Money tips: Black gold loses its lustre


In our monthly money tips column Dave Deruytter wonders aloud: Why is energy so cheap and will it last?

The term ‘black gold’ as a reference to petroleum was first coined at the start of crude oil production in the US in the mid-1800s – ‘black’ because of the colour of crude oil and ‘gold’ because it made the producers so rich. The expression came back into vogue again after the two oil crises of the 1970s because of the sharp increases in the price of crude oil at that time. By then, it was the OPEC countries in particular who became very well-off, led by Saudi Arabia.

For quite some time most observers thought that oil would never become cheap again. And indeed crude oil went swiftly above the €100 mark per barrel over prolonged periods of time, partly because of the fast economic growth of oil-hungry developing economies in countries such as China.

Then why is it trading at less than half that price today?
One reason is the fact that the US has become an oil and gas exporter since the discovery and development of shale gas and shale oil a few years ago. Indeed, before that the US was an important importer. In short, US oil consumption decreased, whilst its gas consumption increased due to the important local shale gas production.

Another reason lies in the cooling of fast-growing developing economies. Today, China is growing at only 6.5% of GDP per year. That is quite a bit less than the double digit growth around the period of the Beijing Olympics in 2008. Also, the other BRICS countries are slowing down growth-wise or even showing negative growth, as is the case in both Brazil and Russia.

Thirdly, one cannot underestimate the effect global environmental initiatives have had on the slowing down of oil consumption. Windmill and solar panel parks have grown very quickly over recent years amidst the global effort to use more clean energy. Germany now appears to have windmills everywhere. In sunnier climes such as Italy and Spain it has become obvious to place solar panels to produce an important part of energy needs. The Paris climate agreement, made at the end of last year, will only add to that evolution once its effects get up a head of steam.

In fact, from a purely economic point of view it is good that crude oil is not just burnt to produce energy. Indeed, given its limited supply, it is probably better that it is used chiefly to produce quality plastics rather than anything else. But even then it has a disadvantage over metals: the fact that it is difficult to recycle, if at all. Still in aviation its use to reduce the weight of the aircraft – and thus the kerosene consumption – compensates to some extent for the negative aspects.