There is a case that can be made that the present day liquidity profile and reduced capital investment in upstream sources for new supplies of petroleum, match the similar scenario of the 2008-9 financial crisis. In recent times, and partially as a result of the global pandemic, huge infusions of cash have been pumped into the market to achieve a number of objectives. Commodities began an extreme pricing upswing last year as a result of this cash infusion and pent-up demand from the shut-down phase of the pandemic. As a result, not only are there strong parallels to 2008, but current conditions are even more exaggerated as we approach 2022, thanks to continued governmental and financial intervention in the markets. In this article, we will examine some of the key causes of the 2008 financial meltdown, and compare them against relevant data in the present day. We will then tie that to current data on petroleum supplies and production to make our final case about the likelihood of a severe global financial crisis.
Lack of capital investment in upstream petroleum supplies
If you follow the news you will become quickly and acutely aware that things are different on the global energy front. Strikingly different from just a year ago. One of the things that drives the conversation is the speed at which the market has flipped from assuming that oil would be plentiful and low priced well into the future to just the inverse. There was even a catch-phrase to describe this scenario, used as recently as March of 2020-Lower For Longer.
So what happened? As you can see below spending on fossil fuels has declined precipitously from 2014, reaching a bottom only last year. Estimates vary from between $600 bn to $1.0 Trillion of capital has been lost to oil and gas extraction since 2014.
Two primary reasons have been the cause of most of this capital restraint. The first is prices well below an acceptable rate of return for oil companies for much of this period. Lower for Longer carried an enormous financial impact onto the balance sheets of oil producers, and they did what oil companies do when oil prices drop. They stopped spending…on oil and gas. Even now, with prices that are much higher, domestic oil companies are choosing to pay down debt, buy back their stock, and raise dividends as opposed to increasing their capital budgets. This was discussed in detail in an OilPrice article in September.
The second principle chilling effect on global fossil fuel investment has been the action of governments and activist shareholders to foster so-called “green energy” alternatives through edicts, tax subsidies, and regulatory barriers. Following the Paris Accords, signatories have moved swiftly to reward investment in these alternative energy sources, primarily-wind, solar, and biomass. This, despite the fact that many of these alternative technologies are still evolving, and lack supporting infrastructure. We have in effect, “jumped” into the pool and then checked for water. We explored the actions by European governments in this OilPrice article.
International companies like, Shell, (NYSE:RDS.A), (NYSE:RDS.B) and BP, (NYSE:BP) are doing some of the same things, but also are diverting capital to renewable energy projects in an effort to reduce the carbon footprint of their operations. In a moment of candor and clarity, in response to an activist investor pushing the company to spin off its legacy assets, Shell CEO, Ben van Beurden said-
The needs of Shell’s customers, and the company’s efforts to pivot away from fossil fuels, were better served by keeping its range of assets and businesses. In particular, he said the company’s legacy oil-and-gas assets were needed to fund its investments in lower-carbon energy.
These companies are also scaling down their carbon-based operations, monetizing assets up and downstream. Shell in particular has led the way with their sale of their Permian assets to ConocoPhillips, (NYSE:COP). BP is considering further steps, but has not made any big moves in this regard recently. These actions will result in their portfolios becoming less carbon intensive as the alternative energies they are investing in now, come online mid-decade. Will they be as profitable? Doubts have emerged, but this is a question for a future article.
One need not worry about the financial viability of these green energy projects, over the short run at least, as there are ample government stipends in place to pay all or part of their costs. Domestically, and across the pond, governments have paved the road for a green energy transition. The market has already decided about this capital shifting as relates to these companies, bidding up their share prices by about half since the first of the year.
The problem for world energy consumption is that oil remains a fundamental driver of energy security globally and demand is running ahead forecasts with demand above 100 mm BOPD. Prices have gone higher. Much higher, and that could be problematic for the stability of the financial system if the thesis we are constructing comes into play.
The great global liquidity influx and a commodity boom
Liquidity or lack thereof is stuff of which financial crises are made. If you hark back to 2008-the last financial crisis that wasn’t related to the now winding down pandemic, an increasingly seized up financial system brought global markets to their knees as it metastasized. Liquidity in the form of massive government intervention righted the ship and by early 2009 green shoots were appearing in the market.
Two of the things that precipitated the financial crisis of 2008 were a leveraged asset bubble in housing and a maturing commodities super-cycle. Growth in commodities brought on by the Chinese economic boom led to oil topping out at nearly $150 per bbl in 2008. This boom continued to mid-2014, with oil regaining $110 bbl before succumbing to OPEC’s desire to retake market share from U.S. shale producers, and lower growth in the Chinese market. Oil became plentiful as OPEC opened the taps, and prices stayed low for the next 6-years.That is one key difference from 2008 that will tend to extend and exacerbate a downturn if it occurs. Oil is not plentiful and prices are spiking.
Climate policy will directly impact economic growth
We are already beginning to see the second-order effects of the climate policies being adopted in the wake of the Paris Accords and its offspring the COP-26 love fest in Glasgow this year. I am referring, of course to the energy crisis in the UK, brought on by unanticipated underperformance of wind farms, and under-investment and early retirement of petroleum energy sources, over the last few years. This has all been pretty well documented, and I am not going to belabor them further now.

By: David Messler