Do not belive in miracles, especially those promised by cartelists

Everybody - well, almost everybody - in the world today seems to enjoy the lower prices for oil.  After a long winter, spring seems to finally come to our land and into our homes (OK, also in our cars). 

But is it really spring and, if so, it is here to stay? Not really. 

The prices for the most needed commodity which is represented by oil is determined, as a for other commodities, by the offer and demand for the ”black gold”.  Demand has been soaring all over the world for the last 50 years and more, whilst offer also increased, although not at the same pace and, importantly, not at the same costs for processing, transportation and processing. When demands exceeds the available offer, prices can only spike and no law can oppose to this basic law of the economics.  

The equation is not in fact that simple. The problem for the purchasers is aggravated by the fact that they are divided in different locations and with different interests.  They have to compete for oil or they will stop moving.  In the last decade a third way emerged, in the shape of alternative (mostly renewable) sources of supply, in huge quantities and available everywhere.  Available but not so easy to extract and to store, when speaking of the new electricity generation sources.  

The oil, on the other hand, is not in the hands and control of a single entity, be it a state or a multi-national company. There are at least a dozen major producing countries in the worlds, with oil in various quantities, qualities and possibilities to ship overseas. Although one might think that the oil market is global in size, it is regional at most, even with the advent of the super-tankers, capable of moving large quantities of crude at long distances. 

For years, most of the world oil producers, including the countries with the largest reserves, learned that they are stronger if they stay united.  They are different, have different interests and sometimes wage war to each other, for the control of the oil reserves, of course (see Iran and Irak, for instance). But they stay together and in order to ensure that this friendship holds, they put in writing their engagement, in the form of the Organization of the Petroleum Exporting Countries (OPEC). 

What is OPEC? Apparently, a honorable alliance of states, even if some of the members are not that honorable. It is headquartered in the peaceful Vienna, in the heart of Europe and its meetings are attended by elegant gentlemen, getting down from luxurious limousines. 

Appearance is deceiving in this case: in spite of the face shown to the world, OPEC is in fact a cartel: an explicit agreement among producers to control the level of the prices above their competitive level, set by demand and offer, through the control of the output. It is the largest cartel ever seen in the history of the humanity, with a very long duration and, worst of all, it is meant to stay around for a while. 

We all know that cartels are bad, because they alter the rule of thumb of the market economy and, because of this, they are prohibited almost anywhere in the world, except, perhaps, countries such as Cuba or North Korea, where there is not much market economy either. 

What happens and why the nice guys in suits meeting almost in the open in Vienna on a regular basis are not immediately apprehended by the police and thrown to jail? Well, the nice guys do bear with them the strongest weapon against the justice: diplomatic passports. They are all high ranking state dignitaries in their respective countries and out-of-touch of the due prosecution in their respect. Their actions are taken in the name of the states they represent and the immunity they benefit is known in the legal doctrine as the ”sovereign  state immunity”.  It is pretty much the same doctrine which shields for decades bloody or just crook heads of state, whilst these are in position.  Is it right? Definitely, it is not. A wrongdoing remains a wrongdoing, whoever is committing it and under what cover. Nice clothes do not turn bastards into angels and not even into true gentlemen. 

The nest of the cartel, hosted by Vienna, is the ultimate hypocrisy of this cartel. Vienna is the host of several reputable international organizations, from the United Nations to the International Atomic Energy Agency.  Like a predator, OPEC mimics the surroundings in an attempt to deceived the pray. 

So, do not forget that the decreases of the oil prices since December 2014 are not the natural result of market forces but the effect of the blunt decision of a cartel. And cartels never make gifts and never give up on their primary goal, which is to keep prices high and ensure hefty benefits to the participants. 

In this specific case, the OPEC members want nothing more to pull the carpet from the feet of what emerge as competitors to their market dominance: the alternative sources of gas and oil (such as the shale gas or the deep-waters oil alongside the shores of the South America), the new green energies (wind, solar, hydro) and the new fuel-saving technologies.  The OPEC members are pragmatic businessmen but they realized that too much greed, in the context of a long-lasting crisis, which left the world economy weakened, will eventually put at serious risk their supremacy. ”Wisely”, they decided to press the breaks and to show the world their smiling faces, which seem to say: ”we are your friends and partners and you should not worry or waste your time and money in finding new sources of energy or in research for a more efficient use of the fossil fuels”. The wave of the technology changes swept the world more than once - the steam engine, at least, died before being able to accomplish its full potential - and the OPEC members have no wish to follow on this path. 

Taking into account all these considerations, no rational person should be fooled by the apparently friendly approach of OPEC. A cartel remains a cartel, whatever is doing and even a reduction in prices, decided in concert and not by individual decision, is only made in order to strengthen the position of the cartel and to allow it to raise the prices again as soon as possible (at the cartel will), thus recovering anything which apparently gave up whilst being ”friendly”. 

OPEC members are very much aware that their market power - and the efficiency of OPEC, as a collective mechanism of setting world prices for the crude - will only exist as long as their - only - product remains in high demand and does not have feasible alternatives.  A cartel of the horses growers could enjoy a huge power 150 years ago but it would raise nothing than eyebrows or smiles today, with no impact on the economy and our life. OPEC members would like to avoid the faith of those who knew only how to grow horses or the faith of those who invested heavily in coal, at a time when this fuel seemed to rule the world for the next 100 years (until 1920-1930). It did not. 

This is why, remain wary and vigilant and prepare for the moment when, inevitably, the honorable OPEC members shall raise the price bar again, by limiting their output.  They will be able to do this - and they will do it for certain - when the investments in shale gas, in the renewable energy or nuclear energy would have faded to levels that it would make these investments unsustainable. We should not forget that investments in oil extraction, especially, have a lot of sunk costs (sometimes, literally) and a shock induced by an abrupt loss of attractiveness may give these alternative sources and new technology a blow difficult to recover later on. 

So, beware of cartelists, even when they bring gifts.  This used to be said in the context of the Trojan horse, which made the great Troja fall to its assailants, but it is perfectly applicable here. 

The renewable energy - to aid or not to aid ?

The renewable energy is clean and available in large quantities, so there is no surprise that it became so fashionable in the recent years, almost everywhere in the world.  Even if the source of energy is, often, completely free (basically, the Sun), the costs for extracting the energy and make it useful is a different story.     

The renewable energy has two major drawbacks which would undercut its score in front of the bankers and put it at disadvantage in the competition with the classical sources of energy - the lower efficiency of the generation capacity in transforming the basic wind, solar or thermal energy into electricity and the lack of continuity of generation, especially for the wind and solar energy.  Due to the surge in demand for generation equipment for renewable energy sources worldwide, the prices for such equipment soared and are likely to stay high for the next years. After all, when the gold rush was at its peak, even the worst carriage used to cost a fortune! 

In the context of a financial crisis and, hence, a reduced access to financing the conditions were met for "high-voltage" tension between old and new energy producers, fighting for the scarce available funds.  

The renewable energy producers had a struck of luck (or rather were more efficient and persistent in front of the Government) and benefited, after hurdles and delays, of a generous state aid scheme, in the form of "green certificates", which must be bought by the energy producers from traditional sources.   

The likely privileged status of the renewable energy had both supporters and foes, which is rather normal if we consider that traditional energy producers have to support now both their needs for investment and the needs of the renewable energy producers - through the green certificates they acquire and the obligations to balance the grid whenever the wind or solar energy producers are off-production.  The Romanian energy industry was already facing major problems, from the old and obsolete assets in the coal-fired and hydropower units to the insufficient capacity of the national grid to take over the quantities of electricity produced by the new sources.  New investment in the fossil-fuels generation units is paramount and new nuclear reactors in Cernavoda are still considered as a viable option.  Therefore, before the newcomers were even considered competitors in the energy market itself, they became competitors for the financing available for this industry.  This kind of competition could be solved, of course, on pure market basis, i.e. the most efficient energy project was to win the race.  But the renewable energy would have lost the fight easily if governments and legislators on all continents did not step into this game and tried to ensure what they consider a level playing field for the new generation of energy generation.  

For years, Romania lagged behind the EU Member States in terms of new investment in renewable energy and the chance of meeting the targets assigned to it under the Europe 20-2o-2o program were slim.   To be honest, Romania was not in such a bad situation if we take into account the high  number and the capacity of the large hydropower stations, which come under the definition of renewable energy - although these are not considered to be environmentally-friendly - and which have been used for almost 100 years.  Also in order to be honest, the large hydropower units were old and they required immediate and significant investments in refurbishing and upgrading.  

Romania made no exception from the legislative intervention trend and the Romanian Parliament passed a law in 2008 – Law 220/2008 - creating a whole support structure for the renewable energy, aligned with the objectives set for Romania by the European Union: 24% energy produced from renewable sources in 2020.  The issuance of this law was the beginning of another period of to make it effectively applicable.  Some of the opposition was justified by the fact that certain provisions of Law 220/2008 could not be applied as such and needed to be amended.  On the other hand, certain arguments against the new sources of energy were based on the failure to understand or even to accept that the advent of the renewable energy was necessary for the energy market as they increased the variety of the supply, in harmony and in addition to all the other sources – based on the fossil fuels, the nuclear power or the large hydropower units.  

Was this intervention useful and was the field leveled? It is difficult to say but for sure the producers from renewable and environment-friendly sources received a boost and started to be loved by the banks. 

Unfortunately, no real analysis on the right place of the new renewable energy sources took place so far in Romania and investments in the new generation units were made rather because money was available for it.   

The arguments in favor of the renewable energy are based too often on lot of enthusiasm and on environmental considerations rather than on sound market considerations. A speculative "bubble" is still possible in Romania (as it happened in other countries) but it is not unavoidable.  Interestingly enough, most of the early investors in renewable energy sites, in 2009-2012, came from the real estate sector, where another bubble just burst.  They should have learned their lesson but there is no guarantee.  Real energy investors should step in as soon as possible.  

The arguments against an increased use of the renewable sources seem also short-sighed and out-of-time, so they are unconvincing.   The contenders are sometimes as the horse carriages owners in England who, when the steam engine appeared, raised against its use based on arguments such as that the locomotive should be the ”work of the devil”- after all it was throwing hot steam, isn’t it ?!  They were not saying, of course, that their fear was in fact that the new technology shall force them to either change their business model or it shall force them out of business at all. 

Of course, things are not so dramatically this time, as energy produced from coal, gas and uranium shall still be viable for a long time.  The argument of the horse carriages masters may come back in a different form: if we can still do the job, why to rush and extend the use of the new technology, outside the environmental arguments? I think that this would be a valid question.

The new renewable energy sources proved their ”raison d’etre” in the Romanian energy industry and their utility in supplying the necessary energy to the grid, as it happened during the severe drought in the last two years, which seriously affected the generation capacity of the large hydroelectric units. 

The renewable energy has a future but it must start walking on its feet. Not the soft cushion of the financial aid from the State is what the renewable energy needs but the solid ground of a clear and consistent energy strategy.

The debate is on.