Greetings… from Athens
For me, this is where my professorial life started.
Decades ago – before oil became my life – I was actually a specialist in classical Greek political philosophy. I told my students it was a result of the Vietnam War… I didn't trust anybody born after Aristotle!
As a student myself, I lived here in Greece for a bit, although I was too young (and too poor) to appreciate it. I had not been back for over 40 years – until today.
Much has changed in Athens, although not everything. These taxi drivers remain among the most irritable in the world… toward passenger and pedestrian alike.
Yet, these days, the city of the Acropolis, Plato's Academy, ouzo, moussaka and the bouzouki is known for something other than the riots (which our driver had to pick his way through to get to the hotel).
Athens is mired in the mother of all debt crises – one that is threatening the entire Eurozone.
That crisis underscores everything in this city, from the cost of a hotel room to the way in which Greeks measure foreigners.
The debt is actually one of the reasons for my arrival here early this morning.
How Greek's Debt Crisis Affects the Oil Sector
On Monday (June 20), I am set to address an international conference on the subject of oil volatility and the limits of government action.
Most of the rest of my time, however, will be spent discussing the debt crisis, its impact on volatility, and resulting oil prices. There is a consensus on the seriousness of the debt problem, but a wide range of opinions across Europe on what it means for the oil trade.
Greece sees the oil effect first-hand, but from a number of vantage points.
One is the rising retail prices for oil products – a result of the country having refinery capacity but little in the way of domestic crude sources. Even what is refined, however, is more attractive as export, especially in the current financial malaise.
That has required the government to step in to guarantee sufficient volume for the local market. And nobody likes the way it has been done…
Refiners complain that it is hurting profits, while traders bemoan their ability to hedge in a broader regional market.
The average guy on the street doesn't like it because the price is still too high. Besides, following austerity moves enacted over bitter public opposition, he just flat-out hates anything the government does anyway.
Then there is the perspective provided by imports.
The country is dependent on bringing in essential crude from other countries. That is becoming more difficult to do as the Greek credit rating heads south. It is also of concern to plans calling for necessary new pipelines into the country (for the needed oil), as well as crossing the country (for just-as-needed revenues from throughput fees).
Greece has also been a hub for oil tanker traffic, although more of that currently is moving to the Greek side of Cyprus.
Unfortunately, the sector that brought the world such figures as Aristotle Onassis, John Latsis, and Constantinos Alexander-Goulandris is suffering through an outright depression.
The shipping traffic coming through the port of Piraeus has declined significantly, adding to the economic problems.
But it is actually the connection between the volatility in oil trading (something we have talked about here often) and the weight of debt that holds the greatest key to what will happen next in Europe.
On this score, Greece is in the center of the storm.
It's More Than A Simple Credit Constriction
The only reason the price of oil is not higher is because of the euro problems.
The weakness of the dollar against the euro – combined with the denomination of oil transactions in dollars – had provided a premium to the euro-based oil transit and retail trade in the European market.
In short, Europe has been profiting from two spreads:
- One was the spread of European actual prices for crude against the lower pricing in New York.
- The second was the spread between the cost of crude (in dollars) and the cost of retail oil products (sold in euros). This would be even more pronounced if the euro was not currently under such pressure.
However, pricing in Europe still reflects what is really happening in the oil market, unlike the pricing in New York. While NYMEX prices have been declining for its benchmark crude rate West Texas Intermediate (WTI), the London rate for Dated Brent has been increasing. That spread has exceeded $20 a barrel – a historic high.
European prices are also signaling conditions in other regions, since Brent is used as the benchmark rate around the world far more than WTI.
All of this means that, for oil prices, the euro debt crisis is more than just a credit constriction. It adds to already-existing volatility in the trading cycles for crude oil futures, distorting the price and accentuating that instability.
Make no mistake… I expect these talks in Athens over the next week on the relationship between oil volatility and crushing debt to provide some advance warning on what is likely to hit in the U.S. oil market shortly.
The decisive matter is whether a consensus is forming in Europe on how to deal with the connection.
I'll certainly keep you in the loop.
Meanwhile, I also plan to bring my wife Marina to one of my favorite Greek spots – Delphi – to see the temple of Apollo's famous oracle. Never hurts to get the gods involved in repairing what governments usually manage to screw up…