Climate Initiatives and the Oil Sector Collide

Risk level: Yellow

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)

THE BOOSTER SHOT

-Green agenda makes sense … sometimes.

-From lipstick to vinyl records, oil is here to stay

British energy company BP started evacuating personnel from its rigs in the US waters of the Gulf of Mexico ahead of Tropical Storms Marco and Laura. Tens of thousands of acres of land are on fire in California, just after rolling blackouts left much of the state without power during a sweltering heat wave. Death Valley recently recorded the hottest land temperature on record. This won’t be one of those commentaries designed to guilt the industry into changing its ways. Instead, it points to the difficulties in moving in comprehensive fashion to address the challenge of a future without oil.

The price for Brent crude oil is moving in a narrow tunnel around the $45 per-barrel axis. Economic stagnation has been balanced out by a geopolitical risk premium emanating from the Persian Gulf and Mediterranean Sea. The political and social chaos in the United States, meanwhile, is bruising investor confidence. Brent finished the week down 1%, in line with The GERM Report’s latest alert, to finish trading Friday at $44.93 per barrel.

The US Bureau of Safety and Environmental Enforcement reported that about 58% of total US crude oil and 45% of total gas production in the US waters of the Gulf of Mexico were shut in ahead of Tropical Storms Marco and Laura. Those shut-ins translated to about 1.1 million barrels per day in oil and 1.2 million cubic feet per day in natural gas output. A total of eight rigs were moved out of the way and personnel were evacuated from 114 production platforms. BP and Chevron had already started pulling staff from offshore rigs by Friday.

Total US crude oil production was down some 12% from last year, after crude oil prices plummeted in April. Federal estimates, however, show offshore production is expected to increase some 7% from the second quarter, compared with an anticipated 2% gain from the shale basins in the Lower 48.

As of Monday, the National Hurricane Center reported that Marco was expected to pummel the southern coast of Louisiana with heavy rains and life-threatening storm surge is expected. Tropical Storm Laura already dumped rain on parts of the Caribbean and is expected to strengthen as it follows Marco into PADD 3. Hurricane Harvey in 2017 caused roughly $125 billion in damage, a tie with the damage from Hurricane Katrina in 2005. About 12% of US refining capacity was knocked offline by Harvey and the price for Brent crude oil jumped some 3% after the first storm warnings rolled in mid-August. While neither storm is expected to strengthen to Harvey’s eventual Category 4 status, the one-two punch could leave much of the wells and refineries in PADD 3 underwater for weeks.

Few things affect the world as much as the weather. But the economics of the oil industry gives it a competitive edge against climate initiatives. US President Donald Trump started pulling his country out of the Paris climate accord, ripped up the restrictions on methane emissions and overhauled the so-called Environmental Protection Agency in favor of the energy sector. As a candidate, the president promised to eliminate the federal overreach he said was inhibiting the nation’s energy sector. The Pulitzer-prize winning InsideClimate News offered a damning assessment of the Trump administration’s track record on climate initiatives, but noted the ripple effects globally.

“…instead of racing to grasp the leadership baton dropped by Trump, China, the European Union and other large carbon polluters are falling behind both in their own ambition and in support for the nations most vulnerable to climate change,” commentary from January read.

A lack of global leadership in the age of populism and nationalism leaves the push to change course up to the private sector. The dip into negative territory for West Texas Intermediate, the US benchmark for the price of oil, and the stubbornness of $45 Brent has been something of a wake-up call for the industry too. After Trump erased methane restrictions, BP stated it remained committed to methane-free operations by 2050. In early August, the company said it would increase its investments in low-carbon energy alternative 10-fold by 2030.

“Energy markets are fundamentally changing, shifting towards low carbon, driven by societal expectations, technology and changes in consumer preferences,” BP Chairman Helge Lund stated.

That looks good on paper, though conventional petroleum products will continue to dominate much of the consumer landscape. Birthday candles, crayons, polyester fibers, asphalt, charcoal briquettes, phonograph records and nail polish are all petroleum products. On global climate initiatives, noted political scientists Robert Keohane and David Victor argue a green initiative only makes sense under certain circumstances.

“The emergence of a belief system around the prospects of “clean tech” revolutions and green jobs could also help mobilize new interest groups that favor effective climate policy,” they wrote. “But this belief system will only be sustainable, and worthwhile in the long run, if it is seen as realistic and a reliable source of private benefits.”

Norwegian energy company Equinor may have taken oil out of its name in its most recent rebranding effort, though oil will remain a dominate global commodity for the foreseeable future. It is economically convenient to adopt a green agenda during a period of historically low oil prices, and politically convenient to put on a good face. Climate change and oil will continue on a collision course and abnormal storm activity in the Gulf of Mexico is but one example.

Storm activity will arguably be the main driver of the price of oil this week, particularly on Monday given the expected lack of influential economic data. Tuesday brings a reading of second quarter GDP from the German economy and oil giant Norway, which is expecting a slight increase in oil and gas investments this year. We’ll see late Tuesday and early Wednesday if US demand indicators pull on crude oil and gasoline inventories. French unemployment levels and a gauge of consumer confidence are expected on Wednesday, as are durable goods orders in the United States. But don’t forget the Jackson Hole economic symposium starts on Wednesday. The year’s theme is “Navigating the Decade Ahead: Implications for Monetary Policy.” And it’s data-dump Thursday, with a revised second quarter GDP reading, jobless claims and core PCE all expected from the United States. The week ends with a gauge of consumer, industrial and general economic sentiment from the euro-economy. Technical indicators suggest the price of oil has room to fall, though storm activity will likely drive commodities higher this week. A Yellow alert is in place for the week, with oil prices expected to move by as much as +/- 2%.


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