80 USD oil is not cheap

I am feeling a little like in a warp bubble – don’t you?

Browsing the news-feeds I am swamped with posts about projects that are not doing well because the oil price is so low, countries in trouble because the oil price is so low, markets in panic because the oil price is so low.

What the hell is wrong with the planet? The oil price goes down from astronomic heights and everyone succumbs to panic.

Let’s get to the core of this because I have hinted at it zillion times and nobody seemed interested so far. Oil at USD 80 in 2014 terms is not cheap oil. It is pretty damn expensive oil, just a little less expensive than it used to be but we are still firmly in Hillbilly land.

Let’s do this the right way.

What is cheap? Easy, if anyone can afford it and does not feel the economic pain in a meaningful way. Is that the case for oil or its products? Is it indeed the case for anything in energy? Filling up your car is still a decision with hard feelings involved for most of us.

We can pay but we feel the impact of it for real. It’s not like morning coffee.

oilnotcheap2What is expensive then? Well, if you decide that you want it but you know that it will dent your budget and might have an impact on your lifestyle. In other words, energy is a real item on everyone’s personal budget and it sure is one for corporations. It does not fall under miscellaneous. That’s at least not what it feels like. – don’t you agree?

Are companies still taking important decisions on their fleet or other stuff because of energy prices? You sure can bet on it. Saving energy is still a big topic that pays professional called energy consultants pretty damn well. I know what I am talking about. When I first went independent, the first thing I did was energy consultancy.

Let’s put it into numbers. In 1998, the annual average WTI oil price was USD 11.91. In January 1st, 2014 USD that number would be USD 17.10. Today, WTI is at 78,45. That’s 450% of the 1998 real world level. That was cheap and investment decisions were still being made at levels slightly above that.

So, energy is expensive.

What is the problem then? Well, it’s not expensive enough for some folks out there that need energy prices at some astronomical level in order to make their bad project look good, or, at least, worthwhile. Those who need energy madness in order to get their failing national budgets back into shape. Those who need super high prices in order to justify their otherwise completely useless services.

Let’s face it. High energy prices are a disease. They inhibit human activity and make every move a pain. But they are also an incredible amplifier.

Pain, and those prices clearly are a pain, creates stimulation. Clearly not the stimulation most of us would find pleasant but this is precisely the trick. Most humans are lazy and too damn comfy to do anything about pretty much anything as long as the pain level has not passed a certain threshold.

I react to pain pretty quickly – well, at least, the economic sort of pain. I just hate throwing money after something if a cheaper and often better solution is available. A good example would be telecommunication.

I am a heavy long distance caller. It’s every day and I can hang on the phone with someone from South Africa or in the US for an hour. Before the advent of good VOIP solutions, my phone bill was a major budget item both personally and professionally. It really pissed me off.

Today, everything is VOIP or some other web-based protocol. I use cloud-based services to share information, secure my data and do whatever I need to do at any moment. And I still spend hours talking to someone at the other end of the planet but the cost of doing so is insignificant. It just does not matter anymore.

Are those services of worse quality? Hell no, I actually often tell people to call me on Skype or Viber because the regular phone line is so grubby. And VOIP is on me at all times.

This is what I am talking about. It might take a while and maybe we have to hang with the old, bad, horrible and expensive thing for a whole while as it takes time for innovation to eventually bestow new things on us.

This is the case in energy. High energy prices – and USD 80.- sure looks damn high – to me at least – are the most potent stimulation all those innovators out there can get as for them it’s an opportunity to find new solutions and the opportunity to make a green.

I am not talking about super expensive offshore oil drilling or some exotic exploration techniques or an LNG project that uses some crappy source of gas just because the high price makes it look worthwhile. I am talking about real innovation like LNG as a fuel or 3rd generation bio-methane or synthetic methane or nano-liquefaction or flare gas conversion by mini LNG or some really advanced stuff such as – dare I say – nuclear fusion …

Yeahh, that's what I need ...

Yeah, that’s what I need …

You get the gist?

Those new things are actually not expensive at all (well, some of them at least) but they need a market just as anything hoping to produce positive cash flow needs a market to feast on. And many of those things – although technically very mature – have stumbled over the chicken and egg problem for decades.

But with expensive oil, alternatives are being tried out increasingly and even if many of those first projects fail, some actually take the second step and even the third. Some of them eventually do succeed and those that do build critical mass which once it’s created, cannot easily be undone.

So, will the oil price fall now because of the impact of all those new things that have been festering for many years?

We are still in energy and anything in energy takes quite some time to get real. It’s a long-term business with super-long business cycles after all so don’t hold your breath about anything.

But also don’t be a blind duck. Just because those things take their time it does not mean that they don’t happen. Shale took many years in the shadows before it could shake up the world in ways never seen before. LNG as a fuel is a reality for many decades but only now it becomes the force it was always destined to be.

And the old stuff is not going away easily. I have hinted in other posts that the time of easy (and hence cheap oil) is definitively over which installs a floor to where the oil price may fall. It might dip even further than that for very short periods but not for long.

Those who need even higher prices than the still Mount Everest kind of thing we have today face hard times though as the upside potential for the oil price is pretty slim as well. Take a deeper plunge into this blog for more.

They clearly live in the “Wishful thinking” universe.

If your project does not make sense in a USD 80 / bbl world then look for another job. Your sucky projects will go out of business and that’s a good thing for once.

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