• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Energy

Oil and the Limits to Growth

Examining the widening gap between price and the consumer.
By ROGER ARNOLD Oct 09, 2014 | 04:20 PM EDT

The oil price declines of the past four months are almost identical to what transpired over a similar period in the first and second quarters of 2012. The global markets expressed confusion as to the economic significance and impact of falling oil prices then and are doing so again now. I wrote about this issue in May 2012 and I encourage you to read it again as a preface to today's column.

On Feb. 24, 2012, West Texas Intermediate (WTI) hit a cyclical peak of $109.39 per barrel. Over the next four months, the price fell to $77.72 on June 28, a decline of about 29%. Similarly, on March 9, 2012, BRENT reached a cyclical peak of $128.08 and fell to a trough of $88.69 on June 25, a decline of about 31%.

Moving to the current environment, WTI peaked on June 10, 2014, at $107.95 and has declined over the past four months to about $87.30, a decline of about 19%. On June 19, 2014, BRENT reached a cyclical peak of $115.19 and is now about $91, an approximately 21% drop.

Although the move over the past few months has not been as severe as 2012, we don't know if it has yet been concluded, although I expect that it hasn't. More importantly, it's irrelevant.

In both cases, oil prices fell below the fiscal break-even of most of the largest suppliers with state-owned oil industries, mostly members of the Organization of Petroleum Exporting Countries. In areas of the world where the industry is privately owned, the price has fallen to or below the marginal production costs for the most expensive oil to access.

Of the 12 members of OPEC, only two have fiscal break-even prices below current prices: Qatar and Kuwait, at about $60 and $70, respectively. It then leaps to about $100 for Angola, the United Arab Emirates and Saudi Arabia, and again to $115-$125 for Libya, Venezuela, Ecuador, Iraq, Nigeria and Algeria. The break-even in Iran is around $150.

More importantly, even at the cyclical highs, the majority of OPEC members are just breaking even; and even more importantly, their break-even costs are increasing faster than the long-term average for oil price increases because of the debt being taken on to meet fiscal needs when the price of oil declines. Further, the rate of growth in real economic activity globally is lower than the increase in oil prices necessary to meet the fiscal break-even point.

It is the increasing fiscal break-even required of traditional oil suppliers, like the OPEC countries, which allows the price of oil to remain slightly above the break-even production price for alternative oil supplies, like those in North Dakota's Bakken, and the Permian Basin, and Eagle Ford in Texas.

That is a temporary situation, however, on two fronts. The cost of accessing oil from these fields is not decreasing; it is increasing. The economies of scale expected to reduce the cost of accessing this oil coupled with increases in technology expected to reduce the cost of doing so are not happening.

In net, the world is now at a place where there is a permanent mismatch between what oil producers must sell for and what oil consumers can afford to pay -- and that gap is only going to increase.

As this gap widens, because there is no substitute for oil, the production of it and the price it commands in the market will fluctuate. As prices rise above economic viability due to increases in global demand, the consuming economies will have to offset the economic drag caused by issuing debt, both at the sovereign and private levels. This will also cause an increase in production, which will then cause a temporary glut, which will cause prices to fall. The reduction in prices then causes production to decrease and forces the producers to take on more debt to offset the fact that they are below production or fiscal break-even.

This process has been playing out for several years and will continue to from now on, with both consumers and producers taking on debt faster than economic growth. This was a warning from by The Club of Rome made 42 years ago in the seminal paper "The Limits to Growth."

At this stage, there is no corrective action possible to cause oil to become economical again. The producers can't reduce fiscal outlays as it risks civil unrest and political instability. Global consumption can't be reduced by way of technological innovation because the more efficiently oil is consumed, the greater the aggregate consumption of it is. This is called the Jevons Paradox, which I wrote about in September. In future columns, I'll address the effect of this on capital markets.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Commodities | Markets | Energy | Investing

More from Energy

I'm AMPD About This ETF

Mark Abssy
Jun 6, 2023 11:30 AM EDT

The CNIC ICE U.S. Carbon Neutral Power Futures Index exchange-traded fund provides exposure to a blended national electricity price and carbon credits.

Here's How Investors Can Get in on Soaring Uranium Prices

Bruce Kamich
Jun 1, 2023 12:33 PM EDT

The charts of this fund are giving off a positive glow.

It's a Long Shot, but Here's My Ideal Scenario to Keep the Fed in Check

Bob Byrne
May 30, 2023 7:15 AM EDT

It involves people pocketing their savings from lower gasoline prices so that the economy cools and the Fed doesn't need to raise rates again.

3 High-Yield International Oil & Gas Majors

Bob Ciura
May 27, 2023 7:15 AM EDT

The top global energy names are returning more cash to shareholders through dividends and share repurchases.

CorEnergy Takes Important Step in Deleveraging

Jim Collins
May 25, 2023 1:15 PM EDT

However, the preferreds are no longer 'money good.' So a completely new 'distressed company' calculus has taken over.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 07:19 PM EDT CHRIS VERSACE

    AAP Podcast: This Company Is Not Going 'Solo'

    Listen in as I talk with the very diversified Solo...
  • 01:51 PM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Adjusting Your Trading Approach to Shifting Market...
  • 06:54 PM EDT CHRIS VERSACE

    AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

    Listen in as the Action Alerts PLUS Podcast tackle...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login