanctified by Beijing, according to an indiscretion reported by the Bloomberg agency. At stake: concerns about the development of the Chinese debt, and an international environment made more uncertain by the election of Donald Trump to the US presidency.
The level of indebtedness of Chinese companies alone reached 171% of China's GDP in 2015, according to Standard & Poor's, twice as much as in the United States and Europe. While before the 2008 crisis, China needed a dollar of debt to generate a dollar of GDP, the ratio is now six dollars of debt to one dollar of GDP, reports Morgan Stanley!
Former chief economist of the International Monetary Fund and professor at Harvard, Kenneth Rogoff warned in a forum translated and published by Les Echos in early December:
"Current markets are obsessed with the question of how far the US Federal Reserve will raise interest rates in the next twelve months. They seem to lack long-term vision. The real concern should be on this other issue: Will it be able to lower rates in the next major recession? Given its difficulty in ensuring that its base rate will exceed 2% next year, there will be very little room for maneuver to make cuts in the event of a recession. (...) There may not be enough time before the next deep recession to lay the foundation for an effective policy of negative interest rates or to set a higher inflation target. But this is no excuse for not starting to examine these options closely. "
In other words, the growth potential of the global economy could be too low to sustain global oil production, our prime source of energy. This hypothesis, which seems to appear on the one hand, is a result of too low a rise in the incomes of the middle classes and on the other hand an excessive increase in the various costs induced by the necessarily increasing complexity of our technical societies.
The coming months are going to be instructive: "May you live in interesting times" ...