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How does the price of oil affect international shipping?
The world as we know it is rapidly changing, and the American public has not yet consciously registered that change. Nonetheless, like the shadows on the wall of Plato’s cave, there are indicators that cannot be ignored. One of the common indicators that most people are aware of is the price of oil. Another indicator, not so widely acknowledged, is the means by which energy is delivered to the consumer.
Oil and shipping are related on many levels. Oil is related to everything in our culture. Gasoline is still the main fuel for delivery in many domestic and international shipping venues.
Although oil has other uses, it is gasoline that literally drives Americans in productive endeavors. As we drive to work, our homes and workplaces are being heated and cooled with either electricity or natural gas, usually.
With the exploitation of shale oil and natural gas deposits, the delivery of some liquified natural gas (LNG) to point of use has migrated to ocean freight routes, and ground transportation is responsible for getting the LNG to its destination delivery points, illustrative of just one exchange between oil and international shipping.
Another factor that affects the relationship between shipping and oil is debt. The amount of money spent on extracting oil is (loosely) based on how much a company can sell the oil for. This is expressed by many writers, such as Gail Tverberg, hailing from the world of actuaries, that is how much debt is created by this process. In her article “Ten Reasons Why a Severe Drop in Oil Prices is a Problem,” she discusses how high prices make the oil profitable. If it is not profitable to sell the oil, then it is not wise to go into debt to set up the extraction process. In fact, this sector of the United States economy has experienced problems in servicing its debt since oil is cheaper and U.S. exports of shale products has declined.
International shipping is part of the cost of importing or exporting energy in the form of oil or LNG. It should be noted that this factor is dependent not only on the cost of production itself, but the interest rates charged by lenders, and the acceptability of other forms of energy. In 2013, the United States was a recognized emerging shale producer, but in 2016, the declining shale market is a major indicator of unmet debt payments in the energy sector, as discussed in the article, “U.S. Oil Bankruptcies Spike 379%” on CNN Money in February 2016.
Even with upcoming competition with electricity for automobile fuel, and declining profitability of shale deposits, there are functioning shale oil and natural gas fields remaining in the U.S. Projections by the U.S. Energy Information Administration, based on economic assumptions based on oil prices, technology, and availability of resources, reflect predictions of strong domestic use of oil and natural gas up until 2040, essentially leveling off after 2013. But in order to understand what is going on with the price of oil, there is more to know.
The declining price of oil has not been because of decreased demand (although demand has decreased), so much as it has been the refusal of existing producers to cut back on production in the face of United States shale activity.
Who’s calling the shots here?
The U.S. is no longer the controlling interest on this stage, due to factors that are often not considered in traditional economic models.
Behind the scenes, the extreme crisis involving the viability of Deutsche Bank, (which is tied to the entire Trans-Atlantic financial system) gives alternative financial systems added sway in decision making regarding which resources to use in delivering power in its many forms to the human population. So with the BRICS countries (Brazil, Russia, India, China, and South Africa) and the Asian Infrastructure Investment Bank financing nuclear power and major public projects without generating profit for Western investment banks, this has produced a shift in policy making on an international scale. Saudi Arabia is paying attention. Will the U.S. decision-makers pay attention as well?
Saudi Arabia has refused to cut back oil production. Russia is maintaining its presence as a deliverer of oil despite economic sanctions. Russia’s recent diplomatic blitz against ISIS regarding Turkey, China, Syria, and Iran has affected the ability of the U.S. to garner allies in an attempt to humble the Bear. Putin will be the guest of honor at the G-20 meeting in China. Russian negotiations with Saudi Arabia concerning oil prices will have huge consequences for U.S.-based shale operations as well as financial practices regarding government investment in energy production at all levels.
The debt mechanisms themselves, too, are being challenged. Whether or not the U.S. and European markets will be able to adequately cope with the basic value of their currency is in crisis. That currency value has diverse sources, but is directly affected by the price of petroleum as decided by Saudi Arabian policy. The close association between the City of London and the Saudis is being challenged by the prospect of a Saudi alliance with Asian values instead of the monetary policy of the Trans-Atlantic banking system.
This Asian policy, as directed by Russia, China, and to some extent, India, is increasingly leaning toward nuclear power and increased fusion research, which would critically tilt energy consumption towards electricity rather than gasoline, toward high-speed rail rather than highway construction, toward government-directed credit rather than market-driven financial loans (which demand immediate financial returns). Government-directed credit tends to support long-term infrastructure commitments that result in long-term wage contracts, water management systems, projects for space travel, and technical public education, which benefit small and medium-sized technical businesses.
So how exactly would that change international shipping?
Addressing how this would result in a change in international shipping, the routes themselves are changing as the more populous nations of Asia support re-routing the major shipping lines through larger canals connecting the Caribbean to the Pacific, and the Mediterranean to the Indian Ocean through the enhanced Guatemalan and Suez canals, both financed without Western banking money. The projected Kra Canal, which is being considered as an infrastructure project by Chinese investors, would connect the Indian Ocean to the South China Sea. China’s One Belt, One Road Initiative affects 60% of the human race. They’re shooting for 100%.
High-speed rail would divert shipping and transportation away from ocean-based shipping and toward land-based transportation; this would integrate international trade to the local economies located along the routes, rather than the European-controlled urban ports. High-speed rail competes more favorably than ocean freighters with air travel in terms of time. There is also the added advantage of combining the load capacity of rail with its ability to achieve safe speeds of 300-400 km per hour. The construction of the One Belt, One Road would include a tunnel under the Bering Strait to include the North and South American continents in the land-based transportation network being built in the Eastern Hemisphere. Putin has announced that his next generation of nuclear power plants will produce zero nuclear waste.
Will the United States embrace this effort, or will we turn instead to war?
The oil industry has long held the reins of the United States economy, to the extent that our currency is now more an international exchange currency than a domestic one. But there is a transition to be made here, and the survivors in the oil industry (and perhaps every other industry) will be the ones who listen carefully to this different drummer.