Oil prices: A repeat of 1985 will trigger a supply crisis

In the 1980ies drastically falling oil prices gave seven fat years to the west while bankrupting the Soviet Union. Hopes are high for a da capo. But since that time the world has changed a lot and oil fields have been severely depleted. If today’s (yesterday’s) prices can be brought down in a similar manner, my guess is that the illusion of secure oil supplies will come to an end. Especially Europe and Japan will face a harsh “new” reality.

This post was written two days ago in german and the situation has only exacerbated after the writing. The possibility of a 1980ies style price crash has turned into probable event. This is intended to be only a short abstract of the original version.

Now as then the main factor, governing the situation will be the scramble for cash from the part of the oil producing countries. Like corporations on the verge of bankruptcy, cash strapped exporters will enter into any contract just to stay afloat.

During the Reagan years real oil prices plunged up to 70 per cent while real GDP grew from three to seven per cent per annum. The break-down of crude oil prices was consequence of an overvaluation, following the Iran revolution and the beginning of the Iran-Iraq war, discord within the OPEC and, beginning in 1985, the flooding of the oil markets by the Saudis, a central US ally in the middle east.

Today’s situation is somewhat similar. Western central banks have exhausted their options to revive global economy and Putin’s Russia has arisen from the ashes of the Red Empire. It is challenging the military power of the USA and her petrodollar. Clearly Russia cannot be allowed to stand up to the world’s only superpower and her system of vassal states.

In my view the ongoing decline in oil prices is a manufactured event, which might take into account classical behaviour of market participants – but it is not a market phenomenon per se. It is rather a take down on (economic) political grounds, with the intent to a) restart the world’s growth engine and b.) to resize the political role of the Russian Federation.

And as odd as it may sound today – the thing is also about getting hold of Russia’s still vast natural ressources. The name of the real game is not postindustrialism but biophysical production in an age of “Peak Everything”.

If this intervention wants to succeed (in a traditional sense), it must make sure, that there will be no shortages of real suppply in the face of plunging prices. If this can be achieved, the mainstream narrative of what has happened, can be maintained and business as usual can go on for a while.

This is a possible outcome. But my guess would be to the contrary. Low prices will disincentivize production and bring about more oil consumption (as they should to boost growth).

It might be the straw, that breaks the camel’s back. Oil field depletion has been relentless, ranging from somewhere between four and seven per cent annually in “legacy production”. At some point reserve growth by better production technology will not be able to keep up with naturally declining conventional output.

Shale oil will be key in the long run, or rather: mid-term. If it is possible to make the American model work outside the US, then shale oil might be able to extend the energetic-political system for another decade or so.

I have my doubts. The best case is, that shale can temporarily keep abreast of dwindling conventional production in a purely quantitative respect. But it cannot compensate for the high EROI of conventional production it has to replace. Steeply declining net energy has to have an impact somehow, somewhen. Free energy is desperately needed. ;-)



Unabhängiger Journalist

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