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Nasty oily problems

Oil companies are always trying to get the F1 media to say how important they are in the sport, which is fine. They do play a role in developing technology and in providing the sport with much-needed cash. If you look up and down the F1 grid you see that some of the biggest oil companies are heavily involved in the sport: Petronas with Mercedes, Shell with Ferrari, Total with Renault-related teams, ExxonMobil with McLaren and so on. But oil is important in other ways to the sport because of the price of what they used to call black gold is very important in getting governments to pay for Formula 1 races. If you look at the current F1 calendar (ungainly though it may be) you can see that oil revenues are a key driver in a number of nations involved. Abu Dhabi, for example, uses F1 to show off that it is diversifying away from surviving simple on oil money, Bahrain is using the sport in the same idea way, although it is less dependent on oil revenues. Much of the Malaysian motorsport activity has been funded by Petronas, oil is vital in the funding of the Russian GP, and the new race in Baku and, as we all know, oil money has kept Pastor Maldonado in the sport, despite all his adventures. The fact that the price of oil has been seriously low in recent weeks means that the Grand Prix contracts that some people signed up for are now beginning to cost the local promoters rather more than they wanted to have to pay. Race promoter deals are traditionally done in US dollars, but in recent years the Euro has also been used. The Formula One group doesn’t want to do deals in currencies that might be worth pennies from one day to the next and so it is the promoter who takes on the risks of currency fluctuations. Thus when a currency weakens, the cost of a Grand Prix to that country increases, while  inflation, which often follows, means that their money is not worth what it was, so fewer tickets are sold.

Right now, you need only scan the financial pages of any newspaper to know that a lot of economies are hurting big time because of of low oil prices. Russia, for example, is in big trouble because of oil. The rouble has hit record lows against the dollar in recent days causing Russia’s central bank to have to deny the currency is collapsing. The currency has been squeezed not only by the dive in the value of Russia’s oil exports but also  by Western sanctions, which comes as the result of some of the dodgier activities that the Russian government has been up to in recent years. These are things that F1 leaders tend to skate over very rapidly, or to sidestep when the subject is brought up. Russia? Bad guys? Lovely weather we’re having… The Russian economy contracted more than three percent last year. Russia’s exports and government revenues fell, the rouble has lost 70 percent of its value in the last 18 months, inflation is running at 13 percent. The government has looked for things to cut, but its reserves are being burned up. They can print more roubles but that will push up inflation and push down the quality of life. Russians are travelling  less and the value of labour is reducing. That might normally be a benefit, but foreign investors are wary of Russia.

Over in Baku, there are similar things happening. The country has just announced a 20 percent tax on taking money out of the country following a 32 percent dive in the value of the manat in the last month. The black market has gone berserk because the government restricted currency exchange. There is even talk of a total ban on the movement of foreign currency, which would make paying for an F1 race a rather difficult exercise.

In Malaysia Petronas has announced major spending cuts. It is one of the countries biggest employers and jobs are going to have to go. The government is not very popular because of new taxes aimed at shoring up the economy, not to mention scandals over money that seems to have disappeared into the wrong bank accounts.

Conversely, the trends in the oil industry are working in favour of sports in AbuDhabi where the government is looking to invest more in  sports events in an effort to increase economic diversification in the future. So now is a good time to get on a plane and to fly to Abu Dhabi with sponsorship presentations to promote Abu Dhabi abroad.

We won’t go into Venezuela right now, suffice to say that today the International Monetary Fund said that the country’s inflation will reach 700 percent this year. The IMF estimates that inflation was running at 275 percent in 2015.

43 Responses

  1. One of the effects of low oil prices on the Canadian economy is that it has pushed the country to re-examine its economic dependence on being a so called petro state, (easy money) back to a country that had a core economy of being a manufacturing state. This will be aided by the crash of the Can $ to pretty much 55-60% of the USD. Already the flight of Hollywood films has begun now that the estimate is that this exchange rate will last for a minimum of two years. Same with orders for goods and services from the EU as well as the US. Medical treatments, mainly surgeries have suddenly become a huge business as the US health insurance industry have suddenly taken note.Tourism I’m told is expected to have a huge increase from car crazy Americans and my friends in Whistler say forget about coming here – its booked solid! So its not all doom and gloom as it has forced Canadians to reevaluate what we want out of life and why we need to stay away from commodities controlled by the whims of global markets.

    As far as the GP du Canada; Sure, the race will cost us more money up front, but the other-side of that is an increase in Euro’s and USD’s coming into Montreal due to the extra value these race fans from other nations will find. Will Montreal be one of the most popular races with Europeans in 2016 considering its a six hour flight and 60% off the Euro? I think so. So stay awhile, come early and explore the Laurentians or head off to Toronto afterwards. (No I don’t work for a Tourist board. -:) )

    Life is too short to go around head looking at your shadow and the oil crash has been a wake up call for our nation. We have more and better things to offer to the world than the goo like stuff from Alberta.


    • A 65 cent dollar is good for our economy, always has been and leaving the tar in the ground is better for every ones health.


      • The tar sands oil extraction is crucial to Alberta’s economy at the moment. Alberta is a net contributor to the federal government in Ottawa when the oil industry is in good health, and it provides employment opportunities for all Canadians. Be careful what you wish for.


        • For decades Alberta received transfer payments from the east, that’s how Canada works. The rich provinces give to the poor, mine always pays never receives. It is a fallacy that Canada needs the tar sands money.


      • Leaving the Canadian tar pits untouched won’t make any difference to the environmental effects of fossil fuels. Industry and consumers will burn what oil they need, wherever it comes from. Would you rather Canada earned those petrodollars to help pay for cheap medicines and universal healthcare and public schools, or Saudi Arabia to help fund its oppressive monarchical autocracy and Wahhabi foreign policy? Or are you the kind of person who actually doesn’t mind the oil business and happily fills up their car and heats their home and buys a plethora of plastic goods (I could go on and on…) – just so long as none of the dirty work is done on their own doorstep?

        The only real benefit to the environmental cause is that as the price of oil falls, it will drag down the price of natural gas – which, despite many an environmentalist’s best efforts to destroy the industry in places such as North America and the UK, is a much cleaner alternative to coal.


        • But the best answer remains nuclear power…


        • Jamie I could crush you and your simplistic, ignorant environmental view, but this is not the place. Me, I practice what I preach. We eat, drink and breath the environment and so will future generations, you cannot take from it and ignore the affects. Natural gas is no better than coal and it is not just the burning of these products that is the problem, do some reading.

          Canada doing the right thing has nothing to do with what others do.


          • I think you mean ‘effects’.

            I’ll just get on with reading for my Masters while you go out and buy a dictionary. Do come back and crush me later, won’t you? I’ll be interested to see how your research notes compare with my own.

            And thanks – I’m a huge fan of irony.


            • Yes I did mean effects, thanks for the correction.

              Obviously environmental sciences are not on your reading list, but as you have access to a university library you should be able to find some of the hundreds of peer reviewed papers I’ve read on the topic.

              Irony, is that the opposite of wrinkly?


              • Brent, for Jamie to read those, he’ll need your list. I take it from your comment that you are against coal, gas, oil, and nuclear. What does that leave besides hydro, wind, and solar? Wind can be iffy, and is always variable (plus kills birds and bats; solar shuts down for the night; and hydro provokes those who hate the environmental damage building them does. What do you have that is better, and how is it better?


                • We’re on the road to nowhere come on inside; takin’ that ride to nowhere
                  we’ll take that ride.


                • I believe nuclear, in the right locations, is part of the solution. Tidal power is another source, but really the starting point, for the developed world, is using less.

                  I’d love to provide reading lists for anyone interested. Garrett Hardin, The tragedy of the commons (1968) would be on the list. Lester Brown’s, Plan B 3.0, Mobilizing to save civilization (2008 Earth Policy Institute) is another. You should be able to find both without a university library access. Salinization, eutrophication, desertification, ocean acidification, fresh water depletion, airborne mercury contamination, soil erosion, genetic erosion, food wastage, deforestation, climate change, where do you want to start? Do some research on Syria and you will find they are the first climate change refugees and it is just the start.


        • Surely the tar sands extraction and refining must be making a huge loss now.


    • A similar thing happened in the online gaming industry between 2005 and 2009 when the USD was 2:1 on the GBP. Basically, everyone in the UK that could buy their online games in USD did because it was half the price.


  2. Surely organizers hedged their money using currency futures and what not to prevent potential currency shocks ?


  3. Lower oil prices are ultimately beneficial because oil is the product of one industry and the cost for everyone else. Maybe with the money saved on gas more people can afford weekend tickets.


    • Mostly beneficial – for now at least. However, when the price was rising to near-record levels, many hundreds of billions were borrowed/invested against future exploration and production. The $650 billion rise in emerging-market corporate debt since 2007 has largely been in oil and commodity industries. To cut a long story short, many of those deals could now go bad (indeed, projects worth $380 billion have already been put on hold), and we may well be seeing the start of the next “sub-prime” debt and default crisis – with serious consequences for the global economy.

      Still, I find it impossible to defend the hubris of the oil companies and the big banks who bet on >US$100, and the mostly corrupt and autocratic nations of OPEC. We can’t escape the consequences of such a massive commodity bubble for ever. And to paraphrase Paine, if trouble must come, let it come in our time, so that our children can live in prosperity.


      • There are, I believe, many different theories about the future of oil. Your ideas are among them. However, supply and demand remains supply and demand. Others argue, with the same vehemence, that low oil prices will result in reduced production in marginal oilfields, there will be disorder, civil wars and uprisings in some places, despots will rise, despots will fall, production will fluctuate. Once the trees have been shaken, OPEC will turn down the taps and, soon enough, supply will no longer keep up with demand. Prices will rise, the gamblers in finance will places their bets again, but in different places on the roulette table of the global markets. Researchers will make progress in alternative energy and the world will move on, booming and busting. Our children will still have trouble aplenty. Will they read Paine or believe that we can live in the best of all possible worlds as Leibniz and Wolff argued? Or will they defer to the different realities put forward by the Voltaires and Kants? The world is not built by philosophers; it is built by fire fighters and bricklayers.

        Paine probably also said that we should not take things for granted. Free knowledge and free soapboxes included. Beneficial, all the time.


  4. Looking on the bright side, at least Silverstone managed to turn a profit last year!


  5. on January 22, 2016 at 7:24 pm | Reply Trotsky's Ghost.

    Sorry to be pessimistic, but with that wonderfully libertarian country currently
    called Iran threatening to ‘regain our rightful position as a major player in international oil exporting’ and thereby adding to flood-level of excess pumped
    oil in which the world is now awash, there is a distinct tendency to market
    gloom on a scale not seen for more than forty years.

    Even if only half the gloomy predictions become reality, one suspects
    that a top-end, highly cost-critical, easily disrupted sport like F1 might well
    find that the F1 sky darkens with the sheer volume of chickens coming home to roost. Fi is owned by a totally market oriented consortium of a type which is
    severely threatened by massive economic slowdown……mmmmmmmmm……

    Going to be a very bumpy downhill ride, guys…….


  6. It’s all rigged….pun intended. They, the financial class, always make money. Up, down, sideways….hence, money being the root of all evil. Just look at all the wars they make the US do just to keep the petro-dollar alive, for example.


  7. “…the price of oil has been seriously low in recent weeks…”

    No it hasn’t. “Seriously low”? It hasn’t even been just “low”.

    At US$30 a barrel it is still expensive in historical terms (adjusted for inflation). You seem to forget that oil has been in a huge bubble for a few years, breaching the highs of the 70s oil shock and almost reaching the massive spike of the early 1860s (US$120 in 2016 dollars), reached shortly after commercial drilling started in the US, and the civil war was generating huge inflation in commodities.

    The oil bubble is bursting, and the price is now heading back down to where it has been for about 135 of the last 155 years (around US$20 in 2016 dollars). And it’s not much to do with supply and demand either – when bubbles burst, real world economics just takes over. If (or when?) it falls under US$15 a barrel, then one can justifiably use the adjectives “cheap” or “low”.

    Oil producers and traders (and pension funds) getting hooked on bubble prices doesn’t change these simple economic facts. So while they may have banked on >US$100 oil, it doesn’t make US$30 oil cheap, let alone “seriously low”.


  8. The range of topics you cover , and link to F1, just says you are a real journalist. Sadly, most of your colleagues – whatever their departments or center of interest, tend to go really narrow.
    So, Joe, thanks for taking the pain to look at the whole scene, and report. I truly appreciate


  9. If Russia are bad guys, then the US and its NATO cohorts must be evil incarnate. I haven’t seen Russia flying air cover for ISIS, just flying sorties against them.

    And how come printing more roubles will push up inflation and push down the quality of life for Russia, but the US Fed can create untold sums of dollars and supposedly inflation is zip and the quality of life for the average American is all hunky-dory? It just doesn’t make sense to me.


    • No, it probably doesn’t. It is just the world happening.


    • “And how come printing more roubles will push up inflation and push down the quality of life for Russia, but the US Fed can create untold sums of dollars and supposedly inflation is zip and the quality of life for the average American is all hunky-dory?”

      I think it’s partly to do with the the currency your debt is valued in. America borrows dollars and prints dollars. Russia borrows dollars/euros/… but prints roubles.


  10. I never really thought about the Forex risk some of these countries are exposed to until you pointed it out Joe. Even here in Aus the pacific peso has gone from a peak of $1.12 US to now around 70 cents in about 3 years. Unless the organizers hedge they are pretty exposed.

    It will be far worse for some other of the 2nd tier countries like the BRICS and South East Asia. If the Fed raises rates again it will be capital flight like the Asian Financial Crisis all over again.

    I still think the crash in oil prices makes selling these new hybrid regs far harder. While fuel in europe is still expensive because you pay such high taxes, over here its getting pretty cheap, down to 90 cents (45 p, 58 euro c) a litre. In the States its crazy cheap! When I was in Miami I filled my rental for 2.06 a gallon in late Sep 15, now its below $2 a gallon. Still waiting for peak oil…


    • Here in Tasmania, still part of Australia last time I checked fuel is $1.28 a litre at my local. If you are buying it for close to 90c you should be onselling.


  11. on January 23, 2016 at 1:55 pm | Reply Anatoly Nechaev

    Just to correct some misconceptions and give a context on your Russian economy figures:

    >> The currency has been squeezed not only by the dive in the value of Russia’s oil exports but also by Western sanctions

    But overwhelmingly by oil. It’s convenient to include sanctions here but effect they having on currency is pretty much non-existent.

    >> inflation is running at 13 percent

    Which is down from 19% in August 2015. But still more than double of 6% pre-2014. Here’s where sanctions having big effect. Especially Russian counter-sanctions which caused huge price jumps and fall in product quality.

    >> The government has looked for things to cut, but its reserves are being burned up.

    Russian reserves stabilized since August 2015 at $350 billion. Not only they didn’t burned up since, but they actually grew to $370 billion.

    But overall you’re right, Russia is in serious trouble.
    I would recommend reading Mark Adomanis’ columns in Forbes and elsewhere. He’s quite good in pointing these things out.


  12. Oil, it’s F1’s new Tobacco.



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