We’re drowning in cheap oil – yet still taxpayers prop up this toxic industry

George Monbiot in The Guardian

As these new crisis bailouts for fossil fuels show, it’s those who are least deserving who get the most government protection

 

‘Oil companies have already been granted ‘ministerial buddies’ to ‘improve access to government’ – as if they didn’t have enough already.’ Illustration: Andrzej Krauze



Those of us who predicted, during the first years of this century, an imminent peak in global oil supplies could not have been more wrong. People like the energy consultant Daniel Yergin, with whom I disputed the topic, appear to have been right: growth, he said, would continue for many years, unless governments intervened. 

Oil appeared to peak in the United States in 1970, after which production fell for 40 years. That, we assumed, was the end of the story. But through fracking and horizontal drilling, production last year returned to the level it reached in 1969. Twelve years ago, the Texas oil tycoon T Boone Pickens announced that “never again will we pump more than 82 million barrels”. By the end of 2015, daily world production reached 97m .

Instead of a collapse in the supply of oil, we confront the opposite crisis: we’re drowning in the stuff. The reasons for the price crash – an astonishing slide from $115 a barrel to less than $30 over the past 20 months – are complex: among them are weaker demand in China and a strong dollar. But an analysis by the World Bank finds that changes in supply have been a much greater factor than changes in demand. Oil production has almost doubled in Iraq, as well as in the US. Saudi Arabia has opened its taps, to try to destroy the competition and sustain its market share – a strategy that some peak oil advocates once argued was impossible.

‘Last week David Cameron flew to Aberdeen, where he announced another £250m of funding for, er, free enterprise, much of which will be used to prop up oil and gas.’ Photograph: Andrew Milligan/AFP/Getty Images

The outcomes are mixed. Cheaper oil means that more will be burned, accelerating climate breakdown. But it also means less investment in future production. Already, $380 billion that was to have been ploughed into oil and gas fields has been delayed. The first places to be spared are those in which extraction is most difficult or hazardous. Fragile ecosystems in the Arctic, in rainforests, in remote and stormy seas, have been granted a stay of execution.

BP reported a massive loss today, partly because of low prices. A falling oil price drags down the price of gas, exposing coal-mining companies to the risk of bankruptcy: good riddance to them. But some renewables firms are being tanked by the same forces; they are losing their subsidies just as gas prices crash. One day they will compete unaided, but not yet.

To cheer or lament these vicissitudes is pointless. They are chance events that counteract each other, and will at some point be reversed. The oil age, which threatens the conditions sustaining life on Earth, will come to an end through political, not economic, change. But the politics, for now, are against us.

Already, according to the International Monetary Fund, more money is spent, directly and indirectly, on subsidising fossil fuels than on funding health services. The G20 countries alone spend over three times as much public money on oil, gas and coal than the whole world does on renewable energy. In 2014, subsidies for fossil fuel production in the UK reached £5bn. Enough? Oh no. While essential public services are being massacred through want of funds, last year the government announced a further £1.3bn in tax breaks for oil companies in the North Sea. Much of this money went to companies based overseas. They must think we’re mad.

Last week David Cameron flew to Aberdeen, where he announced another £250m of funding for, er, free enterprise, much (though not all) of which will be used to prop up oil and gas. A further £20m of public money will be spent on seismic testing. Expect more whale strandings, and ask yourself why the industry that threatens our prosperity shouldn’t cover its own bloody costs.

The energy secretary, Amber Rudd, says she stands “100% behind” this “fantastic industry”. She will “build a bridge to the future for UK oil and gas”. Had she been born 300 years ago, I expect she would have said the same about the slave trade. In a few years’ time her observations will look about as pertinent and about as ethical.

Oil companies have already been granted “ministerial buddies” to “improve access to government” – as if they didn’t have enough already. Now they get an“oil and gas ambassador”, and a new ministerial group, to “reiterate the UK government’s commitment to supporting the oil and gas industry”. A leaked letter shows that Rudd and other ministers want to silence local people by transferring the power to decide whether fracking happens from elected councils to an unelected commission. Let’s sack the electorate and appoint a new one.

Compare all this to the government’s treatment of renewables. Local people have been given special new powers to stop onshore windfarms being built. To the renewables companies Rudd says this: “We need to work towards a market where success is driven by your ability to compete in a market, not by your ability to lobby government.” Strangely, the same rules do not apply to the oil companies. Your friends get protection. The free market is reserved for enemies.

Yes, I do mean enemies. An energy transition threatens the kind of people who attend the Conservative party’s fundraising balls. It corrodes the income of old schoolfriends and weekend guests. For all the talk of enterprise, old money still nurtures its lively hatred of new money, and those who control the public purse use it to protect the incumbents from the parvenus. As they did for the bankers, our political leaders ensure that everyone must pay the costs imposed by the fossil fuel companies – except the fossil fuel companies.

So they lock us into the 20th century, into industrial decline and air pollution, stranded assets and – through climate change – systemic collapse. Governments of this country cannot resist the future forever. Eventually they will succumb to the inexorable logic, and recognise that most of the vast accretions of fossil plant life in the Earth’s crust must be left where they are. And those massive expenditures of public money will prove to be worthless.

Crises expose corruption – that is one of the basic lessons of politics. The oil price crisis finds politicians with their free-market trousers round their ankles. When your friends are in trouble, the rigours imposed religiously on the poor and public services suddenly turn out to be negotiable. Throw money at them, trash their competitors, rig the outcome: those who deserve the least receive the most.

Why are we looking on helplessly as markets crash all over the world?

Will Hutton in The Guardian

The imminent collapse of the Chinese Ponzi-scheme economy shows that we need to bring control to the international economy

 

Chinese investors watch stock prices as a brokerage house in Beijing on 14 January, as prices continue to fall. Photograph: How Hwee Young/EPA


There has always been a tension at the heart of capitalism. Although it is the best wealth-creating mechanism we’ve made, it can’t be left to its own devices. Its self-regulating properties, contrary to the efforts of generations of economists trying to prove otherwise, are weak.

It needs embedded countervailing power – effective trade unions, law and public action – to keep it honest and sustain the demand off which it feeds. Above all, it needs an ordered international framework of law, finance and trade in which it can do deals and business. It certainly can’t invent one itself. The mayhem in the financial markets over the last fortnight is the result of confronting this tension. The oil price collapse should be good news. It makes everything cheaper. It puts purchasing power in the hands of business and consumers elsewhere in the world who have a greater propensity to spend than most oil-producing countries. A low oil price historically presages economic good times. Instead, the markets are panicking.

They are panicking because what is driving the lower oil price is global disorder, which capitalism is powerless to correct. Indeed, it is capitalism running amok that is one of the reasons for the disorder. Profits as a share of national income in Britain and the US touch all-time highs; wages touch an all-time low as the power of organised labour diminishes and the gig economy of short-term contracts takes hold. The excesses of the rich, digging underground basements to house swimming pools, cinemas and lavish gyms, sit alongside the travails of the new middle-class poor. These are no longer able to secure themselves decent pensions and their gig-economy children defer starting families because of the financial pressures.

The story is similar if less marked in continental Europe and Japan. Demand has only been sustained across all these countries since the mid-1980s because of the relentless willingness of banks to pump credit into the hands of consumers at rates much faster than the rate of economic growth to compensate for squeezed wages. It was a trend only interrupted by the credit crunch and which has now resumed with a vengeance. The result is a mountain of mortgage and personal debt but with ever-lower pay packets to service it, creating a banking system that is fundamentally precarious. The country that has taken this further than any other is China. The Chinese economy is a giant Ponzi scheme. Tens of trillions of dollars are owed to essentially bankrupt banks – and worse, bankrupt near-banks that operate in the murky shadowlands of a deeply dysfunctional mix of Leninism and rapacious capitalism. The Chinese Communist party has bought itself temporary legitimacy by its shameless willingness to direct state-owned banks to lend to consumers and businesses with little attention to their creditworthiness. Thus it has lifted growth and created millions of jobs.

It is an edifice waiting to implode. Chinese business habitually bribes Communist officials to put pressure on their bankers to forgive loans or commute interest; most loans only receive interest payments haphazardly or not at all. If the losses were crystallised, the banking system would be bust overnight. On top, huge loans have been made to China’s vast oil, gas and chemical industries on the basis of oil being above $60 a barrel, so more losses are in prospect.

Investors in China’s stock market took fright in the new year, with falling share prices only another turn of the screw. The only surprise is that nobody saw through it all earlier. China’s leaders are visibly frightened and at a loss, clamping down on any possible source of dissent as they flail to keep their Ponzi economy alive. As consumer demand falters in Europe, North America and Asia, so the demand for oil falls, even as Saudi Arabia, waging economic war against Iran and US shale producers, pumps oil out of the ground without limit. The whole structure of banking that was predicated upon higher oil prices gets more rickety still.

At just this crucially sensitive moment, the US Federal Reserve last month raised interest rates from their extraordinary lows, more concerned to signal its ardent desire to return to the normality of business as usual than to face the reality we live in abnormal times. There is no danger of inflation. If credit growth is out of hand, the tool central banks must use, as the Bank of England recognises intellectually by equipping itself with such tools but as yet not bold enough to use them, is direct quantitative controls to constrain the growth of credit. The system is not robust enough to withstand a rise in interest rates.

Indeed, further evidence of global disorder, as the Fed must have known when it raised interest rates, was the resulting acceleration of the flight of capital out of the so-called emerging economies in Africa and Latin America. Brazil, for example, is now in its worst recession since 1901. But the US central bank accepts no responsibilities for global economic management. Nor does anybody else.

It’s clear what needs to happen. There needs to be wholesale change in economic thinking. Forces in world labour markets – new forms of 21st-century trade unionism – need to be strengthened. The power of financial markets needs to be constrained. Credit growth needs to be managed by direct controls on the growth of bank balance sheets and banks need to be weaned off the financial casino they have built. Great companies need to be allowed to purpose themselves around creating value rather than dancing to the interests of disengaged shareholders.

There needs to be parallel change in how countries think of the international order: it has to be built and sustained rather than assumed to be someone else’s responsibility. We need to keep the EU together around open trade, open movement of peoples (notwithstanding the refugee crisis) and respect for political pluralism so menaced by new forces in eastern Europe. To keep the world open, there has to be international agreement on deepening and extending a framework for trade, and a new system of managed exchange rates to replace the tyranny of floating rates. Shia Muslims need to be befriended; Sunni Muslim helped to weed out poisonous Jihadism. Israel needs to be a genuine peace-seeker. China must be allowed to be convulsed by the coming regime change, vital to depoliticise its economy, without fearing foreigners are going to exploit the turmoil.

All this requires a new generation of political leaders prepared to throw off the categories in which thinking has been cast since 1980 – and remake our world rather as the world was remade in the years after 1945. Prosperity, peace, co-existence and recognition of mutual interdependencies are too easily taken for granted. The financial markets are signalling deep unease, not least at the world they themselves have helped build. It is a message that should be heeded.

The collapse in the price of oil is a challenge to the old world order

Allister Heath in The Telegraph


It is one of life’s mysteries that being wrong about everything has never been much of a barrier to success. Take Thomas Malthus, the British theologian: his big idea was that the number of human beings would necessarily grow faster than the supply of food, leading to calamity. There was little difference, in his mind, between people and rabbits: both were doomed to over-breed, over-consume and starve.

Yet this theory, expounded in 1798 in An Essay on the Principle of Population, one of the most influential books ever written, and now also routinely applied to oil and other resources, is bogus. Unlike rabbits, who are powerless to control their environment, the more we need, the more we eventually find a way of producing: the availability of food and oil are determined by technology and economics, not by some law of nature. Modern techniques (such as fertilisers, genetic selection or fracking) mean that agriculture and the extraction of commodities have become hugely more efficient.

The average British field yielded just over three tons of cereal per hectare per year in 1961; today, it is twice that. Thanks to the spread of free markets and knowledge, the world has never produced so much food, and the number of hungry people worldwide has dropped by 216m since the early Nineties, according to the United Nations.

Ditto oil production: in 2000, the Energy Information Administration estimated that the world contained just over one trillion barrels of untapped oil; since then, proved reserves have shot up by 60pc, increasing every single year despite booming consumption from energy-thirsty emerging markets.

Malthus wasn’t just far too pessimistic about supply: he was also wrong about demand. Rabbits can’t control their birthrates; we can. As more countries embrace markets and globalisation, thus ensuring that their economies develop, global birth rates keep on falling. As to energy consumption, it is just a matter of time before improved battery technology and ever-cheaper solar power finally lessen our dependence on the internal combustion engine and oil. We will eventually be able to feed and fuel the world’s population using significantly less land and fewer hydrocarbons than we do today.

Jesse H Ausubel, an academic at the Rockefeller University in New York, has calculated that an area the size of the Amazonian forest could be returned to wildlife when the average farmer around the world becomes as productive as their US counterparts. Ausubel calls this the Great Reversal: nature’s chance to restore land and sea to their original use. It is an intriguing and exhilarating prospect, made possible by the wonders of capitalism, innovation and human ingenuity.



The abject failure of Malthusianism was, in fact, one of the defining trends of 2015, especially in the oil market; it will continue to be one of the central forces of 2016, impacting everything from how quickly the Bank of England puts up interest rates, to the stability of the Middle East. The price of Brent crude oil, which briefly reached $147 a barrel in 2008, is now down to around $37. Some analysts even believe it could fall briefly to $20, especially if more Iranian supplies than expected hit the global markets.

There are many reasons for this historic collapse. Thanks to shale, America is poised to become a net oil exporter. Opec, the old cartel that wreaked so much havoc in the Seventies, is now all but defunct; its members no longer have the ability to push up oil prices. At the same time, the slowdown in China has reduced demand for energy.

The cost to oil-exporting countries from the lower prices is nearing $2 trillion a year. Drivers, by contrast, have saved a fortune, allowing them to spend the cash on other things and contributing to a strengthening in consumer spending across the Western economies.

Drivers have saved a fortune thanks to low petrol prices

Manufacturers’ costs have also slumped, facilitating investment and creating jobs. Europe, China and India have been the great winners. In Britain, lower petrol prices have helped eliminate consumer price inflation. Take-home pay has thus shot up after years of austerity. Cheap oil has also delayed – and delayed again – the prospect of a rate hike from the Bank of England, helping borrowers but hurting savers, some of whom had already lost out from their holdings in commodity and oil firms.

Perhaps the biggest impact will be geopolitical. In oil-exporting Venezuela, the public has booted out the Corbynite government whose demented Left-wing policies had led to a shortage of toilet paper. In Russia, the budget deficit is likely to reach alarming levels this year, forcing the country to dip into its reserves and putting pressure on President Putin, especially given his military commitments in Syria.

The Gulf states face the greatest challenge to their viability. Some, such as the UAE, a close ally of the West’s fight against terror, have such large cash reserves that they ought to be able to cope with low oil prices for decades. Others, including Iraq and Bahrain, will find it much tougher; Saudi Arabia has just been forced to pass an emergency budget. All will slash their purchases of Western assets and luxury goods, hitting the London economy.



The West will be hoping that the existing Gulf regimes aren’t replaced by something worse, while also hoping that the collapse in the price of oil will reduce flows of cash to extremist Wahhabi and Salafist groups around the world. If radical Islamist terror groups end up being the biggest losers, the collapse in the oil price could yet end up achieving more than sanctions or Western military intervention ever could; but a successful uprising in somewhere like Saudi could also risk turning a bad situation into a catastrophe.

As for Scotland, the nationalist electorate will eventually have to wake up to the new reality of a world awash with oil. The SNP’s plans for independence didn’t even come close to adding up even when the price of Brent crude was over $100 last year.

At current prices and with output sliding, an independent Scotland that sought to retain the NHS and the welfare state would face immediate bankruptcy.

Forget about politics and slick campaigns: if anything keeps the UK together over the next few years, it will be cheap oil and the latest, abject failure of Malthusianism, one of the most wrong-headed ideologies of the past 200 years.

Recession, retrenchment, revolution? Impact of low crude prices on oil powers

Guardian writers: Shaun Walker in Moscow Dominic Rushe in New YorkChris Stein in Lagos Chris Stephen in Tunis Sibylla Brodzinsky in Caracas Hugh Miles in Cairo and Saeed Kamali Dehghan

A glut of oil, the demise of Opec and weakening global demand combined to make 2015 the year of crashing oil prices. The cost of crude fell to levels not seen for 11 years – and the decline may have further to go.

There have been four sharp increases in the price of oil in the past four decades – in 1973, 1979, 1990 and 2008 – and each has led to a global recession. By that measure, a lower oil price should be positive for the world economy, with lower fuel costs for consumers and businesses in those countries that import crude outweighing the losses to producing nations.

But the evidence since oil prices started falling from their peak of $115 a barrel in August 2014 has not supported that thesis – or not yet. Oil producers have certainly felt the impact of the lower prices on their growth rates, their trade figures and their public finances but there has been no surge in consumer spending or business investment elsewhere.

Economist still reckon there will be a boost from a lower oil price particularly if it looks as if the lower cost of crude will be sustained.

Dhaval Joshi, an economist at BCA, a London-based research company, said: “A commodity bubble has deflated three times in the past 100 years: the first was after world war one; the second was after the 1980s oil shock; the third is happening right now.”

For the big producer countries, this is a major headache, the ramifications of which are only starting to be felt. Oil powers base their spending plans on an assumed crude price. The graphic below shows just how far below water their budgets are.

Joshi says crude prices may fall by a further 35% to reach its long-term trend. That would mean an oil price closer to $25 a barrel - and fiscal crises in some of the world’s most pivotal economies.

Saudi Arabia

The Ras Tanura oil production plant in Saudi Arabia’s eastern province. Photograph: Bilal Qabalan/AFP/Getty Images

Low oil prices are not just squeezing Saudi Arabia’s domestic budget, imposing austerity on a kingdom not used to it: it is taking its toll on Saudi support for foreign projects too.

The kingdom this week announced swingeing budget cuts for 2016 to address an alarming deficit of 15% of GDP run up this year. Subsidies for water, electricity and petroleum products are likely to be cut, and government projects reined in.

But overseas beneficiaries will face some austerity too. For years, Saudi Arabia has used its oil wealth to support friends and allies around the world, including media organisations, thinktanks, academic institutions, religious schools and charities. Countries that have traditionally benefited from Saudi largesse include Jordan, Lebanon, Bahrain, Palestine and Egypt.

But now the IMF has raised the prospect that Saudi Arabia could go bankrupt in five years without changes to its economic policy, cuts in support to foreign allies seem inevitable.

Egypt’s black-hole economy is potentially the kingdom’s most expensive foreign policy commitment. In recent years, Saudi Arabia has donated billions in cash and oil products but, despite this, the Egyptian economy, battered by war, terrorism and political instability, is facing an acute foreign currency shortage.

Speculation is mounting that Saudi financial support to Egypt is starting to dry up – something the Egyptian authorities have denied – and that this is damaging the bilateral relationship.

There have been some signs of tension. In July, Egypt’s oil minister said he had no objections to importing crude oil from Iran, a move sure to ruffle the Saudis. In September, the Saudi journalist Jamal Khashoggi – known for his closeness to the Saudi state – raised eyebrows when he said the new Egyptian culture minister, Hilmi al-Namnam, who is well known for his secularism and dislike of Wahhabi Islam, should never have been appointed.

So far, the Saudi authorities have given few clear signs about how they are planning to respond to the oil price crisis, let alone lay out a long-term plan for a post-oil Saudi Arabia.

Options under consideration are thought to include cutting construction projects, energy subsidies and public sector wages, introducing new taxes and privatisations, and issuing debt.

Another possibility foreign observers have posited is that the Saudis will be forced to unpeg the riyal from the dollar, although given the potential this would have for uncontrollable knock-on effects on the rest of the economy, this seems likely to be a last resort.

Cuts impacting on ordinary Saudis are something the government will be keen to avoid to maintain political stability, so industry, the public sector and foreign allies are likely to bear the brunt of the economic burden.




Nigeria

 Nigeria’s president, Muhammadu Buhari, swears in his cabinet in November. Photograph: Afolabi Sotunde/Reuters

The oil price slump has not prevented Nigeria’s new government from unveiling big spending plans – but analysts warn that the generosity is misplaced at a time when oil prices languish below $40 a barrel. 

Nigeria is Africa’s top oil producer and the World Bank estimates crude sales fund about 75% of the country’s budget.

In its £19.8bn budget proposal, the government plans to increase spending by about one quarter over last year’s budget, and to pay for it by improving tax collection and cutting the cost of government.

The budget includes £1.65bn for cash transfers to poor Nigerians. The programme was a campaign promise of the president, Muhammadu Buhari, who was elected in March on a platform of cutting corruption and weaning Nigeria’s economy off its dependence on oil revenue.

But some analysts think the proposed budget is unrealistic during times of $40 oil.

“This brings a dose of reality to a people who have extremely high expectations,” said Bismarck Rewane, the chief executive of Financial Derivatives Co. He predicted the government would have to back down on some of its promises.

Nigeria is Africa’s largest economy, but most of the money is concentrated in the hands of a wealthy elite and about two-thirds of Nigerians live in poverty, according to the United Nations development programme.

Analysis Nigeria overtakes South Africa to become Africa's largest economy. Complicated statistical recalculation adds $240bn to the economy - the equivalent of finding six Ghanas within Nigeria, says Tolu Ogunlesi

Unemployment has climbed this year, hitting 9.9% in the third quarter, according to the National Bureau of Statistics.

Chuba Ezekwesili, research analyst at Nigerian Economic Summit Group, says despite the falling price of crude, the country has been able to avoid a jump in inflation by imposing limits on the availability of foreign currency.

While other major oil producing economies have let their currencies lose value along with oil prices, Nigeria has spent its reserves to prop up the value of the naira. But Ezekwesili says they can only do that for so long.

“They’re sort of delaying the inevitable,” he said. “I feel like eventually it has to give way, and by the time it does I feel the economy is going to be hurt because a lot of businesses can’t work under those conditions.”

Ezekwesili was also sceptical of the government’s ability to generate the revenue necessary to pay for programmes such as cash transfers to the poor. He doubts the government can accomplish its goals of streamlining its costs and generating more revenue by next year.

“One thing I’ve learned about policies in Nigeria is we tend to be very optimistic but it never really works out exactly as we want it to,” Ezekwesili said.

Russia

Oil extraction at a Gazprom field in Khanty-Mansiysk, Russia. Photograph: TASS/Barcroft Media

Vladimir Putin goes into 2016 with record approval ratings but the shakiest economic outlook since he took charge. In the 15 years he has been at the helm, 2015 was the first year that real wages registered a decline, something that did not happen even during the 2008-09 financial crisis.

Oil and gas exports make up about half of the Russian budget, and the rouble rate has been strongly linked to the price of oil.

Sanctions against Russia, particularly the ban on Russian banks seeking western credit, combined with falling oil prices in late 2014 to create a perfect storm that demolished the rouble, with the currency losing half of its value against the dollar, reviving memories of previous crashes. The currency regained some of its value by spring, but falling oil prices in autumn have caused it to fall back to lows similar to those it experienced in late 2014.

Rouble in freefall despite rate hike



Falling oil prices were one of the principal reasons for the collapse in the Soviet economy, and some economists are warning of history repeating itself. Riding on a wave of high oil prices for most of his presidency, the Russian president did not expect such a sharp downturn. Last October, Putin said that if the price of oil fell below $80 a barrel, the world economy would crash. A range of other top Russian officials made similar statements, in effect ruling out the possibility that oil could fall below $70.

Some analysts say the rouble is still overvalued, and the current oil price should theoretically push the rouble down further. This is necessary to balance the budget: the fewer dollars Russia receives for the oil it sells, the higher the exchange rate needs to be for the budget to receive the requisite amount of roubles. For the budget to balance at 65 roubles, not far off the current rate, the price of oil should be $70, a recent Bank of America Merrill Lynch report found.

For ordinary Russians, it could be a tough year ahead. Those who were used to travelling abroad have already had to scale back as the rouble made the cost of visiting foreign cities prohibitive; and rising food prices have made it harder to balance the books for many families.

The 2016 budget, fixed in October, requires oil to be at $50 in order to run a 3% deficit within “acceptable” rouble rate limits, meaning if the price does not rise soon, cuts will need to be made or reserves spent. The war in Syria is an extra cost, and the announced increases in military spending are not likely to be reversed.

US

Belridge, California, is one of the oldest and largest oilfields in the US containing tens of thousands of wells, many of which are being fracked. Photograph: Les Stone/Corbis

Filling up at the gas station hasn’t been this cheap in the US since the recession. The nationwide average price of a gallon of regular is now $2.02 (£1.36), down 58 cents from this time last year, according to auto club AAA, and expected to fall further.

Scared that North America’s oil boom threatens its grip, Opec, the oil cartel, stepped up production and forced a price war that has driven oil prices down to below $35 a barrel. US consumers have benefited from lower petrol prices to the tune of about $700 a year, according to the US government, and that money is fuelling consumer spending. According to a recent report from JP Morgan, 80% of that saving is being spent on goods and services.

But the collapsing price of oil has also cast a shadow over the US energy industry – formerly one of the country’s fastest growing employers. Fracking – the controversial process of extracting oil and gas from shale rock – has become less attractive to investors as the oil price has fallen, and tens of thousands of jobs have been lost as a result. This year, the International Energy Agency said low oil prices would “slam the brakes” on the US shale industry and the impact is already being felt across the country’s oil producing areas.

The US energy sector has cut more than 90,000 jobs this year, according to outplacement company Challenger, Gray & Christmas. And while the overall US unemployment rate has continued to fall, in Texas unemployment has risen since August, according to the Bureau of Labour Statistics. In North Dakota, home of the Bakken shale oil field, more than 17% of the mining jobs – which include oil and natural gas – have disappeared in the past year. More jobs look certain to be lost in the coming months.

North of the border in Canada, things are even worse. In Alberta, “the Texas of the north”, job layoffs and the downturn of the economy have been blamed for a 30% rise in suicides between January and June, compared with 2014. In Saskatchewan, another energy-dependent region, there have been 19% more suicides this year.

Daniel Pavilonis, senior commodity broker with RJO Futures, said the situation was only likely to get worse for those employed in the US energy sector. “There are oil tankers just sitting off the coast because we don’t need more supply. We have too much,” he said. “There’s oversupply and a lack of anybody trying to tighten production because they don’t want to lose market share.”

As a result he predicts oil prices will go lower, taking more jobs with it. But for most consumers, it’s a win. Unlike other global economic trends, the oil price fall actually benefits average Americans, said Pavilonis. “This is our money,” he said. “For most people, it’s a good thing.”

Venezuela

A mural depicts President Nicolás Maduro, who, having lost the Venezuelan National Assembly, has a battle to keep economy and his leadership afloat. Photograph: Luis Robayo/AFP/Getty Images

In most of the world, falling oil prices have caused significant reductions in petrol prices. But in the country with the world’s largest oil reserves, the oil glut could force a price rise.

“It’s probably the only place in the world where with oil prices so low, they may raise gasoline prices,” says Pedro Méndez, an informal taxi driver in Caracas, the Venezuelan capital, who fills the tank of his Ford Laser for less than a dollar.

But the lower the price of oil goes, the deeper Venezuela’s economy sinks. It’s near total dependence on crude exports for hard currency has seen the government of president Nicolás Maduro struggling to try keep the economy afloat.

The political effect is already being felt. Gripped by spiraling inflation, chronic shortages of basic goods and a quickly depreciating currency, Venezuelan voters this month gave the opposition an overwhelming majority in the new legislature, which takes office in January.

Each $1 drop in oil prices results in more than $685m in lost yearly oil income for PDVSA, the state-owned oil company, according to analysts.

And every drop in crude prices means less funding for the health, education and housing and other social welfare programmes that won Maduro’s predecessor, Hugo Chávez, widespread support for his self-styled “Bolivarian revolution”.

While dwindling oil revenue hurts the social programmes, Antonio Azpurua, a financial consultant with CFS Partners/LA Group, says it could be a blessing in disguise, allowing Venezuela to wean itself of its dependence on crude. “Venezuela needs to take advantage of low oil prices to build its industrial base,” he says.

With a super-majority in the National Assembly, the opposition could reverse some of Maduro’s populist measures, which have contributed to the current economic crisis. They could also choose to raise petrol prices.

Iran

Iranians took to the streets to celebrate the nuclear deal which will mean they can more freely trade their oil. Photograph: Abedin Taherkenareh/EPA

Iran is rushing to implement the landmark nuclear accord in order to cash in on sanctions relief as early as next month, but the plummeting price of oil is tempering its expectations even though its economy has become less dependent on crude sales.

Tehran currently exports 1.1m barrels of oil per a but the Iranian oil minister, Bijan Zanganeh, has announced that the country is aiming to double that amount within six months of sanctions being lifted, hoping it will return to the pre-sanctions level of 2.2m.

Although the EU lifted Iranian sanctions in October after the Vienna nuclear agreement, the measures will only come into effect after what has become known as “implementation day”, the unknown date when the UN nuclear watchdog, IAEA, will verify that Iran has taken the necessary steps as outlined under the nuclear deal. Iran is expediting whatever it can to bring this date forward to as early as January.

In an effort to woo foreign investment in the post-sanctions era, Iran put a set of new lucrative oil and gas contracts, worth more than $30bn, on the market this month. But all these efforts have come at a time when global oil prices are falling as a result of a crude surplus of 2m barrels a day, a phenomenon Tehran blames on the Saudis.

“The drop in oil prices hurts all oil producers, not just Iran,” said Amir Handjani, president of PG International commodities trading services and a member of the board directors of RAK Petroleum.

“Saudi Arabia is very aware that Iran will be able to sell its crude unencumbered by sanctions on the international market very soon and will use all means at its disposal to make sure Iran doesn’t recapture the market share it lost over the past four years,” he said.

“Basically, Riyadh’s message to Tehran is simple: we can endure low oil prices for a while; can you?”

But the experience of years under sanctions has made the Iranian economy “incredibly resilient”, according to Handjani. Iran’s economy faced huge economic problems in recent years due to international sanctions imposed over Tehran’s nuclear programme. Plummeting oil prices only added to economic woes in a country with the world’s fourth-largest oil reserves.

“To be sure, low oil prices deny Tehran much needed revenue but unlike the Saudis, Iran’s economy is not solely dependent on oil exports. Oil revenue accounts for about 15% of Iran’s GDP,” Handjani told the Guardian. Sanctions have forced Iran to diversify its economy, he said. It has a large manufacturing base, IT sector, and robust agro-industries, which make its economy on the whole “much more balanced” than Saudi Arabia.

“The Iranian economy has absorbed so many shocks over the past 36 years, from war to sanctions, that the pain of low oil prices now, as it breaks from international isolation, pales in comparison.”

Without naming Saudi Arabia, Zanganeh said last week that it was clear which country had an excess of supply and that there was “no ambiguity about who they are”. On the occasion of unveiling new oil contracts, the Iranian minister said last month that his country was willing to play a major role in oil supply and was even ready to work with American companies. “The way for the presence of these companies in Iran’s oil industry is open,” he said at the Iran Petroleum Contracts Conference in Tehran.

The deputy managing director of the national Iranian oil company (NIOC) told the Guardian in September that the Iranian government was earning more from tax than oil for the first time in almost half a century as the country shifts its traditional reliance on crude to taxation revenues in the face of falling oil prices. Critics say Iran is unlikely to maintain that equation when the lifting of sanctions allows it to export more oil.

According to Opec, Iran on average was selling oil at $38.92 a barrel in November, $5.63 less than the average in October, which is the worst drop among the group’s members.

Libya

Fuel depots and tankers have been targets for years in the struggle for control of Libya and its oil resources. Photograph: EPA

Plunging oil prices are threatening disaster in Libya, where civil war has left the population depending on fast-dwindling oil revenues to survive.

Libya has Africa’s largest oil reserves and in normal times this provides 95% of the country’s export revenues, keeping the economy afloat. But civil war between rival governments at either end of the country has shattered the economy, leaving the population almost wholly dependent on revenue generated overseas.

The crash in oil prices has halved revenues, and shortages of foodstuffs and medicines – even petrol – are starting to be felt.

This cash squeeze has triggered a three-way battle for control of what remains of the country’s oil wealth. Much of Libya’s largest group of oil fields, the Sirte Basin, is now held by Islamic State, which has interposed itself between forces of the rival governments. Most of what remains is in eastern Libya, held by the elected parliament based in Tobruk.

Tobruk is using its status as the internationally recognised government to battle in foreign courts for the right to income from other producing fields, opposing the state-owned National Oil Corporation, whose headquarters remains in Tripoli, held by a rival parliament.

Tobruk has set up a second National Oil Corporation, based in eastern Libya, and last month demanded international oil companies switch payments that currently go to Tripoli.

Countering that, Tripoli’s NOC chief, Mustafa Sanallah, convened a conference in London in October calling on oil buyers to stick with him. Two of the world’s largest oil buyers, Glencore and Vitol, have agreed, but the eastern government has vowed legal action.

London courts are likely to be the proving ground for this test of wills, with both governments already gearing up for a precedent-setting high court battle, due early next year, for control of the Libya Investment Authority, the country’s £65bn sovereign wealth fund.

But whoever wins control of what remains of the oil industry may find it a pyrrhic victory. John Hamilton, director of London’s Cross-border Information, says the glut of oil on world markets and turbulence around the few remaining oil ports means Libyan oil has already been “priced out” by many buyers.

Opec bid to kill off US shale sends oil price down to 2009 low

Larry Elliott in The Guardian

Oil falls by $2 a barrel with energy shares as Opec refusal to stop flooding the market with cheap oil and likely US rate hike sends Brent crude tumbling

 

Oil rigs in western North Dakota, US. Opec plans not to cut output aims to kill off the threat from US shale oil by making it deeply unprofitable. Photograph: Matthew Brown/AP


Oil prices have slumped by 5% after the latest attempt by Saudi Arabia to kill off the threat from the US shale industry sent crude to its lowest level since the depths of the global recession almost seven years ago.

Signs of disarray in the Opec oil cartel prompted fears of a global glut of oil, wiping $2 off the price of a barrel of crude on Monday and leading to speculation that energy costs could continue tumbling over the coming weeks.

Shares in energy companies lost ground as the impact of the drop in oil prices rippled through European stock markets. Prices of other commodities also weakened following disappointment among traders that Opec had decided late last week to keep flooding the global market with cheap oil.

Iron ore continued its steady fall and finished the latest session at $38.90 per tonne, squeezing profit margins to the bone at even large producers such as Rio Tinto and BHP Billiton, whose shares fell sharply on the Australian stock market on Tuesday.

The consultancy Capital Economics tweeted: “#Oil sell-off after #OPEC makes even ECB look good. Better to have announced something, even if less than hoped for, than nothing at all...”

A barrel of benchmark Brent crude was changing hands for less than $41 a barrel in New York on Monday night after Opec – heavily influenced by Saudi Arabia – did nothing about a market already seen as saturated.

US light crude, which tends to trade at slightly lower levels than Brent, recorded similar falls, dropping from just over $40 a barrel to less than $38 a barrel.

Both Brent and US light crude were at levels not seen since early 2009, when the collapse of US investment bank Lehman Brothers triggered the most severe recession since the 1930s.

As recently as August 2014, Brent stood at $115 a barrel, but in 16 months its price has been more than halved in response to a slowdown in China and other emerging market economies, and the end of oil sanctions against Iran.

Global supply of oil is currently thought to be up to 2m barrels per day higher than demand, with traders fearing that Opec’s refusal to cut production despite the financial pain it is causing its members’ economies will lead to a still greater glut of crude. Venezuela, in particular, is thought to be suffering badly as a result of the drop in oil 

prices.

  Brent crude, from 2005-2015. Photograph: Thomson Reuters

The fall, if sustained, will lead to lower inflation in oil-consuming nations through the knock-on effects on petrol, diesel, domestic energy prices and the cost of running businesses.

Lower crude prices may also delay or limit increases in interest rates. The Bank of England has already accepted that inflation – which stands at -0.1% – has stayed lower for longer this year than it anticipated.

Analysts believe the slide in oil prices has come too late to persuade the US Federal Reserve, America’s central bank, to delay an increase in the cost of borrowing later this month, adding that the prospect of the first tightening of policy from the Fed since 2006 was an added factor in crude’s decline.

The prospect of higher US interest rates has led to the value of the US dollar rising on foreign exchanges; since oil is priced in dollars that has led to a fall in the cost of crude.

Markets had been expecting Opec to announce a new ceiling on production after last Friday’s meeting, but analysts at Barclays said the lack of any curbs in its announcement was a sign of discord.

“Past communiques have at least included statements to adhere, strictly adhere, or maintain output in line with the production target. This one glaringly did not,” they said.

Saudi Arabia needs oil prices of $100 a barrel to balance its budget, but as the world’s biggest exporter of crude it is gambling that the low price will knock out the threat posed by so-called unconventional supplies, such as shale.

The chief executive of Saudi Aramco, Amin Nasser, said at a conference in Doha on Monday that he hoped to see oil prices adjust at the beginning of next year as unconventional oil supplies start to decline.

In a sign that US production could dip, Baker Hughes’ November data showed US rig count numbers down month-by-month by 31 to 760 rigs.

The fall in oil prices helped wipe almost 1% off share prices in New York. Wall Street’s Dow Jones industrial average was down more than 160 points in early trading, with Chevron and Exxon both losing around 3% of their value.

In London, Shell’s share price was down 4.5% while BP lost 3.4% of its value as early gains in the FTSE 100 were wiped out. The Index closed 15 points lower at 6223.

Paralysed Opec pleads for allies as oil price crumbles

Ambrose Evans-Pritchard in The Telegraph

The Opec cartel is to continue flooding the world with crude oil despite a chronic glut and the desperate plight of its own members, demanding that Russia, Kazakhstan and other producers join forces before there can be output cuts.

Brent prices tumbled almost $2 a barrel to $42.90 as traders tried to make sense of the fractious Opec gathering in Vienna, which ended with no production target and no guidance on policy. It reeked of paralysis.

Prices are poised to test lows last seen at the depths of the financial crisis in early 2009. The shares of oil companies plummeted in London, and US shale drillers went into freefall on Wall Street.

Oil tankers are lined up off the cost of Texas, a flotilla of crude storage across the world  Photo: Alamy

“Lots of people said Opec was dead. Opec itself has just confirmed it,” said Jamie Webster, head of HIS Energy.

Venezuela’s oil minister, Eulogio del Pino, pushed for a cut in output of 1.5m barrels a day (b/d) to clear the market, describing the failure to act as calamitous. “We are really worried,” he said.

Abdallah Salem el-Badri, Opec’s chief, conceded that the cartel’s strategy has been reduced to an impotent waiting game, hoping that the pain of low prices will lure Russia and other global producers to the table. “We are looking for negotiations with non-Opec, and trying to reach a collective effort,” he said.

Mr el-Badri said there have been “positive” noises from some but none is yet ready to lock arms and create a sort of super-Opec, able to dictate prices. “Everybody is trying to digest how they can do it,” he said

The cartel’s 12 members postponed a decision on their next step until next year, once they know how much oil Iran will sell after sanctions are lifted. “The picture is not really clear at this time, and we are going to look one more time in June,” he said.

“Everybody is worried about prices. Nobody is happy,” said Iraq’s envoy, Adel Abdul Mahdi. His country has lost 42pc of its fiscal revenues and is effectively bankrupt.

Foreign companies are owed billions and have begun to freeze projects. The government cannot afford to pay its own security forces and is cutting vital funding for anti-ISIS militias, raising fears that the political crisis could spin out of control.

Helima Croft, from RBC Capital Markets, said four of the frontline states in the fight against ISIS are now being destabilized by the crash in oil prices, including Algeria and Libya.

Opec leaders will now have to grit their teeth and prepare for a long siege, testing their social welfare models to the point of destruction. Even Saudi Arabia is pushing through drastic austerity measures.

Deutsche Bank said the fiscal break-even cost needed to balance the budget is roughly $120 for Bahrain, $100 for Saudi Arabia, $90 for Nigeria and Venezuela, and $80 for Russia, based on current exchange rate effects.

“It is going to be 12 to 18 months before they see any relief,” David Fyfe, from the oil trading group Gunvor, said.

“We think oil stocks will continue to build in the first half of next year and we don’t think they will draw down to normal levels until well into 2017.”

Mr Fyfe said Iran has 40m to 50m barrels floating on tankers offshore that will flood onto the market as soon as sanctions are lifted. It will then crank up extra output to 500,000 b/d by the end of next year.

Per Magnus Nysveen, from Rystad Energy, said it will take a very long time to force the capitulation of America’s shale industry. While the rig count in the US has collapsed by 60pc over the past year, the number of wells being “fracked” has risen in recent weeks.

“There is still an inventory of 3,500 wells. Theoretically they could continue fracking at this pace for another six months without any new drilling. We don’t think there is going to be a significant fall in US output next year. It could be flat,” he said.

Mr Nysveen said the damage will be in other parts of the world, chiefly the mature offshore fields in the Gulf of Mexico, North Sea, Brazil and Africa. The decline rate of old fields will double to 10pc a year, subtracting 750,000 b/d from world supply within 12 months.

It is going to be a long war of attrition. The world is awash with oil. US crude inventories rose further last week by 1.6m barrels to the vertiginous level of 489.4m.

China has been soaking up some 250,000 b/d for its strategic reserves, preventing a collapse of the market. But the old sites are filling up and it is unclear whether new facilities are ready.

OPEC is now just as irrelevant as the once mighty Texas Railroad Commission

More than 100m barrels are being stored on tankers offshore. Tanker day-rates have soared to more than $111,000 – the highest since July 2008 – as the last remaining vessels are booked to absorb the glut.

Goldman Sachs warns that the market is approaching an “inflexion point” that could send prices crashing to a new a floor of $20, the "cash cost" that forces drillers to stop production altogether.

A dangerous situation is developing. Opec policy has caused spare capacity to fall to a wafer-thin margin of 2m b/d, leaving no one to act as the regulator of the market.

This sets the stage for a violent spike in prices down the road. The International Energy Agency says the world needs $650bn of fresh investment each year in upstream oil and gas just to stand still, yet $240bn has already been slashed from projects earmarked for next year.

Bhushan Bahree, from HIS Energy, says there is no longer anything to distinguish Opec members from any other producer. The cartel is defunct. “Opec and non-Opec are irrelevant classifications,” he said.

There is a new world order of three oil superpowers with roughly equal shares – Saudi Arabia, Russia and the US – and none of them is yet willing to cut output voluntarily to shore up prices.

The Americans would never agree to such a move. The Russians cannot easily do so, given that their key producers are listed-companies, supposedly answerable to shareholders, and Siberian conditions make it hard to switch output on and off. The Saudis are stuck.

Mr Bahree compares the demise of Opec with the fall of the Texas Railroad Commission, the once mighty giant that set output and controlled world prices through the middle years of the 20th century. The Commission still exists, a forgotten shadow of its former self. Today it issues local permits.

Saudi Arabia risks destroying Opec and feeding the Isil monster

'Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff,' says RBC

Ambrose Evans-Pritchard in the Telegraph

The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff"

Helima Croft, RBC Capital Markets

Algeria's former energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country's Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. "Why remain in an organisation that no longer serves any purpose?" he asked.

Saudi Arabia can, of course, do whatever it wants at the Opec summit in Vienna on December 4. As the cartel hegemon, it can continue to flood the global market with crude oil and hold prices below $50.

It can ignore desperate pleas from Venezuela, Ecuador and Algeria, among others, for concerted cuts in output in order to soak the world glut of 2m barrels a day, and lift prices to around $75. But to do so is to violate the Opec charter safeguarding the welfare of all member states.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff. There could be a total blow-out in Vienna," said Helima Croft, a former oil analyst at the US Central Intelligence Agency and now at RBC Capital Markets.

The Saudis need Opec. It is the instrument through which they leverage their global power and influence, much as Germany attains world rank through the amplification effect of the EU.

The 29-year-old deputy crown prince now running Saudi Arabia, Mohammad bin Salman, has to tread with care. He may have inherited the steel will and vaulting ambitions of his grandfather, the terrifying Ibn Saud, but he has ruffled many feathers and cannot lightly detonate a crisis within Opec just months after entangling his country in a calamitous war in Yemen. "It would fuel discontent in the Kingdom and play to the sense that they don't know what they are doing," she said.

"We are feeling the pain and we’re taking it like a God-driven crisis"

Mohammed Bin Hamad Al Rumhy, Oman's oil minister

The International Energy Agency (IEA) estimates that the oil price crash has cut Opec revenues from $1 trillion a year to $550bn, setting off a fiscal crisis that has already been going on long enough to mutate into a bigger geostrategic crisis.

Mohammed Bin Hamad Al Rumhy, Oman's (non-Opec) oil minister, said the Saudi bloc has blundered into a trap of their own making - a view shared by many within Saudi Arabia itself.

“If you have 1m barrels a day extra in the market, you just destroy the market. We are feeling the pain and we’re taking it like a God-driven crisis. Sorry, I don’t buy this, I think we’ve created it ourselves,” he said.

The Saudis tell us with a straight face that they are letting the market set prices, a claim that brings a wry smile to energy veterans. One might legitimately suspect that they will revert to cartel practices when they have smashed their rivals, if they succeed in doing so.

One might also suspect that part of their game is to check the advance of solar and wind power in a last-ditch effort to stop the renewable juggernaut and win another reprieve for the status quo. If so, they are too late. That error was made five or six years ago when they allowed oil prices to stay above $100 for too long. But Opec can throw sand in the wheels.

At root is a failure to grasp how quickly the ground has already shifted from under the feet of the petro-rentier regimes. Opec forecasts that oil demand will keep rising relentlessly, adding 21m barrels of oil per day (b/d) to 111m by 2040 as if nothing had changed. They have their heads in the sand.

The climate pledges made for the COP21 summit in Paris by the US, China and India - to name a few - imply a radical shift in the global energy landscape. Subsequent deals by 2025 may well bring a "two degree world" within sight.

The IEA says oil demand will be just 103m b/d in 2040 even under modest carbon curbs. It would collapse to 83.4m b/d if global leaders grasp the nettle. My own view is that it will happen by natural market forces.

The next leap foward in technology is going to be in energy storage. Teams of scientists at Harvard, MIT and the world's elite universities are in a race to slash the cost of batteries - big and small - and overcome the curse of intermittency for wind and solar.

A team in Cambridge says it has cracked the technology for lithium-air batteries that cut costs by four-fifths and enable car journeys of hundreds of miles on a single charge. By the time we reach 2040, it is a fair bet the only petrol cars still on the road will be relics, if they can find fuel at all.

"Everything will be electrified. The internal combustion engine is a dead-end. We all know that, and the car companies ought to know that," said one official handling the COP21 talks.

Opec might be better advised to target prices of $75 to $80 and maximize revenues while it still can, taking advantage of a last window to break reliance on energy and diversify their economies.

The current war of attrition against shale is a hard slog. US output has dropped by 500,000 b/d since April, but the fall in October slowed to 40,000 b/d. Total production of 9.1m b/d is roughly where it was a year ago when the price war began.

"The expectation that a swift tailing-off in tight oil would lead to a rapid rebalancing in the market has proved to be misplaced," said the IEA. Costs are plummeting as rig fees drop and drilling time is slashed.

There is a time-lag effect. Shale cannot keep switching to high-yielding wells forever. Their hedging contracts are running out. The US energy departmentexpects a further erosion of 600,000 b/d next year, but this is not a collapse.

By then Opec will have foregone another half trillion dollars. "What is winning supposed to look like for the Saudis? Can they really endure another year of this?" said Ms Croft.

Opec can certainly bankrupt high-debt frackers but this does not shut down US shale in any meaningful way. The infrastructure and technology will remain. Stronger players will move in. Output will bounce back as soon as oil nears $60.

Shale frackers will respond with lightning speed to any rebound and create a permanent headwind for Opec over years to come, or a sort of "whack-a-mole" effect, contrary to warnings by the IEA this week that Mid-East producers may regain their 1970s stranglehold once rivals are cleared out.

What is clear is that the Opec squeeze has killed off $200bn of upstream oil investment, mostly in offshore projects, Canadian oil sands and Arctic ventures. That will cut oil output in the distant future, but it is a different story.

Saudi Arabia has certainly regained market share, but the cost is causing many in Riyadh to ask whether the brash new team in power has thought through the trade-off. While the Kingdom has deep pockets, they are not limitless. Kuwait, Qatar and Abu Dhabi all have foreign reserves that are three higher per capita.

It has been downgraded to A+ by Standard & Poor's and has a budget deficit of $100bn a year, forcing it to burn through reserves at a commensurate pace and now to tap the global bond market.

Austerity has finally arrived, a nasty shock that was not in the original plan. A confidential order from King Salman - marked "highly urgent" - has frozen new hiring by the state, stopped property contracts and purchases of cars, and halted a long list of projects. The Kingdom will have to slim down the edifice of subsidies and social patronage that keeps the lid on protest.

It is far from clear whether Saudi Arabia can continue to prop up allies in the region and bankroll Egypt, already struggling to defeat Isil forces in the Sinai. An Isil cell captured - and beheaded - a Croatian engineer on the outskirts of Cairo in August, even before the suspected bombing of a Russian airline this month.

The Isil brand has established a front in Libya and has launched attacks in Algeria, where the old regime is fraying, and oil and gas revenues fund the vitally-needed social welfare net.

Iraq is pumping oil a record pace but it is nevertheless spiraling into economic crisis, with a budget deficit of 23pc of GDP. Public sector wages are to be cut. The austerity budget for 2016 - based on $45 oil, down from $80 last year - has set off a political storm.

The government has slashed funding for the "Popular Mobilization" militia fighting Isil. "The Iraqi state faces a grave challenge. The budget crisis makes the status quo intractable," says Patrick Martin from the Institute for the Study of War.

Helima Croft says Isil is now operating close to Iraq's oil facilities near Basra, detonating a car bomb at a market in Zubayr last month. They clearly have the ability to attack energy targets, and have an incentive to do so since oil production within their Caliphate heartland is their main source of income.

Al Qaeda in the Islamic Maghreb showed it could launch a devastating surprise when it crossed into the Sahara two years ago and seized the Amenas gas facility in Algeria, killing 39 foreign hostages. Variants of Isil can strike anywhere they find a weak link.

"We remain concerned that they may eventually set their sights on a major oil facility. These are obvious targets of choice, and none of this geopolitical risk is priced into the market," she said.

Saudi Arabia itself is vulnerable. There have been five Isil-linked terrorist acts on Saudi soil since May. They include an attack on a security facility near the giant oil installation at Abqaiq, where clusters of pipelines offer the most inviting sabotage target in the petroleum world and where the aggrieved Shia minority sit on the Kingdom's oil reserves.

It would be a macabre irony if Saudi Arabia's high-risk oil strategy so enflamed a region already in the grip of four civil wars that the Kingdom was hoisted by its own petard. That would certainly clear the global glut of crude oil.