Pork Cycle meets Peak Oil

The pork cycle, one of the few credible economic theories I know: a high market price for a product signals producers to invest in production capacity, by the time the capacity is available massive amounts of products enter the market leading to price drops. Prices fall so low that for some producers not even the marginal costs are recovered: they go bust. The stocks of the product run down, prices start rising. Shortages occur signaling producers to…..boom bust repeat

The fossil energy market has been very different: after the Second World War massive fields were brought into production (Ghawar in Saudi, Texas, later the North Sea, Alaska, GOM) that could be switched into a higher gear by just opening the throttles. The guy with the biggest throttle (Saudi) determined the price, it adjusted the flow of oil (almost realtime) to such a level that the market was (more or less) in balance at a price it desired.

This worked nicely for over half a century, but then came 2005. Economies were soaring, demand increased to unbelievable levels but Saudi stuttered. It couldn’t open its valves far enough to stabilize the price. Prices started rising. Two years later oil cost 147$ a barrel. Economists (the talking heads on TV) had always said that the global economy ran on 30$ oil. Oops.
Lehman fell, central banks started to fix the problem with massive amounts of free money for the banks.

Now a historical interpretation from myself: fracking as technology had been known for a long long time, but it was way too expensive to actually use. The free money flooding the investment market suddenly made fracking viable. BUT:

Now a technology was introduced into the Fossil Fuel industry that resulted in oilfields without a tap: development was so expensive (way higher than offshore) that production was always flat out from the start.

We have been in the first up leg of the Fracking Pork Cycle: consistent 100+$ shale oil invited everybody and his mother to start fracking. The market saturated. Saudi now needs every dollar it earns for its exploding population and is NOT throttling back anymore:

Now let’s apply some economic theory and do some predictions:
* prices plummet (happening)
* countries relying heavily on oil revenue (Saudi, Russia) will start looking for ways to increase the oil price : wars in Ukraine and Iraq?
* countries that dislike Russia and Saudi will do everything they can to keep the market flooded, leading to economic havoc there

In the long run low prices will kill frackers: their need for free (QE) money is starting to hurt the western economies because low rent causes bad investments being made. Once QE stops fracking instantly dies leading to soaring oil prices, killing western economies.

My advise? Stop free money, don’t start fracking elsewhere, oil prices will slowly increase. Renewables, already delivering cheaper energy than oil and coal, will quickly pick up the gauntlet. We transform away from fossil society. Russia and Saudi see what’s happening, get a last shipload of money from the expensive oil and can prepare.

We live long and prosperous and have at least a fighting chance to save the planet. Or so.


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