The Big Oil Drop: Free fall continues...

Almost a year back, I had written about the falling crude prices. Since then the free-fall has continued with oil trading in the low to mid 30s. Alarm bells are ringing across the industry. The time for trying to figure out the reasons for the slide is long gone, though everyone has their own. The sharp slide is already having its impact. Projects worth nearly $35 Billion have been shelved; 200,000 jobs have been cut, the M&A market is warming up for the bloodbath. And the situation is likely to worsen. 

The US Congress has agreed to allow sale of crude outside US lifting a 40-year ban. The Shale boom made US less dependent on external producers. Which was one of the main reasons for bringing the prices down. However with prices down, the producers are in for a hard time, some having shut shop, most cutting activity levels to the bare minimum. Thus the US Congress decision is an attempt to ease the producers as their domestic market is already having a glut. This move might stabilize the US market but is unlikely to lift the prices.

The lifting of sanctions on Iran is likely to bring more cheap oil in the global market this year. Thus putting more pressure on the oil producers. Supply increases further with demand staying same or even worsening given the global economic slowdown.

The sharp drop has resulted in Saudi Arabia having a huge deficit in its budget. The Saudis, who are the only ones with swing capacity, have steadfastly refused to cut production to boost the price. Instead they have taken an interesting decision to publicly list Saudi Aramco.The listing of the world's biggest company could be the biggest financial event of the century, making up quite a bit of the Saudi deficit. Although it would also open their economy to more scrutiny, something which is against their secretive ways. But then tough times do call for drastic measures.

The emergence of Australia as a source of LNG would shift the direction of the global LNG trade away from Qatar. However the low prices have resulted in delays in some of the projects. Thus enabling Qatar to retain its hegemony for a while longer. Meanwhile, Qatar has been doing its bit to retain its market renegotiating supply contracts with the likes of China and India.

Then, the Paris agreement on Climate Change. If every country keeps their end of the promises, their would be shift from hydrocarbons to alternate energy sources. However, the low crude prices have made the alternate energy sources less attractive. We are reaching a stage where the oil is unlikely to run out but environmental concerns would reduce its consumption.

However, the tensions in the Middle East over Syria and the Saudi Arabia-Iran stand-offs might spike the prices up. Throw in further uncertainties like the possibility of Saudis acquiring a nuclear deterrent from North Korea or Pakistan, further escalation in the so called fight against Islamic State (which has captured a big chunk of the oil trade) or the migrant situation blowing up in Europe  But hoping for a war to jack up prices is certainly not good karma. 

Low prices are welcome news (for now) for an energy-importing country like India. The export bill reduces and with it the foreign exchange outflow. However, it comes at the cost of its domestic production which needs a much higher price to be commercially viable.

Times certainly are tough for the people in the oil sector.

COP21 - The Global Climate Deal

Everyone agrees the world is on the brink of a climate disaster. Everyone also agrees that something needs to be done to avoid it. Unfortunately, everyone wants everyone else to take this initiative.

At the COP 21 conference in Paris, leaders from across the world got together and decided to do something about it. After lots of discussions and deliberations, they finally came up with a single agreement on tackling climate change (Proposal). The key areas identified are as follows

• To keep global temperature rise "well below" 2.0C (3.6F) and "endeavour to limit" them even more, to 1.5C.
• To limit the amount of greenhouse gases emitted by human activity to the same levels that trees, soil and oceans can absorb naturally, beginning at some point between 2050 and 2100.
• To review each country's contribution to cutting emissions every five years so they scale up to the challenge.
• For rich countries to help poorer nations by providing "climate finance" to adapt to climate change and switch to renewable energy.

This is major first step but given that we are already losing the climate battle, more needs to be done. It is widely believed that 2C is the maximum global temperature rise beyond which the damage to the environment would be irreversible. Weather patterns are becoming increasingly erratic, floods and droughts are becoming common place and if this pattern continues, some of the small, low lying nations might completely disappear off the face of the Earth, and quite a few animal and plant species will become extinct. Given that the temperatures have already risen by nearly 1C, we are getting closer and closer to the environmental apocalypse. It is certainly a grim picture.

Although an agreement is in place, the action plans and targets set for controlling emissions for each country are voluntary. And this is where complications arise. The developed countries who have already contributed to temperature rise are now keen to ensure that no further rise takes place. The developing nations also aspire a developed status but that would mean an increase in energy consumption which would contribute to the temperature rise. But why would the likes of China and India wish to remain under-developed? They want the developed countries to take a larger burden while ensuring their development continues with the cheaper sources of available energy. 

Then comes the problem of funding. Who will bear the cost of developing more efficient energy sources when fossil fuels are still available cheaply. The world is not going to run out of coal and oil anytime soon. Only drastic climate constraints might lead to the closure of these industries. We certainly need cleaner energy, but it has to be low cost and efficient and easy to use. Till the renewables are able to fulfill these criterion, the hegemony of oil and coal as energy sources will continue.

While the bigger debates go on, as to who does what, there are ways in which individuals can reduce their own carbon footprints and do their tiny bit to save the environment. After all every drop counts. The most obvious way is to consume less, but that's detrimental to the growth of the economy. And if the economy doesn't grow, then investments into better energy resources can't be made, leaving us to consume more hydrocarbons. A vicious cycle. 

But we can as individuals certainly contribute to lower our wastage. And it doesn't even have to be at a very large scale. And these are already known to us - Minimize use of electrical appliances; Don't waste water; Carry a shopping bag to the market; instead of taking plastic bags; Plant trees; Walk instead of driving; Use public transport; Use paper instead of plastic; Do not take prints of every document in office. The printer certainly is the most environmentally-unfriendly item. We print reams and reams of paper, most of which is just thrashed. And there are many more ways we can all do our little bit. Reduce, Reuse & Recycle has to be the mantra.

The success of COP21 can only be measured in the years to come. It certainly is a major step, but we as citizens of the world can certainly do our bit to help the cause. Otherwise...