Email

Three Ways a Greek Debt Settlement Will Affect the Energy Sector

by | published June 23rd, 2015

There are now rising indications that the Greek government and its creditors are going to avert a full-blown financial meltdown…

And this means there are some positive developments coming for the energy sector.

As I have been noting over the past couple of weeks, whatever emerges at the 11th hour will be at best merely another thumb in the dike. Completing the metaphor: Nobody has any actual plans to repair the leaking levee.

But at this point, the market will take what it can get.

Here’s what needs to happen in Greece… and how it will affect the energy sector…

Greece Needs to Take a Tougher Stance

The “solution” must include some prospect that Greece can make loan payments that are about to default while at the same time establishing a monetary policy in line with International Monetary Fund (IMF) guidelines. This is what always puts significant strains on a domestic economy already suffering under the weight of inefficient mechanisms, bad planning, worse management, and a considerable amount of waste, corruption, and off-the-book transactions.

Put simply, continued IMF assistance – along with World Bank finance (now provided only to countries abiding by IMF rules), as well as credit access from the European Union (EU) and the European Central Bank (ECB)/European Investment Bank (EIB) – is dependent on the government in Athens taking a harder line at home.

And that is what is bringing the people back into the streets. The harder line requires a trimmed budget. Unfortunately, that budget is always in the red because of huge pension payments, subsidies, and an inability (or reluctance) to collect taxes.

Greece has a higher percentage of its population on public funds – either pensions, state jobs, welfare, or the like – than any other EU country. Inflation is always a problem, as is the ability to entice bank deposits (which have been leaving daily by the billions of dollars for weeks).

The government has attempted to cut expenses other than pensions, but the numbers don’t tally. Negotiators on the other side of the table are frustrated by what they say are moves indicating a lack of serious intent. Meanwhile, the rhetoric from Greece has labeled the creditors as vampires.

That both sides are now talking in conciliatory terms is a signal things are finally getting serious. There needs to be some face saving on both sides. This will, of course, accomplish nothing in getting to the real underlying problems. It will nonetheless remove Greece from its current high position among global market problems. 

Less Pressure on Greece, More Credit for Energy Projects

So what does a resolution mean for energy? There are three distinct ramifications to consider.

First, the removal of the immediate threats of a Greek default and subsequent “Grexit” (a departure of Greece from the euro zone) offset a range of negative economic and banking pressures in wider European circles. To be sure, much of this has already been factored into bond interest rates, bank reserves, and the ECB’s version of quantitative easing. But kicking the can up the road will still help in relieving some of the pressure.

That means there will be a more positive view of forward market factors for Europe as a whole if for no other reason than that the cross-debt problems from a Greek meltdown have been sidelined. As we are beginning to notice today, that is resulting in a rise in oil prices and an increase in energy demand forecasts.

Second, any “solution” (even if it is no more than a cosmetic one) will allow expanded attention to a wide range of energy initiatives. Banking credit will now become more readily available for renewable projects such as the massive moves into solar and wind power in Germany, as well as liquefied natural gas (LNG) terminals in Italy, Spain, the U.K., Poland, and the Baltics.

Even Greece may benefit here. A possible natural gas pipeline to bring Russian volume via Greece to Europe was announced during the recent economic meetings in Saint Petersburg. Russia still cannot access European banks directly for capital, given the ongoing EU sanctions against Moscow on Ukraine. Athens, however, can.

Easier Access to Interbank Transfers

Finally, we are likely to see a rising component of a crude oil price increase because of the removal of interbank restrictions, at least in the short term. Remember, oil is purchased internationally for dollars. That requires hard currency reserves (petrodollars) in European banks to bring about oil trades.

Now, Greece certainly does not impact most of this trade. The Greek debt problem, however, does adversely affect the ability of European (and other) banks to access interbank transfers. The removal of the former allows a more seamless move on the latter. Easier access means greater trading volume as the demand for product increases.

The Greek mess is not over. At best, there is a Band-Aid coming. Then the more serious problems of Italian and Spanish debt loom just beyond.

We need to take this one step at a time. For now, there should be a small step within the week. And that will allow some moves up in the energy sector. I’ll keep you posted.

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Stewart McNulty
    June 24th, 2015 at 10:46 | #1

    Hello Kent. I don’t get the comments on “market share” competition between OPEC and the US. Beside NGL exports from the US, I don’t see any other direct competition. The US exports refined products and OPEC mainly exports non-refined products.
    Should the US open up exports of non-refined oil then we would have direct competition.
    Thanks for the opportunity to communicate with you. Stu McNulty

  2. Frank Pearsall
    July 1st, 2015 at 16:56 | #2

    Kent,

    A big picture question: has fracking destroyed the peak oil theory or just pushed it into the future?

    Many thanks for helping make sense out of so many conflicting articles.

    Frank Pearsall

  1. No trackbacks yet.