More sides to every story: is the current fall of the oil price the consequence of excess supply or disappointing development of demand?

One of the best economic journalists that I know is macro-economist Marcel de Boer of Het Financieele Dagblad in The Netherlands: he is well-informed, has a very large network with "the top-dogs in the business" and he dares to think out-of-the-box, which brings him to the not-so-obvious solutions. Marcel de Boer is always a good and though-provoking read and a darn nice guy on top of it.

This week, in his regular column in the FD, he spoke about the three most decisive (economic) days during the last twenty years.

Besides picking ‘9/11’ and the ‘collapse of Lehman Brothers’ as the most decisive days – a choice which I can fully understand even without endorsing this selection to the fullest –  he chose as a third pick the decision of the OPEC made on November 27, 2014 to leave the oil tap fully open and not shrink the production of oil.

Here is a (translated) snippet of his very interesting column:

Yesterday, exactly one year ago, the members of the oil cartel OPEC came together in a cold and grey Vienna in order to take a decision with far-reaching consequences. Under pressure of Saudi-Arabia, the oil ministers agreed to leave the oil tap fully open. The historical policy of the OPEC had always been to shrivel up production when prices came under pressure, but now the OPEC chose for a different strategy. It would try to force producers of relatively expensive kinds of oil – deep sea oil, polar oil and oil from tar sands and shale – out of the market. A few months of low prices would be sufficient, they thought... Afterwards, the oil price would recover.

Well, the plan ended in a fiasco. The oil price further deteriorated, but the expected rebound never showed up. This was not only due to the fact that China bought less oil, but also because Iraq started to pump up more oil and the record production in the US stayed at the high level, due to gargantuous cost savings. All these circumstances made that supply remained exceeding demand. The oil price dropped from $ 110 to $45 per barrel.

Well, after reading this though-provoking story, one would think that the increasing divergence between supply and demand of oil was merely caused by the excessive global production of oil, due to the ill-conceived strategy of the OPEC countries, as well as the excessive production in Iraq and the US.

Yet, I was curious if the excess supply in oil was – except for the diminished oil consumption of China – really the only cause for the extremely low oil prices of this very moment.

As the testing of the pudding is in the eating, I gathered some charts and statistics from the International Energy Agency and other sources and put the latter in a tell-tale chart.

The first chart which I want to show is the one containing the price development of crude and WTI oil. This development has indeed been dramatical in 2015, tumbling from $92 per barrel to a mere $45 per barrel: a drop of more than 50%.

The development of the oil price in 2015
Chart courtesy of www.iae.org
Click to enlarge

And the first question to be answered is: is the current oil production indeed extremely high from a historical point of view?! The answer: yes it is! 

Two charts show this: the oil supply during the last fifty years (chart 2) and the supply during the last 2.5 years ( chart 3).

The development of the oil production from 1965 - 2010
Chart courtesy of consumerenergyreport.com
Click to enlarge

The development of the oil production from 2013Q1 - 2015Q3
 Chart courtesy of www.iae.org
Click to enlarge

However, the rise (!) of the oil production during the last five years – although impressive – has not been extremely dramatic: on the first chart of the aforementioned two charts, it is visible that in the period between 1965 and 1975 the oil production increased from 30 million barrels per day (bpd) to 60 million bpd. This was an increase of 3 million bpd every year!

As both these charts show, the oil production rose by approximately 12 million bpd during the last five years (2010 – 2015): an average of about 2.4 million bpd per year. High, but not extremely dramatic, when compared to the period between 1965 and 1975.

What made these production changes of the last five years so dramatic, on the other hand, was a. the fact that the oil production between 1975 and 2010 rose by an average of 0.7 million bpd and b. that these rises in production took place during the worst economic crisis of the last eigthy years.

The following two charts show the development of the aggregate demand for oil during the last few years and a composite comparison between supply and demand, based upon these charts:

The development of the oil demand from 2013Q1 - 2015Q3
 Chart courtesy of www.iae.org
Click to enlarge

The development of the oil demand and
production from 2013Q1 - 2015Q3
 Composite chart courtesy of www.iae.org
Click to enlarge

This composite chart makes perfectly clear that the divergence between the oil supply and demand is as much caused by the increased production capacity as by the “disappointing” development of the global demand for oil. In my humble opinion, this makes 27 November 2014 a slightly less historical day than Marcel de Boer argues in his column, as the increase in oil supply has not been dramatically (!) higher since 2014Q4.

Suffice it to say, that the OPEC policy has not been sensible in my point of view. The “war of attrition” that especially Saudi-Arabia fought with the other (new) oil producing countries has blown up in their faces, as the oil price is still extremely low and there are few signals that it will start to rise very soon. Especially, as Iran is returning to the international limelight.

The fatal flaw that Saudi-Arabia and the other oil producing countries made, perhaps, is believing in the fairytale of the everlasting Chinese growth with the ‘magic’ 7% per year and that for a population of 1.3 billion people. 

The growth of the oil production has perhaps been based upon an expected demand, that was partially a figment of Chinese governmental imagination.

The following table and charts are based upon Chinese statistical data from the International Energy Agency, regarding the development of the Chinese oil consumption between 2000 and 2015. 

Going by the (imho) realistical preassumption that a Chinese growth of 7% per year would lead to a growth in oil consumption of roughly 7% per year or even (much) more, there has only been a 7%+ economic growth in China between 2003 and 2007, as the following three charts show.

The development of the Chinese oil demand from 2000 - 2015
 Chart courtesy of www.iae.org
Click to enlarge

Table comparing the growth of the Chinese oil
consumption from 2000 - 2015 with their "magic" 7% growth rateand with a more realistical 6.2% growth rate
 Data courtesy of www.iae.org
Click to enlarge

Chart comparing the growth of the Chinese oil
consumption from 2000 - 2015 with their "magic" 7% growth rateand with a more realistical 6.2% growth rate
 Data courtesy of www.iae.org
Click to enlarge

The rest of the period between 2000 and 2015, the Chinese growth has been meandering around 6.2% as the aforementioned table and charts show beyond a reasonable doubt. Or even much less...

And to defend my preassumption about the correllation between economic growth and oil consumption: in a country with a developing middle class all coming from a rather poor standard of living, it seems logical that the oil consumption would grow as hard or even much harder than the economic growth, as more and more middle class people can afford to buy a car, a motor cycle or other oil consuming means of transport and/or production. 

The fact that the oil consumption in China grew “only” by 6.2% per year in average, shows that the economic growth has seldomly been north of the magic 7% in China, in my humble opinion.

This is a point that has been defended over and over again, by the savvy macro-economist of BNR Newsradio, Kees de Kort, based upon similar charts regarding imports and exports and production capacity. 

The moral of this story is that the decision of the OPEC to keep the oil tap fully open was not a wise one, as it led to an oil glut of impressive proportions.

Yet, I don’t think that November 27, 2014 was the decisive historical day that Marcel de Boer called it in his column. The divergence between the global oil production and consumption started already earlier and was also caused by people believing the Chinese fairytale of the magical 7% growth per year... every year! 

A fairytale that has been debunked over and over again, by people who just watch the independent statistics on China, like Kees de Kort does, and don't believe the ones provided by the Chinese government...

Will “Paris” turn out to be the first leg of a real asymmetric, religious war between Europe and Islamic State? European goverments must act to prevent this from happening.

“Now is more frightening than in January. Anybody can be a target”

Romain Edieux, citizen of Paris to BNR News Radio  [name can be written incorrectly - EL]

Friday, November 13th seemed to be a Friday like any other. Many Europeans were relaxing at home after another week of hard work and other people were inhabiting the numerous restaurants, sports venues and theaters all over Europe.

In the French capital Paris, however, the Friday was destined to be totally different, alas. For the second time in 2015, the city came under lethal fire of several terrorist attacks.

Murderous gangs with representatives from (allegedly) Islamic State started a killing spree at seven different spots in Paris, among which restaurants and pubs, the football stadium “Stade de France” and music theater “Le Bataclan”. Especially the attack at Le Bataclan became a gruesome massacre, with approximately 100 fatalities and numerous other seriously wounded victims, of which still many are fighting for their lives.

The whole attack breathed the former ‘Al Qaida’ signature of having synchronized and closely cooperating, but yet independent cells of fighters, who created as much havoc as possible at various spots within their target zone. Probably, this Al Qaida signature of attacks has been adopted by Islamic State, since their rise to notoriety.

Like Paris’ citizen Romain Edieux stated in his somewhat cynical, but nevertheless spot-on analysis to Dutch newsradio station BNR: 

‘January [ the attacks at the editors of Charlie Hebdo and several Jewish targets in Paris – EL] was also a big shock for us of course, but then the attackers seemed to have a motive. Yesterday was a bigger and more frightening event than in January. Anybody could become a target’.

What made these attacks particularly frightening for Europeans, was how unsophisticated, low profile and randomly targeted these attacks seemingly were...

The terrible 9/11 attacks in New York and Washington showed a clear hi-tech approach and had probably taken years of preparation. Besides that, although many innocent citizens perished in these disgusting attacks – especially in New York – they were highly symbolical in nature and aimed at the most blatant symbols of American power and invincibility: the White House (probably) and the Pentagon in Washington, as well as the Twin Towers in New York.

Even the gruesome attacks in Madrid (March 11, 2004) and London (July 7, 2005), although much more randomly aimed against common commuters and therefore even more frightening than the New York attacks, were by itself quite sophisticated and demanded a non-common knowledge of the creation of small, but nevertheless extremely lethal explosive devices.

The Charlie Hebdo attacks (7 & 8 January, 2015) were also very low-tech like yesterday’s attacks, but had more clearly recognizable targets and were therefore not so frightening to the common Parisien, as French citizen Romain Edieux stated so bluntly.

To these eyes, the November 13th attacks were not only very low profile, but they seemed to be totally randomly targeted. Yesterday evening, it was suddenly as if every brainwashed idiot, with a (religiously/politically inspired) vision and massive resentment against the French society or the West as a whole, could grab a Kalashnikov machine gun and a few relatively easy-to-acquire hand grenades or IED’s (i.e. improvised explosive devices)  and start his own private war against randomly targeted citizens, with numerous casualties as a result: the perfect, asynchronous war against the West and Western values.

Of course there was a masterplan behind it, but it was probably a fairly simple one, which could be executed at any minute without much preparation. This was as close to “every neighbour could become one’s enemy” as one could get. And that is a very frightening concept, to be honest.

This particular fact makes it also quite hard to see these November 13th attacks as a ‘one-off’, which 9/11 obviously was; albeit due to the fact that it would be virtually impossible to hijack new airplanes in the days or months after these attacks had taken place.

“Paris”, however, could be repeated at will: every day and in every European city of choice. The structure of Western societies with their open borders, their hi-tech electronic infrastructure and their total freedom of movement and assembly are almost impossible to defend against these kinds of attacks; for the simple reason that you can’t lock up any person with radical views at will and without a formal complaint.

What will happen unfortunately, in my humble opinion, is that the already rising distrust and resentment between large parts of the population in Europe will further increase and that as a consequence tensions will mount further in European societies.

Especially the compassion, patience and hospitality towards refugees from the Middle East and Africa might dramatically suffer from these attacks, as some citizens might see some of those refugees as a ‘fifth column’ for the warriors of IS in Syria and Iraq. Even more as rumours have been spread recently that IS has sent warriors to Europe through Turkey and/or refugee boats from Libya. Rumours that have neither been confirmed nor denied.

What scares me – and probably many other people – most is that these attacks might be the first leg of a real asymmetric, religiously motivated war between common European citizens and (sympathizers of) Islamic State – or other religious/political splinter groups – in Europe and the Middle East: a war, which is so low-tech that it is virtually impossible to defend citizens in an open society against it, for the aforementioned reasons.

Like always, there will be people (i.e. the ‘tinfoil hat’ brigade) who will see these attacks as a ‘false flag’ operation of obscure semi-governmental organizations and/or power groups in the European society. These people see the whole world as one giant conspiracy and see danger lurking behind every corner.

And others will demand drastical measures against the open societies and open borders of the EU nations, as well as against large groups of minorities in these European societies. However, those measures will make an effective end to everything for which the EU, Europe and the European nations stand, as beacons of freedom, openness, friendship and cooperation. That would be the end of Europe as a concept.

What should therefore happen, according to me, is that the military and civic Secret Services, as well as Criminal Investigation Departments in all European countries, will regain their indispensable role as ‘society protectors of last resort’.

This should not per sé be carried out by increasing their practices of eavesdropping and ubiquitous online tracking of losely targeted groups of suspects and private citizens.

Nowadays, there is already a massive amount of eavesdropping going on, as Edward Snowdon has showed during the last few years. If the Paris attacks have proven one thing, it is that these now common practices of Secret Services all over Europe are eventually unable to prevent such attacks from happening.

In my opinion, the only real answer could be the infiltration of secret agents and cops in dangerous splinter groups all over Europe. This is of course very dangerous and ungrateful work, as doing a great job for these agents means that nothing will happen and virtually all of their work will remain invisible for the general public.

However, European society cannot rest on its laurels when it wants to keep its open, compassionate and hospitable atmosphere; I am simply too afraid that more of such low-profile and low-tech attacks might follow in months and years to come, when nothing changes.

France, the EU and Europe must act and they must do so very quickly: not by targeting already less popular groups in European society and by further reducing the rights of common citizens among such minories.

No, Europe must find such groups of extremely dangerous radicals the hard way, by finding, infiltrating and arresting such people. Like ‘we’ did in the Seventies and Eighties of last Century with the Rote Armee Fraktion (Germany), the Brigate Rosse (Italy), IRA (United Kingdom) and the ETA (Spain)...

While writing this article I am very much aware that I use the word ‘war’. This is a word that is often abused – since the days of president Richard Nixon’s  ‘war on drugs’ – and by itself quite hyperbolic in nature, when there is not a ‘real’ declared war going on.

However, yesterday’s attacks were so randomly executed and so much aimed at hitting common French citizens at extremely low-profile target spots, that it seemed like a guerilla war crime to me. 

In this ‘Paris’ case, it is an undeclared war of a yet unidentified group of people with infiltrators all over Europe for reasons unknown; a group of people who don’t scare away from targeting common citizens at common places in one of the largest and most beloved cities of Europe. And that is a terrible, yet undeniable truth!

“Don’t expect the European Union to treat British citizens and companies the same after a voluntary Brexit, as it did before”. My dear advice to the citizens of the United Kingdom!

“Don't it always seem to go

That you don't know what you got 'til it’s gone”

Joni Mitchell – Yellow Taxi

I work in a large, internationally oriented company in the financial industry. As in many internationally oriented companies, the employees of this company are an international group of people from various countries inside and outside the European Union.

A substantial amount of employees within my company came from the United Kingdom; especially within the ICT-oriented staff departments in which I happen to work. These people are appreciated for their flawless knowledge of English (of course...) – paramount for the communication with the branches and departments all over the world – as well as for their vast experience in the financial industry and/or the ICT industry. And as genuine Europeans (i.e. members of the EU), these UK citizens can work in The Netherlands without any difficulties.

The fact that British people can work in The Netherlands –  or all other EU countries as a matter of fact – without a working permit and virtually without any other obstacles standing between them and their labour position, sounds very obvious..., but it isn’t.

Just as it isn’t very obvious as well that British companies can trade with the other countries in the European Union without experiencing all kinds of political, legal and financial boundaries for their imports and exports of (financial / commercial) services and goods. No, these are actually privileges, supplied by the very existence of the European Union as a political, financial and economic institution.

The fact that these aforementioned privileges already existed for a very long time and that actually a generation of European citizens has grown up, which has never experienced a (working) life without these privileges being in place, does not say that such privileges are a ‘law of nature’ for all European citizens, including the British.

Everybody, who has looked at the very bloody history of Europe, should realize that the current situation of long-lasting peace and prosperity within the European continent has been built upon the blood, sweat and many, many tears of their forefathers in centuries past. Arguably the most important ingredient for this longlasting peace in Europe has been the European Union.

It is nothing less than a miracle that a large part of Europe has survived for more than 70 years without having a large, bloody international war within its boundaries. As the situation on the Balkan in the Nineties of last century and the more recent situation in Ukraine proved beyond a reasonable doubt, there are still numerous (inter)national tensions living within the European continent and even the smallest spark could lead to a bloody and extremely disruptive international war on European soil.

How realistic this prospect of international tensions and war still is, is proven by the recent refugee crisis: this is still an enormous lump to swallow for many member states within the European Union and most countries currently try to lay (or keep) this problem outside their own boundaries and borders: ” Is your country lying in the epicentre of the current refugee crisis?! Well, that is too bad for you, but I do not see why that is MY problem! Really!”.

What the European Union did achieve – in spite of its numerous serious flaws, its extremely sluggish and often indecisive decision-making process  and its not per sé very democratic governance structure – is finding an outlet valve for the living tensions within the European continent and creating a structure of political and economic cooperation, friendship and solidarity for all its member-states. Looking at the EU like this, shows what a tremendous success this Union has been for all member-states.

Unfortunately, the British – who traditionally felt somewhat isolated from the rest of the EU and always had their own glorious past to ponder upon  – do not look at the European Union as the political miracle that it is. Although their country suffered dearly from the Second World War and played an indispensable role in the liberation of the European continent, it has almost never been occupied by foreign nations during hundreds and hundreds of years. While their country has been involved in many wars, it has virtually never been victimized as a consequence of such wars, in contrary to many other nations within Europe.

Perhaps this absence of international wars on their own turf and the consequences thereof,  is the main reason that the EU is rather seen by the British as an economic stronghold with some nasty political consequences, than as the political stronghold that the EU was originally meant to be. This explains the relative lack of love and compassion for the European Union on the British Islands.

In my humble opinion, this might even be the underlying reason that especially the British take the economic connections within the EU for granted, while largely ignoring the political ‘raison d’être’ for it.

“Why would the United Kingdom be a member of the European Union after all?! When we leave this Union, we are relieved from its idiotic rules, as well as its meddlesomeness and political treadiness. Probably nothing would change at all for us from an economic point of view; only the European political decision-making would not bother us anymore and we would be finally free to do as we please!”.

I had to think about this presumed British stance, after having some very interesting discussions with one of my dear English colleagues a few days ago and especially after reading the following article in Het Algemeen Dagblad:

The United Kingdom will abandon the European Union, when other EU countries do not agree with PM David Cameron’s demands for reforms within the Union. The British PM will let the EU know that the UK plays for keeps regarding the desired changes, in a very powerful warning, according to various media this Saturday.

In a letter to EU-president Donald Tusk, Cameron writes that he wants to negotiate about the British membership of the EU and its demands. “When we cannot reach an agreement and when our concerns will not be addressed – which is quite plausible unfortunately – we have to rethink the answer to the question whether the EU is good for the United Kingdom or not”, according to David Cameron in this letter to Tusk, that will published next Tuesday.

Due to the circumstances and background that I sketched earlier in this article, I understand this vision and the underlying threats of PM David Cameron. When a British PM is simply an unresisting victim of the people’s will and desires, a Brexit seems indeed imminent for the United Kingdom.

However, I consider Cameron’s vision to be a blatant exposure of Cameron’s political misconception of the true meaning of the EU and his total and utter failure as the leading politician in one of the largest countries within this Union.

As a matter of fact, PM David Cameron acts like a gratuitous sollicitor for an unwilling defendant, who is under trial for murder one. The fact that this defendant does not understand what the impact of his past and future actions will be, does not release the sollicitor from the duty to warn his client for the consequences of these actions.

Instead, however, PM David Cameron chooses to warn the justice (i.e. the EU) that he makes a mess of the trial and that his punishment after the trial will be too harsh on the defendant, who will go on strike afterwards. Sympathetic, but missing the point by at least 1000 lightyears.

When the UK will have left the EU as a consequence of Cameron’s referendum, after a long and difficult period of untwining that might last for at least 5 to 10 years, the United Kingdom will be on its own outside this very union. And so will the British people be.

Perhaps the largest difference between the UK and other non-EU countries in the European Economic Space or Switzerland is, that the other countries have never been a member of the EU in the first place. They have always followed a path of cohabitation with the EU, without ever being a member of it. However, the UK has been a – reluctant – member of the EU for the last 45 years; a member which has profited from its membership to the fullest, against a substantial reduction in expenses in comparison with other leading members.

I personally think that the UK will be seen by the other EU countries – and perhaps even the USA - as a mutineer, who left ship and betrayed his allies. The UK’s political loneliness might be very palpable in the not so distant future, just like the shockedness and flabbergastedness of the other ‘sailors on the European ship’.

Yet, I am afraid that nothing in the world can change the stance of the British (in fact, mostly the English and Welsh) citizens, regarding the European Union. Even if the current chair of the EU, Poland, represented by its president Donald Tusk, proves to be vulnerable for David Cameron’s obvious blackmailing, it will not change a thing in the British attitude towards the EU.

Will everything than remain the same ol’, same ol’ for the United Kingdom after their abandonment of the European Union?! In other words: their dreaded Brexit?!

I truly doubt that, to be honest... When you want leave a hotel room, because the costs of it are too high, you cannot stay in that same room for free afterwards. I think that the whole structure of visa, working permits and free trade with the EU might take a turn for the worse for the UK after their Brexit.

European borders might become more closed for British exports of knowledge workers, goods and services, of which especially (financial) services are traditionally the economic cork on which the UK floats and new excise duties and levies might be imposed on British goods and services.

Especially Frankfurt and Paris will be very determined to overtake the British role as Financial Services Capital of Europe and arguably the world, when the UK leaves the EU. Lobby groups for these financial capitals will strongly emphasize this to their politicians, after a Brexit has occured. And in numerous other ways, the leading, industrial countries within the EU will try to diminish the British influence after such a Brexit.

Consequently, a Brexit will lead to more losers than winners on the British Islands, in my opinion. British citizens should realize “that they don’t know what they got, ‘til its gone”, as Joni Mitchell taught the world so beautifully in her song “Yellow Taxi”. 

Before they realize it, the EU could be a thing of the past for them. A thing that they might miss more dearly than they realize at this very moment...!