Figure 1: Continuous monthly Brent crude price by TFC Chartz (click for big)
The world has endured nine months of crude oil price agony with the price over $100 per barrel. The top price during this period was $125 per barrel in April. No $147 or higher: the world is less wealthy, with less available credit.
In 2008, the general economy was in turmoil. The dollar shadow banking system was in a state of collapse. Hedge funds were blowing up and liquidity was looking for a place to hide. Banks morphed from ‘safe and secure’ to ‘questionable’ overnight. No banker could trust any other because nobody knew what was on the others’ balance sheets, how many bad loans. What saved the banks was governments stepping and with reassurances.
What steps in today? Send in the fairies!
2008 was before people were realizing that money borrowed to spend on suburbia was dead money and that the loans were all likely to be bad. The big increase in fuel prices since 1998 to 2007 had made the car habitat unaffordable, too costly to support, both in terms of energy and credit. Economists refuse to acknowledge this today. Most still believe in their silly models which only work when fuel costs $25 per barrel. When fuel costs rise to $100, the wheels come off: the growth economy only works when petroleum is mispriced as a ‘loss-leader’.
At $110 per barrel, our Fearless Loss-leader is bankrupting the entire world. Expensive oil and the oil-using toys must be bought with credit, the use of which drives prices of both toys and power supplies higher. The lack of return on the petroleum ‘investment’ emerges as self-multiplying credit costs which cannot be met except with more zero-return credit.
Managers resist adding the costs of pollution and water waste which is also a loss-leader. Adding true costs exposes industrialization as a non-productive enterprise. What remains after value boils away are the scams. The waste-based economy cannibalizes itself as the consequence of its operations, the only way it can ‘remain in business’ is to cheat. When the input prices rise, the cheating becomes too absurd for the putative ‘beneficiaries’ of the process to tolerate.
The last similar period of plus-$100 crude was during eight months of 2008. After reaching the high of $147 per barrel the market fell apart. Looking now @ nine months and you can see the Euro-economy convulsing, the Chinese economy blowing up and Americans gathering in the streets. Correlation isn’t causation, right?
You can look at the open interest at the bottom of the chart and see how a lot of mis-informed oil traders lost their shirts. Buying in at $120+ per- and being sold out at half that level usually marks the end of the career in futures’ trading. Ditto with the waste-based economy’s managers who have bought in high and and are continually doubling down with borrowed money. All that is left is for the managers to run out of what remains of ‘good will’ then the ‘value’ of the waste-based economy will evaporate … leaving the managers to be sold out at a catastrophic loss.
What is taking place is the obvious outcome of depletion of both credit fields and oil fields. It is the ‘drill, Baby, drill’ concept in brought into action in broad daylight. Money-drilling is less time consuming to deploy than deep-ocean drilling platforms. Credit becomes the substitute for energy: the conceit is to empty resources faster and more efficiently in order to keep up appearances.
On our chart, the intermediate-term price downtrend is reaching the longer-term moving average which may or may not provide technical support. It didn’t in 2008. The current price decline is more stately than the precipitate plunge that took place in 2008-2009, this is because credit is provided on the accounts of sovereigns rather than the accounts of fraudulent banks. Nevertheless, it is easy to see the world becoming more destitute with each passing day, with economies emptied out by the voracious automobiles and the vast infrastructure needed to keep them scurrying around aimlessly like cockroaches.
Under your nose: credit death removes the bid for crude along with any bid for replacement energy sources. Credit dies because the self-monetizing ‘good’ bought with the credit is a ‘bad’. Credit extinction becomes the chic form of energy conservation, its emergence parallels the ongoing paralysis and destruction of the despised middle class, which itself is a product of cheap petroleum energy:
Figure 2: If you have to ask what it costs you can’t afford it.
For the past year and a half the Europeans have been hunting for the easy, non-energy solution to their energy problem. Certainly there must be one! The Europeans have successfully institutionalized their exit outside of history. Instead of being ‘leaders’ of anything, Europe has become a confederation of geriatric states managed by impotent. self-referential non-entities. Instead of galvanizing itself against the existential threat their energy waste represents, Europe self-organizes against common sense, emptying its own till on day one only to refill it on day two with empty promises. Europe believes in fairies: certainly the ‘Growth Fairy’ will arrive tomorrow so as to fill up Europe’s empty moneybag.
Because the growth fairy will arrive tomorrow, just like all the other Utopian promises of ‘progress’, Europe refuses to direct administrative resources against energy waste because it can claim with a straight face no such directions are necessary. The European leadership turns away from the resolution and discipline needed to even consider the energy solution. They can only fake ‘resolve’ and complain about short-sellers and each other.
Meanwhile, the ongoing economic unraveling reduces energy demand the hard way. Rock-throwing Greek and Italian demonstrators are ‘opted out’ of the waste-based economy by virtue of their unemployability. Given enough time and neglect, all of the peripheral European states will become car-free as these states’ populations are reduced to penury and the euro-replacement currencies devalued to worthlessness.
As this takes place, empty promises are made to the energy producers at a remove. Irony is not lost as auto factory for Eastern Europe Slovakia was dragooned by the means of a government change to hand over its citizens’ hard-earned euros to support parasitic Eurofinanciers and Middle Eastern oil sheiks: the funds funneled by way of hapless Greeks and presumably Spanish, Irish, Portuguese and Italian rock-throwers.
Hard on the heels of the ‘Slovakian Settlement’ comes the latest ‘Grand Plan’ whereby the European Financial Stability Fund becomes another ‘bad bank’ or rogue lending entity leveraging loans against Slovakian capital for the benefit of the same useless Euroracketeers. How much longer can everyone put up with this nonsense? The EU, UK and American banking zombies are drowned in the ocean of bad loans extended to buy what is now worthless: used cars, used tract houses, used toll roads and airports along with the petroleum supply for all these gone up in smoke.
What happens next? Cheating schemes and victims! The ‘Brand X’ economists are unable to understand what is taking place right under their noses. Here is Paul Krugman:
The Path Not Taken
Paul Krugman (NY Times)
The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.
This doctrine was sold both with claims that there was no alternative — that both bailouts and spending cuts were necessary to satisfy financial markets — and with claims that fiscal austerity would actually create jobs. The idea was that spending cuts would make consumers and businesses more confident. And this confidence would supposedly stimulate private spending, more than offsetting the depressing effects of government cutbacks.
Some economists weren’t convinced. One caustic critic referred to claims about the expansionary effects of austerity as amounting to belief in the “confidence fairy.” O.K., that was me.
Krugman goes on the discuss Iceland and the non-fatal consequences of its default. That default — along with Argentina’s — have been discussed here before: neither are germane because both countries have energy surpluses. Neither country has to cough up the credit to swap for someone else’s crude. Argentina has domestic petroleum supplies to export. Iceland has a tiny population and is an electricity exporter in the form of refined aluminum. What the EU has to offer the oil-producers are sleights-of-hand and the bleats of politicians. Soon enough, the Euroracketeers will gain ascendancy over the inepts in government(s) as they did during the darkest days of the 20th century. Like the Wall Street oligarchs and #Occupy nemesis: the Europeans have little to offer but a willingness to behave themselves for a fee.
Figure 3: ‘Nice car, does the heater work?’ Behavior is ‘assumed to be’ an ersatz good by economists. (AP/UK Daily Mail)
As in Greece and elsewhere, the #Occupy activities are energy conservation by other means:
The big questions raised by anti-capitalist protests
Martin Wolf (FT)
Why did it take so long? It is over four years since the financial crisis began. Yet only now are anti-capitalist protests emerging, including at St Paul’s Cathedral. So is this the beginning of a resurgent leftwing politics? I doubt it. Are the protesters raising some big questions? Yes, they are.
For this to be the beginning of a new leftwing politics, two things have to occur: first, a credible new ideology must emerge; second, some social force must march behind it.
Ideology follows reality, in this case only if it rationalizes not buying cars or using gasoline: in their thousands the #Occupiers will emerge as the social force because none of them will be able to afford cars or gas:
Robert Johnson and Kevin Lincoln (Business Insider)
Suburban America is a Ponzi scheme.
A report out today from Strong Towns makes this bold claim.
It argues that the mass migration from cities to suburban areas following World War II has seen two cycles of growth and maintenance. The first cycle was paid for outright, the second is heavily financed, and the third cycle is poised at the brink of an abyss.
Like Bernie Madoff, city planners swapped long-term obligations for short-term cash, expanding at an unsustainable rate and developing land they could never afford to maintain.
The Strong Towns report suggests fixing our automobile infrastructure will cost a cool $5 trillion. This is entered onto the liability side of the American ledger, alongside the trillion$ in losses to come on the useless suburban real estate itself. To this must be added the cost for petroleum to run the entire mess …
The American Society of Civil Engineers (ASCE) estimates the cost at $5 trillion — but that’s just for major infrastructure, not the minor streets, curbs, walks, and pipes that serve our homes.
The reason we have this gap is because the public yield from the suburban development pattern — the amount of tax revenue obtained per increment of liability assumed — is ridiculously low. Over a life cycle, a city frequently receives just a dime or two of revenue for each dollar of liability. The engineering profession will argue, as ASCE does, that we’re simply not making the investments necessary to maintain this infrastructure. This is nonsense. We’ve simply built in a way that is not financially productive.
We’ve done this because, as with any Ponzi scheme, new growth provides the illusion of prosperity. In the near term, revenue grows, while the corresponding maintenance obligations — which are not counted on the public balance sheet — are a generation away.
In the late 1970s and early 1980s, we completed one life cycle of the suburban experiment, and at the same time, growth in America slowed. There were many reasons involved, but one significant factor was that our suburban cities were now starting to experience cash outflows for infrastructure maintenance. We’d reached the “long term,” and the end of easy money.
It took us a while to work through what to do, but we ultimately decided to go “all in” using leverage. In the second life cycle of the suburban experiment, we financed new growth by borrowing staggering sums of money, both in the public and private sectors. By the time we crossed into the third life cycle and flamed out in the foreclosure crisis, our financing mechanisms had, out of necessity, become exotic, even predatory.
One of humanity’s greatest strengths — our ability to innovate solutions to complex problems — can be a detriment when we misdiagnose the problem. Our problem was not, and is not, a lack of growth. Our problem is 60 years of unproductive growth — growth that has buried us in financial liabilities. The American pattern of development does not create real wealth. It creates the illusion of wealth. Today we are in the process of seeing that illusion destroyed, and with it the prosperity we have come to take for granted.
There it is, the waste-based economy unmasked as a scam. Who is supposed to pick up the multi-trillion dollar tab? The unemployed and pension-free retirees, Americans who have seen their jobs flow overseas or their replacements imported from Mexico and elsewhere. Neat trick if it can be made to work. Problem is, the ‘plan’ is more snake oil and ‘something for nothing’, more lies and false promises, another swindle.
What’s next? A few more months of $100 crude and something important will be broken, probably the credit market, maybe the USA, itself. There is little left in the way of growth industries: con games, poverty, food stamps and fairy tales.