‘High oil prices have a ripple effect on other commodities too’

High oil prices knock out everyone – be it other commodity prices or strain on economies.

As he watches volatility in crude oil prices, Chris Midgley, Global Director of Analytics, S&P Global Platts, worries that if the oil prices do go up further then it would promote a recessionary environment which is bad for global economy. Also, it will lead to slower technological advancement, Midgley told BusinessLine .

When asked if he sees a rebound in oil prices, Midgley said, “I never liked when people said lower price now or lower prices forever or high prices forever. Rather, I would say cyclical forever. This market is cyclical – another period of high prices followed by another period of low prices.”

Iran, Venezuela tensions

But worry would be if it goes higher, he said adding that though it will promote the energy transition, it will be probably be a less efficient way because prices are off the mark.

High prices will also dent offtake, as it will lead to demand destruction, he added.

According to him, there is plenty of supply in the market, but the problem is disruptions inlcuding geo-political – which are also aplenty today.

“You may say OPEC will pump in more oil, but does OPEC have that much oil? They are, as it is, struggling enough to offset Libyan and Venezuelan production as well as Angolan production. There isn’t spare oil around. We need Venezuela to come back,” he said.

Besides, the US administration may push hard for zero exports from Iran, but that is not easy, he pointed out.

Ripple effect

Stating that he would not like to paint a worrisome picture, Midgley said, “at this rate we are depleting the existing reservoirs at a much faster rate and there are no new investments coming in new reservoirs. The need of the hour is larger capital and longer investment cycle on projects. The activism that we have today of leaving it has the danger of industry investing less and we moving into higher oil price cycle.” Midgley cautioned that higher oil prices also have a ripple effect on other commodity prices.

“If you look at all the demand growth we see recently it is coming from mining and production…and it requires huge amount of investments. Higher energy prices lead to higher commodity prices, which in turn affect global economy and that will impact the economic growth.”

Energy is an important part of anything that is produced and distributed and fluctuations in prices will have an impact on agriculture sector and produces like sugar and cotton, as well, he added.

There are also IMO (International Maritime Organisation) bulk specification changes which come into effect from 2020 which again will increase the cost of fuels. According to Midgley, all these are recipes for adding additional costs to economy.

“It looks like we are due for recession. And most of the recession is led by higher commodity prices. And we are seeing a little bit of recipe that might show some concern about global economy due to oil prices,” he said adding, “I don’t want to be an alarmist because at the end of the day we know that just as oil prices are cyclical so are economy. They grow through expansion then fall through recession. Now we are look at a recipe for perfect downward trend in growth that may lead in recession in global economy due to oil prices.”

US-China trade war

Asked what he sees will be the implications of the US-China Trade war on commodities prices, he said a lot of trade war has been on commodities.

“We have seen that in the US in prices of steel and aluminium...But the war between the two could have benefit for other countries. A concern would be if it starts going into other sectors like the automotive sector,” he said.

The automotive sector is so inter-linked like parts and components are built in one country and put together in another and sold in third, Midgley said adding that if it affects automotive then it would have very large impact on the market.

On whether coal is the bad boy of energy sector, he said, “Energy is energy. I don’t think coal should be termed as the bad boy. It creates jobs and it creates wealth. Energy is wealth creative. If you constrain energy, you increase the cost of energy. Coal is a necessary energy sources. Clean coal in super critical plants has proven to be very efficient.”

“See everyone is talking about moving to gas,” he said adding that “Yes, LNG is lower carbon but it is not zero. You are just working on margins. Will it not be better to think about carbon capture storage with coal that create jobs, that creates zero carbon emissions and that keeps existing assets capitalised. There is some alternative thinking that needs to happen here.”

Alternative options can be considered, Midgley believes. “Coal is part of mosaic of energy solutions and its about how do we manage carbon using those solutions. There is also nuclear, which is a cleaner fuel.”