Fact Checking
Well-Known Member
What's the specific channel to transmit that kind of crisis to global markets, did big western banks load up on Saudi "bonds" foolishly, thinking they are AAA rated?
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What's the specific channel to transmit that kind of crisis to global markets, did big western banks load up on Saudi "bonds" foolishly, thinking they are AAA rated?
Large gasoline engines, actually. Very large. Building-sized.
A heat engine is something which converts heat to work. Such as a gasoline engine or a diesel engine or a gas turbine or a steam engine. The usual comparison is between small heat engines and large heat engines.
Large heat engines, like the enormous several-story-tall stationary turbines at power plants, can be around 50% efficient.
Small heat engines, such as the little tiny ones in a car, are truly terrible, 20% efficiency or less. The even smaller heat engines in lawnmowers are even worse, and the tiny heat engines in gas-powered lawn trimmers are even worse than that.
Now, hydropower, electric motors, wind turbines, are all much more efficient than any of the heat engines, even the big ones. But the small gasoline engines are truly terrible.
I think they did. Even if they didn't, the last time a sukuk bond threatened default (it didn't default), the entire sukuk market temporarily froze up.
So this included a freeze-up in Indonesian corporate finance markets, Pakistani corporate finance markets, etc.... you can see how this could have a contagious effect, since sukuk are now owned by banks all over the world. Many of them are much safer than the Saudi ones, but a Saudi default would probably cause panic over all of them, even the healthy ones...
Sort of like during the 2008 crisis when nobody would touch any Mortgage Backed Securities and money flew out of all money market funds just because *some* MBS were garbage and *some* money market funds were heavily invested in them.
Is this like a temporal rift in the space-time continuum?
Thanks for moving that post over. I was coveting it for this thread.
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Fact Checking
Well-Known Member
Are the sizes and the trade and financial dependencies comparable?
1)
Mortgage backed securities became contagious because every U.S. and many European banks relied on them to store cash, and because shadow banks used repos against them as sources of cash liquidity. This literally drained over a trillion dollars of "lubricant" short term cash that keeps the gears of advanced economies turning.
Once that source of cash froze up, financial markets and trade in both regions froze up, triggering a freeze in closely coupled economies like China as well, covering over ~50% of the world's GDP. This was a Great Depression scale, "extinction level" event.
2)
Greece's debt crisis was really bad because it highlighted the deep, structural debt deflation problems caused by the Eurozone "gold standard", which could have spread to Italy, Spain and even France - and partially did spread to them.
Yet despite Greece effectively defaulting and the Eurozone struggling 5+ years with the outcome - and BRExit was in no small part enabled by a populist backlash against the foolish austerity measures the rich elite imposed on the poor populace - still even that didn't trigger a global financial crisis.
3)
The combined GDP of Saudi Arabia, Pakistan and Indonesia is a small percentage of world GDP, and they are mostly "leaf node" countries in the chains of globalized commerce - not root nodes like the U.S., Europe or China.
So unless the Saudis decide to not deliver oil at all for extended periods of time, in a kamikaze action, I find it hard to see global contagion, unless western banks loaded up on sukuk bonds after the 2008 and Greece experiences, which I find hard to believe without concrete evidence.
RobStark
Well-Known Member
Often the financial dependencies are not appreciated until crisis tests the limits of what markets can bear. We've already seen what has happened to Venezuela. That is fairly localized. But is Riyadh were to crumble it would signal that no economy dependent on oil exporting is safe. Credit to all of OPEC and Russia could seize up. Likewise credit to oil companies across the industry could seize up. This would have particular impact on the US. So collectively debt across the oil and gas industry could be thrown into crisis. Can the financial markets absorb this shock? Perhaps, but there is a very serious knock on effect at risk here. As credit tightens up for the oil and gas industry, the supply of fuel will tighten up and prices climb. This pushes the global economy into a situation where energy becomes too expensive to sustain growth and employment levels. What follows is a global recession. The cost of fuel is a major component to the productivity of labor. As oil rises to critical levels, productivity falls snuffing out growth in jobs and unemployment rises. With that global consumer demand goes into contraction.
Simply put the global labor market depends on cheap energy and cheap oil and gas depend on cheap money to that industry. So the cost of capital to the oil and gas industry is critical to the global economy. Whether a financial collapse in Riyadh is big enough to trigger all this remains to be seen, but we don't really want to test this to find out. As much as I believe renewables and EVs can hedge against this sort of oil led recession, I am not confident that we are at nearly the scale to do so. Mildly higher fuel prices can of course accelerate investment into EVs, batteries and renewables, but wickedly high prices can bring the global economy to a halt slowing even investment these alternatives. So again, we do not really want to test the limits of what the market bear.
It is not clear that global demand can sustain Brent above $90. We tested $86 and triggered a cascade down to $59. Equity needs to be able to sustain that sort of 30% shortfall in expected revenue so that debt investors do not shy away. In a place like Saudi Arabia, the government is effectively that equity investor. So whether Riyadh can sustain this and for how long is a key concern for debt investors. Capping the upside potential in terms of limited demand growth at high oil prices makes oil equity investment less attractive, while the intense volatility of oil prices make debt investment less attractive. So when Riyadh is shown to be unable to play the equity role, this raises very deep concerns about where both debt and equity capital will come from to sustain oil production at low enough prices to keep the global economy growing.
mspohr
Well-Known Member
This article says ME oil economies can withstand low oil price.
Oil price slump won't hit most Gulf states — but they're far from out of the woods
Oil price slump won't hit most Gulf states — but they're far from out of the woods
TheTalkingMule
Distributed Energy Enthusiast
$50 Brent means $100B+ budget deficits for Saudi Arabia. They're already getting the first hints of losing AAA status and that could drop rapidly after a full 2019 with Brent below $60. Without endless free credit, and ~5 years left til peak oil demand, there's no option but to pump as much as is physically possible. Then it's the absolute chaos of every gal for herself and $25 Brent followed by worse chaos. Yay!
China Oct. new energy PV sales reach new high with YoY surge of 84.8%
The Jan-Oct new energy PV sales zoomed up 93% from a year ago to 725,816 units.
byd 26k per month, but
not that much success per individual model. BAIC and BYD using totally opposite strategies to get to high new energy vehicle sales. ( rifle versus shotgun)
hmmm premium PHEV and EV will promote Chinese writing, cheap EV will promote English characters BYD new “e” product matrix consisting of 8 EV models
The Jan-Oct new energy PV sales zoomed up 93% from a year ago to 725,816 units.
byd 26k per month, but
not that much success per individual model. BAIC and BYD using totally opposite strategies to get to high new energy vehicle sales. ( rifle versus shotgun)
hmmm premium PHEV and EV will promote Chinese writing, cheap EV will promote English characters BYD new “e” product matrix consisting of 8 EV models
Hmmm. So at $30/bbl (very likely), they give Saudi Arabia "at least" ten years. The UAE is good indefinitely (which makes sense, since they've gotten their money reinvested much more effectively than the Saudis).
Developing Nations Assume Mantle of Global Clean Energy Leadership | Bloomberg NEF
Economics become the driving factor.
Shell: EV Demand To Grow Regardless Of Oil Prices | OilPrice.com
No sh-- Shell. Shell and BP are starting to realize that EVs are cool. That consumers are willing to pay a premium for them. That price parity is not critical for rapid growth. That there is little the price of oil can do to slow this down.
Yup. Somebody wants a Model 3.
No sh-- Shell. Shell and BP are starting to realize that EVs are cool. That consumers are willing to pay a premium for them. That price parity is not critical for rapid growth. That there is little the price of oil can do to slow this down.
Yup. Somebody wants a Model 3.
mspohr
Well-Known Member
Good to see that somebody realizes this.
When I ordered my Tesla, I wasn't even looking to buy a car. I never would have spent this much money on any ICE car. I took a test drive and the car was so compelling in every way possible that I ordered it the same day. Four years later I can say that absolutely every time I drive the car, even a short trip to the grocery, I think to myself that this is by far the best car I have ever driven and even four years on it is still more advanced than anything else.
I know others have the same thoughts. Glad to see that Shell has noticed.
TheTalkingMule
Distributed Energy Enthusiast
Fed signals a bit less aggressive rate hiking and oil drops 3%. LOL...frackers given a bit more rope.
Natural Gas Prices Fall Below Zero In Texas | OilPrice.com
@neroden Get a load of this, negative prices for natural gas.
@neroden Get a load of this, negative prices for natural gas.
Australian miner taps solar gold with "world's biggest" off-grid hybrid power plant | One Step Off The Grid
Gold miner in Mali will replace 28MW diesel genset power system with 40MW hybrid system and save 40%. The hybrid system will have solar, batteries and heavy fuel oil generator.
Not discussed in this article is the rational for using HFO generator as back up as opposed to diesel. Here is my speculation about how this is a good idea for the miner. HFO will be cheaper than diesel especially as ships convert from diesel to HFO in 2020. However, HFO generation probably is harder to ramp up and down as diesel. (Someone correct me if I'm wrong.) If so, then the all diesel system was in place because it could flexibility adapt to load. In the hybrid system, batteries provide both storage and flexible power generation. So the flexibility of diesel is not really needed. Rather, with ample battery storage, a backup generator is only needed to supply the 24-hour gap between solar production and power consumption. Thus, backup can run pretty much on a 24-hour basis at a nearly constant rate. From day to day the rate may vary a bit, but not so much intraday variation. So what I am positing here is that effectively baseload generation is all that is needed for backup. This allows the system designers to select the cheapest form of baseload available in the area at the appropriate scale. So HFO beats out over diesel.
If my speculation is correct, what we are seeing is an adaptation that will help balance the diesel market relative to other oil products. Curiously this adaptation will leverage batteries and make solar and wind more attractive. One wonders if islands like Hawaii could go the same path. With more batteries, they can replace diesel gensets with HFO generators all while integrating more and more solar.
Gold miner in Mali will replace 28MW diesel genset power system with 40MW hybrid system and save 40%. The hybrid system will have solar, batteries and heavy fuel oil generator.
Not discussed in this article is the rational for using HFO generator as back up as opposed to diesel. Here is my speculation about how this is a good idea for the miner. HFO will be cheaper than diesel especially as ships convert from diesel to HFO in 2020. However, HFO generation probably is harder to ramp up and down as diesel. (Someone correct me if I'm wrong.) If so, then the all diesel system was in place because it could flexibility adapt to load. In the hybrid system, batteries provide both storage and flexible power generation. So the flexibility of diesel is not really needed. Rather, with ample battery storage, a backup generator is only needed to supply the 24-hour gap between solar production and power consumption. Thus, backup can run pretty much on a 24-hour basis at a nearly constant rate. From day to day the rate may vary a bit, but not so much intraday variation. So what I am positing here is that effectively baseload generation is all that is needed for backup. This allows the system designers to select the cheapest form of baseload available in the area at the appropriate scale. So HFO beats out over diesel.
If my speculation is correct, what we are seeing is an adaptation that will help balance the diesel market relative to other oil products. Curiously this adaptation will leverage batteries and make solar and wind more attractive. One wonders if islands like Hawaii could go the same path. With more batteries, they can replace diesel gensets with HFO generators all while integrating more and more solar.
It is specious that economist Verleger blames the glut on producers who used derivatives to lock in revenue. In my view this is exactly what producers should do. If more producers hedged like this, the cost of this hedge would have gone up signaling that the future was well supplied and not in need of more production. The glut is actually the problem of speculative producers who forego hedging on the assumption that oil prices will remain high. Up until the recent price collapse the futures curve was in fairly steep backwardation. This was taking by speculators as a bullish sign, when we now see that it was signaling a fall in future price, i.e., signaling the potential for oversupply. Speculators who either bought these futures or invested in unhedged production were not heeding the price signal. Speculators buying these futures were effectively financing the hedge that motivated hedged producers. So does it make sense to blame hedged producers or the speculators who where buying up futures? Personally I think speculators hold responsibility for making bad bets, bets they lost. But hedged producers rightly make money on prudent risk management.
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