The Day of the Oslo Warning
by Jerome a Paris
Fri May 5th, 2006 at 11:26:28 AM EDT
On 22 June, at 8am, all operators in the oil sector in Norway received the
same message from the authorities: "Starting today, Norway will no longer
authorise oil exports from its territory. You are required to reduce your production
accordingly, effective immediately. Delays will only be tolerated for
imperative technical or safety reasons". At the same time, a communiqué was sent to
all major press agencies, with the similarly terse content. "As of today, for
national security reasons, Norway has decided to suspend all oil exports.
Further information will be communicated at 1pm today. All operators in Norway and
Norwegian waters have been required to reduce production, effective
immediately".
Panic broke immediately in trading floors in Asia, where it was the middle of
the afternoon, and in Europe, where the trading day was just starting. After
2 minutes, oil prices reached 85$/bl ; after 7 minutes, the symbolic level of
$100 was breached, but that was not enough to calm down anything. After 15
minutes, the prices has reached 145$/bl and showed no sign of slowing down in
their vertigious increase, as traders frantically tried to grab whatever cargoes
were available on the market. Frantic phone calls to oil companies on the
ground and to Norwegian authories yielded little. Oil companies confirmed having
received the instructions, and were already urgrently assessing the technical
constrants of shutting down production on their platforms.
After 45 minutes, with most of the world still unaware of the sudden crisis,
oil prices had reached 232$/bl and started gyrating wildly in the $200-$250
range. Behind the scenes diplomatic activity was building up, and pressure on
the Norwegian authorities became rapidly intense, but the only reaction from all
Norwegain ministries or Statoil, the national oil company was "We confirm the
decision to suspend exports but we have no information beyond the communiqué
that has been published." The first official reaction came from Brussels, with
a short communiqué from the European Commission urging the Norwegians to
reverse their decisions and to explain the rationale behind such a disruptive
announcement which put Norway in direct breach of trade agreements and association
agreements with the EU. The communiqué also urged Europeans not to panic, by
reminding that Europe had 90-days' worth of strategic reserves and that
consultations on whether it was necessary to tap into these reserves were already
under way. It stated that in any case oil supplies in Europe would be maintained
and expected a quick resolution of this crisis.
That swift reaction, and the explicit reference to the strategic reserves
calmed down the markets, which nudged down prices to $160. Similar comments and
reactions started pouring from European capitals, all strongly urging Norway to
reverse its incomprehensible decision. Nevertheless, all European stock
markets opened sharply down, with losses between 5 and 10% and wild price
movements. The shares in oil companies were especially volatile, as operators tried to
assess the losses from lower production in Norway versus the potential income
gains on overall production thanks to higher prices. Oil stockes generally
bucked the trend of the market and were higher.
But the announcement by Total, at around 10:30 am, that a Norwegian Navy
ship was cruising nearby the Ecofisk platform, one of the biggest in the
Norwegian offshore sector, and had been in touch with their platform operators to
confirm the instructions of the morning, sent the markets into a new frenzy.
Prices reached $440 per barrel and remained above $400.
More reactions came in. OPEC indicated its surprise and confirmed that it
would increase production as much as capacity allowed to compensate for the
future missing Norwegian production. Saudi Arabia announced that it would put on
the market immediately an extra 1.5mb/d of spare capacity. However, these
declarations did little to reduce prices as the Saudi crude was known to be of an
inadequate quality for the European refineries suddenly deprived of Norwegian
crude.
As the deadline for the 1pm anouncement approached, markets held their breath
and trading slowed down, with prices remaining around 400$ per barrel. Teams
within oil companies, traders and banks tried to assess the impact on the
global oil supply of the brutal disappearance of close to 3mb/d (just above 3% of
world production) and tried to guess how long the situation would last.
Norwegian authorities, despite massive pressure from other governments and hounding
by everybody from the press, oil companies and onlookers, stuck to their two
line statement.
The 1pm announcement, read by a government spokesman and shown on every
television channel on the planet, struck like a bomb.
"World oil production has been stagnating in the past year, even as global
demand has kept on increasing briskly,despite sharply rising prices. It is the
official consideration of the Norwegian government that, for all practical
purposes, peak oil has occurred, and we all have to adjust to a new world of
scarce and expensive oil. In this context, the government of Norway considers that
it is its duty to preserve for future generations the limited reserves of this
most valuable resource that have been endowed to the country, and it has thus
decided to totally suspend all exports. It was decided to make this
announcement without warning to avoid market manipulation and limit speculation. The
authorities of Norway will liaise with all operators to ensure a timely and safe
climbdown from current production levels to those required by the internal
needs of Norway, taking into consideration existing production plans. It is the
opinion of the government that expected higher prices for oil in the future
will be adequate compensation to all operators for lower production levels. Navy
ships have been dispatched in the offshore areas to enforce, if necessary,
the suspension of exports, but we trust that all will behave responsibly. There
will be no further communications today".
The effect was immediate. Prices started climbing again, as panic set in and
buyers tried to get access to oil at any price while sellers disappered.
Prices jumped in discrete increments. 460$, 534$, 647$, 752$. Brutal gyrations
happened.
At 1:15 pm, the IEA, the USA and the European Commission send a joint
communiqué announcing that 3mb/d of oil from the strategic reserves would be released
immediately on the markets in order to stabilise prices in the short term by
compensating for lost Norwegian supply. The market took a breather as prices
tumbled back to $250 per barrel, and traders frantically tried to understand
for how long the strategic reserve would be made available, and how long it
would last at such rates of use.
At 2pm, again, in a joint declaration, the IEA, the USA and the EC confirmed
that the strategic reserves would be tapped for as long as it took to convince
the Norwegians to change their minds and reverse their decision, and
indicated in the strongest terms that such disloyal behavior from a friendly country
was incomprehensible and unacceptable and would trigger the most stringent
review of bilateral relations. The USA indicated that an aircraft carrier
currently running exercises near Iceland was being ordered toward the North Sea in
order to be able to assess the situation.
The hint of a military intervention sent prices upwards again, toward $350.
As the markets opened in the USA, and many operators there discovered the
situation, the frenzy on all markets increased. The Dow Jones opened down 4%, and
continued on a downwards slide.
Authorities everywhere alternated between calls to Norway to reconsider its
decision, announcements of emergency meetings, and soothing declarations for
the public that there were no shortages and that supplies would continue to be
provided, including through the use of the strategic reserves. All TV channels
had switched their normal programming to non stop coverage of the crisis, with
breathless commentary on the potential impact on gas prices, ponderous
discussions on the origin of supplies in each country, and coverage of market
reactions. All channels scrambled to find experts able to explain in simple words
what "peak oil" meant. Most websites specialising in discussion of peak oil had
crashed early on, as millions of people were directed to them by Google
searches.
In the absence of any hard information, with Oslo seemingly having closed
down completely and hunkered down in the face of a massive onslaught of
questions, requests for information and ominous declarations to rescind their order,
markets slowed down. Prices nudged down slowly to $160 as operators began to
believe that Norway would never stand by its decision. Sporadic news from oil
producers in the country indicated that they were slowly reducing their
production and cancelling cargoes confirmed that production was indeed starting to wind
down in the country.
At 5pm, as European markets had closed down after a hectic day, with most
stock markets down by 7 or 8%, and oil around 150$/bl, a new communiqué was
unexpectedly distributed by the Norwegian authorities:
"Norway has decided to resume oil exports, effective immediately. We have
noted with disquiet, but little surprise, the impact of our earlier announcement
this morning suspending exports. Stock markets down 8% in one day, oil prices
tripling, after having reached a peak at more than $750$/bl, unprecedented
diplomatic pressure from our friends in Europe, America and around the world. We
would like to point out that such havoc was created solely by the announcement
of a 3% reduction in global supplies. This underlines the extraordinary
tightness of the oil markets today, and their extreme vulnerability to any kind of
supply shock. While our announcement this morning that we would suspend our
oil exports was only a test, now ended, designed to make clear to everybody that
our current oil consuming patterns are absolutely unsustainable, our
declaration with respect to peak oil stands, and is fully confirmed by today's events.
We believe that we have entered a time of unprecedented change, with oil no
longer plentiful nor cheap. It is our foremost responsibility to plan for this
absolutely predictable event and to concentrate the massive wealth of our
economies towards developing, on a large scale, sustainable forms of transport,
housing and industrial activity. We need to focus on lowering our energy
consumption, and switching to renewable sources. The price of doing nothing, as shown
today, is steep. We will announce in the coming days a national plan for
Norway to reach 100% renewable energy use by 2025. While we apologise to our
friends around the world for the unwarranted scare today, we hope that they will
remember that next time, there will not be a friendly government to "switch the
lights back on", and that they can expect similar oil price hikes to those
seen today, with the corresponding economic disruption. We hope that this lesson
will be pondered by all. Again, we will resume full exports as of tonight, but
can only repeat the need to move away from oil - or to have to face similar
crises in the very near future. Call this the Day of the Oslo Warning."
The announcement that the crisis was over sent the markets soaring in the
USA, with the Dow instantly regaining the 9% it had lost so far in the day. Oil
prices initially dropped back below $100, to $90. But as the "Oslo Warning"
started to sink in, oil prices started moving up again, stabilising at around
150$, i.e. exactly the sme price as before the announcement. On the stock market,
prices went down a little bit, but this average hid massive differences
between stocks suddenly deemed to be able to profit from a new era of expensive
energy and those that would be hurt. Car manufacturers suffered most, but again,
with a clear selection between those seen as competitive in the production of
energy efficient vehicles and others. Coal companies jumped, as did electrical
equipement companies like GE or Siemens. Software companies and those
providing internet services or infrastructure gained. In just a few hours, a massive
reallocation of capital was suddenly under way.
The world would never be the same, and the Norwegians were the unexpected
heroes of the day.
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