An insightful video was posted on YouTube by Wendover Productions that reviewed events in the past 15-20 years of history in the oil industry and ties them together with one key conclusion. The market shock encountered early in the pandemic where some oil prices briefly went NEGATIVE acted as a final wake-up call to the oil industry and put us in a situation where we aren’t technically at “peak oil” but we ARE at a point where we are at (past?) “peak oil investment.”
Here’s the link to the video ----> https://youtu.be/AQbmpecxS2w
The slightly longer summary of the video boils down to this sequence of events.
Fracking technologies altered the cost structure of oil production significantly. Prior to fracking, typical means of production had very high fixed up-front costs but yielded lower average costs. With fracking, lower up-front costs of fracking on land allowed small players to enter production markets and cheap interest rates acted as a subsidy (for a while) but average costs of fracking are significantly higher than traditional means.
In relatively stable times, the boom in production volumes made possible with fracking firms (temporarily) destroyed the market leverage of OPEC. That new equilibrium could be sustained as long as market prices were above typical fracking incremental costs (which were/are HIGHER than traditional production).
When the COVID lockdowns began and demand for crude PLUMMETED, the inertia of daily production and inability to literally STOP production overnight briefly created NEGATIVE prices for crude in some markets. Producers literally had to pay refineries / tanker farms to absorb their production until demand returned or producers could shut down facilities.
Over the last twenty years, growth in the value of energy stocks is about par with inflation, meaning investors in fossil fuel firms haven’t made serious returns compared to other high flying sectors. Energy companies have looked at all of these factors and have flattened or cut back investment. For those firms that really cut back during the negative pricing blip of 2020, many have not returned that capacity to production. However, market demand HAS returned since that Spring 2020 nadir. That has led to a sustained gap between supply and demand. The only possible result when demand outstrips supply is a spike in prices. Yet because oil companies see electric vehicles growing in popularity and they have already delivered weak results to their shareholders, none want to “re-invest” by resuming suspended petro-capacity and are timid about getting into alternatives where their expertise and competitive advantages are not evident. In short, this spike over the last 18 months
- has little to do with fears over Russian actions in Ukraine
- has little to do with fears about other actions Russia may take
- has little do do with any domestic regulatory restrictions or opportunities
- has little to do with politics on any side
Most importantly, prices will likely go higher as investments in traditional production sources stay flat or decline.
Which brings up larger questions about causes for inflation and what – if any – actions can be taken to return it to prior abnormally low levels.
The key statistic I consider each time I hear news broadcasts airing stories about people selling kidneys to fill up their SUV or paying $20,000 for daycare or paying sticker for cars that take eight months to deliver is this…
ONE MILLION AMERICANS HAVE DIED OF COVID SINCE FEBRUARY 2020.
Stop and think about that. Thankfully, there are very few children in that toll. Per the CDC’s website at https://www.cdc.gov/nchs/covid19/mortality-overview.htm one finds
- 743,015 deaths were people 65 or older
- 213,436 deaths were people 45-65
- 42,247 deaths were people under 45
If you look at COVID CASES as summarized at this site ----> https://www.statista.com/statistics/1254271/us-total-number-… the number of cases in the US of people age 18 to 65 is roughly 50.9 million people.
Think about these statistics from a labor market standpoint. Assuming the cases not ending in death only involved a 2 week absence from work, the case quantity means we lost 101 million weeks of labor over two years. For the fatal cases, we LOST 255,683 workers entirely.
Think about the impact of long-haul COVID on these numbers. Estimates range that between 14 and 30 percent of people contracting COVID experience long-haul symptoms that range from merely unpleasant to chronic brain fog / fatigue / pain. If only 10 percent of the long-haulers are experiencing those extreme symptoms, that could be another .10 x .30 x 50,900,000 or 1,527,000 people not fully present in the labor force.
Think about the secondary impacts of those deaths and cases. It would seem safe to assume for most of the working-age deaths, many involved hospitalization which resulted in a partner losing work time visiting the patient or doubling up on parenting duties. Think of the labor sectors where the experience of dealing with irate parents and the public led people to walk away from a medical, teaching, retail or restaurant position. Most people making those decisions – especially higher up the skill ladder – are NOT likely to return to those positions soon, if ever. That is producing upward wage pressure as firms become more desperate to retain the employees remaining, especially as demand (routine doctor visits, in-class learning, eating out, etc.) returns to normal levels with FEWER workers.
There’s no mystery to the inflation being seen now. And no instant cure for it exists in the economic or political realm. Economies around the world are going to have to sort out priorities and hope an equilibrium is re-established without nefarious actors with highly leveraged bets behind the scenes further disrupting the process while trying to protect their narrow interests.