Oil-Phoria Bounce On OPEC Deal, Now What?

by: Danielle Park, CFA

OPEC says the persistence of excess supply and weaker global demand growth have prompted its members to agree on production limits in January for the first time since 2008. Non-OPEC producers are not on side as yet. And history tells us that even when these agreements are accepted in principle, about 60% of the limits are actually honored. The inclination for cash-strapped countries to nod agreement and then cheat production curbs, is endemic.

The US - swing producer to the world - certainly will not be agreeing to an output freeze. To the contrary, Trump co. is vowing to double down on US oil production. And now that WTIC has recovered to the $50 range, producers everywhere have increased incentive to drill, baby, drill.

This chart courtesy of my partner Cory Venable gives a long-term view of West Texas Crude since 2007. Here we can see what happened to the price of oil the last time that OPEC agreed to cut output in 2008: Price plunged about 75% as the global economy recessed. It then recovered on stimulus hopes and stockpiling into 2011, before faltering afresh, as global growth turned down once more and has sputtered since. Technological advances in production and efficiency along with the natural tendency of aging consumers to use less, are formidable deflationary forces pushing down on the price of oil, and these are set to continue no matter what OPEC does.

Most important to grasp is that 2017 is a dramatically different world than 2008.

Today technology is transforming the energy landscape faster than most can imagine and appreciate. Energy costs are falling as technology is allowing alternate fuel types and sources along with energy efficiency (like net zero buildings, electric transportation, horizontal farming, energy capture and recycling etc.) to boom. See: India unveils the world's largest solar power plant, as just one recent example. (Also watch: Inside Story - Solar power - bright future?) Governments and status quo corporations can waste more time and money trying to prevent this life-improving gift for the masses, but they will fail.

The energy revolution is as big for the world today as the dawn of personal computing and the internet was in 2000. In reality, the two are directly related, since the advances in energy are made possible by the ongoing computing revolution. And all of this is coming just in time for an aging, indebted population, desperately needing productivity increases for households and businesses, after a decade of wasteful financial engineering and mal-investment on non-productive consumer goods.

This future is very bright. Trying to lean against this change is as futile as trying to block out the sun from shining on the planet. Literally.