Читать книгу Fuel Hedging and Risk Management - Gajjala Vishnu N. - Страница 9

The importance of energy for present-day society cannot be understated. Energy is ubiquitous in the modern world, with every conceivable product and service utilizing energy for its production and delivery. Consequently, fluctuations in energy prices affect entities at all levels – from households and small businesses to large companies and governments – and the impact of price volatility is easily apparent. Rising energy prices impact a family's consumption basket, causing everything from transportation to groceries to become more expensive, thereby reducing their purchasing power. Higher fuel prices also mean that companies need to either absorb higher costs, raise output prices to maintain profitability, or otherwise manage the rise in costs. Finally, governments need to balance the subsidies given to energy consumers against deterioration in trade and budget metrics (e.g., fiscal and trade deficits) and potential social unrest. Even governments of energy-rich countries need to calibrate the amount of social support provided during periods of high energy prices in order to maintain a buffer for years when energy prices are low.

This increased awareness of the centrality of energy resources has been accompanied, over the last 30 years, by the development of sophisticated financial markets, the advent of the Internet, and electronic trading technologies allowing for more “democratic” access to commodities trading. Nowadays, investors, hedgers, and speculators are able to take control of thousands of oil barrels without leaving their chairs. Very often, the person trading these commodities has no personal experience with the physical commodity. Anyone can buy and sell commodities on trading platforms without even knowing the color of palladium, the location of gas pipelines, or the sea lanes used by very large crude carriers (VLCCs). Such abstraction from the details of the underlying physical commodity and its supply chain may be tolerable for some commodities, but is not advisable in the case of a “strategic” resource such as energy. The issue of security of production and supply is especially important for energy commodities, and this gives them a strategic dimension. Even experienced professionals like energy economists, who do a good job explaining energy prices in terms of supply and demand, can falter if they overlook the cost of securing supply and the security of trade routes.

To understand the importance of these details in the case of energy markets, let us use the analogy of a computer or a tablet. One can think of the commodities' physical platform as the hardware and the financial system as the software installed on it. The luxury of the touch screen and user-friendly graphic interfaces makes electronic technology easily accessible to everybody, to the point that one forgets about the existence of electronic circuits. It is perfectly understandable that more and more users find the workings of the hardware irrelevant, as long as they can use the apps. However if, hypothetically, the computer were to be used in conjunction with other devices to control the heartbeat or any other vital organ in the body, the concerned person would insist on learning about the safety mechanisms of the hardware, reading the manufacturer reviews, and even renegotiating his/her insurance scheme. Similarly, energy security cannot be discussed without a proper understanding of the commodities' physical platform. In a world where major energy chokepoints are prone to instability or turbulence, it is reasonable to assume that consuming nations must, directly or indirectly, bear the cost of securing energy supplies.

To further illustrate the strategic nature of energy, let us consider the case of China, which has become a major part of the energy equation, accounting for a significant fraction of oil demand growth. As a major oil consumer, China now commands the attention of market participants, who keep a close eye on the growth rate of the Chinese economy as any signs of a slowing of growth could send oil prices south. This simplistic analysis sometimes depicts China as mainly responsible for recent oil price volatility, either due to inappropriate monetary policy or industrial overcapacity, among other reasons. However, the situation looks quite different when viewed in the context of the petrodollar system.

Since the onset of the petrodollar system in the 1970s, most Asian oil-importing economies, including China, were obliged to export goods to the United States to lay their hands on the US dollars that were necessary to procure oil from Saudi Arabia and other Organization of Petroleum Exporting Countries (OPEC) members. China has been successful in leveraging its large workforce to build a significant manufacturing infrastructure capable of meeting (or exceeding) the US market demand for manufactured goods. This status quo has helped China to build an industrial complex, the OPEC countries to enjoy unprecedented purchasing power, and the USA to pay for goods and services in a currency it can control or even “print.” The consequence of this system is that, in the absence of credible alternative counterparties, economies like China are very vulnerable to contractions in US imports, while the USA keeps the option to shift manufacturing to other countries like Bangladesh or Vietnam. As China's internal market cannot absorb its industrial production at international prices to cover US dollar-denominated commodity costs, any contraction of US imports can have a social impact (such as unemployment) in China and similar repercussions for neighboring economies. With a very large population aspiring to participate in its economic growth, China needs to maintain a minimum level of gross domestic product (GDP) growth, which requires incremental commodities that can only be purchased when margins from exports are significant. If this were not the case, then growth would likely be borrowed from the future in the form of bad loans. Such complex challenges faced by China and other exporter nations are intimately related to the energy market but are not readily apparent just from trading screens.

Therefore, it is important for market participants to be alert to the geopolitical factors impacting energy prices and the importance of maritime route security and energy chokepoints. In this regard, we will take a closer look at China and how it is reducing its exposure to the petrodollar system through the use of oil and gas trade-offset mechanisms with Russia. We will also discuss how it aims to limit its reliance on the Strait of Malacca and the troubled South China Sea for its energy imports. But before that, we will look at different types of commodities, some characteristics of energy commodities, their provenance, and how they are refined and transported.