WBH Energy Files For Bankruptcy What's next?

This shale oil company is down. It was well foreseen in view of the dramatic oil price drop. And we expect oil price to fall further into 2015 and 2016 down to $20. Then many more shale oil (then natural gas) companies will follow WBH. Moreover, this is just the first step in the "falling domino" sequence. There is an industry  oriented to horizontal drilling and chemicals involved. This is the next candidate to suffer. Then many segments of financial sector, which are linked to shale and other oil companies also suffering severe problems with falling oil price,  will face "no-return" crisis similar to that during the subprime crisis. I would call the new crisis "sub-shale".  

Дума 2016

Основные вызовы для власти:

1. Значительное снижение реальных социальных выплат/пособий/пенсий электорату ЕР вследствие падения ВВП, резкого спада промышленного производства и  доходов экспорта, инфляции цен, а также отсутствия социально значимых товаров из-за санкций/контрсанкций
2. Снижение реальных зарплат в бюджетной сфере (медицина/образование/культура/наука) по тем же причинам.
3. Опережающий рост безработицы в дотационных регионах с очень высокой поддержкой ЕР
4. Рост экономического неравенства и поляризация доходов -дворцы/хижины
5. Политико-экономическое давление извне.

Monop-oil-y

Saudis initiated a number of processes, like larger discounts to oil price, which have to return the changing oil market to its long-term status. Historical oil producers (OPEC, Russia, ...) had a ten-year period of monopoly producing the highest profit for the countries with the lowermost net cost. The market was shared between the main producers. This was a good example of maximized monopoly profit. 

Shale oil is not a challenge to monopoly profit, but bears some danger for the main producers to lose their market shares at the price level of $100. The response to this challenge was very well measured. Saudis waited before the investments in expensive energy technologies, like shale, oil Canadian tar, offshore Arctic, renewable energy, etc., reached the stage of mass production with the highest debt to be paid back. The expected effect of  low oil price (we forecasted the possibility  of $22 per barrel in 2016) is complete destruction of alternative oil/energy sources. Moreover, Saudis made it clear to investors that energy projects beyond conventional oil extraction are risky for decades. European countries with costly renewable energy paid from taxes (i.e. from consumer demand) will suffer most by suppressing investments in profitable businesses. I admire Saudis. They effectively use monop-oil-y.

Russia and Brent - the history of love and fall

It is common place that the Russian economy critically depends on oil price. It this short post we present a simple forecast of the Russian real GDP per capita in 2015 as based on the link between the evolution of the Russian GDP and Brent price. We have borrowed the GDP data from the Total Economy Database (available on Briefing.com) and FRED .

Figure 1 presents the growth rates of Brent price and Russian GDP per capita since 1991.  To the Brent curve, we have added the expected oil price in 2015 - $60. This makes the growth rate in 2015 of -0.4 1/y, i.e. a 40% drop. Figure 1 demonstrates that the Russian economy is more stable than oil price. However, the influence of oil price fluctuations is clear. To illustrate the level of tradeoff between the change in Brent price and the growth of Russian economy we normalize both curves in Figure 1 to their respective (absolute) maximum values after 1995. (Before 2000, Russia passed through a ten-year period of fast recovery after the fall caused by the transition to capitalism since 1991.)  Figure 2 depicts both normalized curves. Here we see almost one-to-one correspondence between the major peaks in two curves, e.g. in 1999  (love history) and 2009 (decline and fall) .   When it comes to the largest changes, the Russian GDP per capita follows the Brent curve with a coefficient 1/6, i.e. the change of 6% in oil price is converted into a 1% change in the GDP per capita. 

Having the estimate of 40% fall in oil price in 2015 (this is a conservative estimate and some experts do not exclude $30 per barrel) one obtains a 7% fall in the Russian economy in 2015.

Figure 1. The growth rate (1/year) of Brent price and real GDP per capita in Russia. 

Figure 2. The growth rate (1/year) of Brent price and real GDP per capita in Russia normalized to their peak values after 2000. 

Germany – economic driver or vampire?

Euro was introduced (as notes and coins) in 2002. Since that time, the evolution of GDP per capita in European countries has been demonstrating distinct signs of separation between the countries within the Euro area and those which retain own currency.  Figure 1 below shows real GDP per capita (borrowed from the Total Economy Database on Briefing.com) normalized to the level observed in 2000 for several European economies. Sweden, UK, and Switzerland (dashed lines) have been growing faster than any of biggest European countries, except Germany.  We do not show smaller economies and the countries joined the Euro area later than 2002.  

Formally, Germany is the driver of the Euro area economy. But several countries outside the Euro area are doing much better than their neighbors joined the Euro area.

Might it be that Germany is not the driver of economic growth but kind of economic vampire?

Euro area, USA, China, India, Russia - economic growth

Here we present the evolution of GDP per capita (OECD dataset) for Euro area, USA, China, India, and Russia. In Figure 1, instead of presenting real GDP levels, we normalize all time series to their respective values in 2008. Euro area is the looser in term of growth – real GDP has gained 17% since 1995 with the peak in 2007.  Moreover, it is about 4% below the 2007 level with a negative trend.  

It might be surprising for some readers that USA had the same evolution between 1995 and 2011 with some minor deviations, but definitely has been growing at a larger rate than Euro area since 2011. In 2013, U.S. was marginally above the 2007 level.

China and India are winners in growth rate, but still are far behind in terms of GDP per capita level. Russia is in a middle position in both graphs.

Figure 1. Real GDP per head for several countries and Euro area all normalized to their respective levels in 2008.

Figure 2. Real GDP per head for several countries and Euro area.

Oil, 2016, Russia, WWIII

We have posted on all items in the title of this post separately. Briefly, we predicted oil price to fall to $30 in 2016. Russia is the country critically dependent on oil price. The best real GDP projections for Russia with oil at $60 still include a few years of recession and high inflation. These economic phenomena are famous to punish the poorest part of population - retirees and unqualified personnel. This is the root electorate of United Russia - the current power. In the shade of low oil price and partly demoralized electorate, Russia runs into the 2016 legislative elections. This is kind of perfect storm when all possible negative factors come together and, by positive feedback, multiply damaging power. 

This could be extremely heavy burden just for the Russian society if not the Ukraine conflict. Not exaggerating the degree of internal protests initiated by socio-economic degradation we cannot exclude fierce suppression of any kind protest since the beginning of 2015. West will pour some oil (irony) into the internal and external conflicts ... and WWIII.  

I feel panic.