Oil Shock



Triangle of Doom 120414

Figure 1: Triangle of Pants by TFC Charts, (click for big). What is taking place right now is an oil shock very similar to that which occurred in 2008-09. What triggered the current reaction was $105/barrel a few months ago as opposed to the much higher 2008 price. The lower price confounds expectations, convention leads us to believe that any fuel price shock would result from prices higher than $147 per barrel.

Since 2008, the world has become poorer; what remains of purchasing power has been diverted away from ordinary customers toward elites. Monetary- and fiscal policies around the world have amplified this flow making it difficult for customers to buy industrial goods including oil. By catering to crony ‘friends’ the central banks and governments have been working against their own stated interests, precipitating the very crisis they have been working so hard (?) to avoid.

The hope: more easing => lower money cost for drillers => price bubble ‘hedge’ against high- and increasing crude price => more financial market support for drillers. Finance makes money lending to all concerned.

The reality: more easing => more tycoon ‘success’ => more customer insolvency => lower crude prices => deflation => finance-lender bankruptcy => driller distress leading to more easing. Finance fails as customers are unable to retire firms’ debts and they (firms) default.

Because there are no organic returns from fuel use, customers must borrow.

There is a constant need for individuals to take on more debt; even as globalization has expanded the number of debtors it has not expanded their means. The world’s credit market is inundated with obligations that outweigh the ability of humans to retire them by way of labor. Reduced means = price declines. The elites cannot- or will not support a mass-market enterprise like oil consumption: they will lend some of their own (borrowed) funds to participating firms but refuse to squander a meaningful proportion of their wealth to simply buy and waste fuel. As the non-elites imitate their betters => price declines.

The economic arguments against inequality have narrow merit: the success of elites of grabbing more for themselves offers diminished returns. Non-elites’ obligation include servicing and retiring the elites’ debts, they do so by borrowing- and buying overpriced goods. From a wider viewpoint, elite success at pauperizing the bulk of the human race is a crude form of resource conservation. Greed undermines our consumption economy; this is a blessing in disguise! Pillage-to-breakdown gives our planetary life support system what small chance remains for it to do its job through the balance of the millennium … until we can learn to husband our capital wisely.

Retirement of loans requires productive activities that gain returns that can be applied against principal; productive activity is where ‘means’ are supposed to come from. The gargantuan amounts of debts today indicates there are really no productive activities at all, only borrowing platforms and (false) narratives. Debts are not retired with the output of industry but rather with new rounds of lending. Debts multiply exponentially as old debts drag from coffins like vampires-plus-interest. At the same time, new credit is always needed to fund the latest fashionable failing enterprises. Our dead-money debts are worthless claims against a rapidly diminishing capital account. Not just citizens but the world entire economy is insolvent: the oil price tells us that we can no longer borrow against the promise of future productivity … because there is no such thing.

Technology makes every sort of outlandish promise but is never able to simply pay its own way. Technology-related costs expand faster than returns, at the same time tech pushes aside forms that might serve to retire some of these costs: the voracious power demands of Internet data centers must be met with coal, Internet companies such as Amazon that perpetually lose money replace profitable ‘brick and mortar’ stores that provided the revenues which enabled the online firms’ rise in the first place.

The price for crude oil does not measure the worth of extraction but rather the worth of consumption … over the past six months there has been the downward repricing (depricing) of consumption by 35%. At the same time, reducing the price of inputs does not increase the solvency of the world’s bankrupts. A society cannot borrow- or consume its way to wealth. Only the careful husbandry of capital produces wealth. Industrialization is the strip mining of our capital and hunt for more. What propels the wasting process is the false promise that the mining process ‘creates’ capital rather than annihilating it.

Crude futures take another hit, (Bloomberg):

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 62.93 -2.91 -4.42% Jan 15
Crude Oil (Brent) USD/bbl. 66.10 -2.97 -4.30% Jan 15
RBOB Gasoline USd/gal. 170.40 -6.94 -3.91% Jan 15
NYMEX Natural Gas USD/MMBtu 3.62 -0.18 -4.81% Jan 15
NYMEX Heating Oil USd/gal. 205.09 -5.69 -2.70% Jan 15

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,204.30 +13.90 +1.17% Feb 15
Gold Spot USD/t oz. 1,202.67 +10.32 +0.87% N/A
COMEX Silver USD/t oz. 16.39 +0.13 +0.78% Mar 15
COMEX Copper USd/lb. 288.50 -1.75 -0.60% Mar 15
Platinum Spot USD/t oz. 1,233.25 +10.25 +0.84% N/A

Says Arthur Cutten:

Oil took a 4 percent hit, and concern is growing that this is a sign of slackness in aggregate demand, and not a over production move by the US and some of its allies to punish Russia, or the Saudis to give the shale oil crowd a stiff gut check on their long term viability.

The same folks who are needed to push up the price of crude are on food stamps, have lost 35% of their wealth in Japan, have ‘slowed’ in China; are mired in depression in southern Europe … and in northern, eastern and western Europe as well. Because a car cannot be paid for by driving the car, the world is ruined by way of its 1 billion cars.

Driving the car does not pay for the fuel, or the roads or any of the rest of the associated junk including the massive, intrusive governments that everyone loves to hate. What pays is hundreds of trillion$ of debt … that can never be retired.

The costs of housing, education, Obamacare, wars, infrastructure maintenance and entertainment (drugs) are borne by citizens who must borrow additional amounts to bid the price of petroleum products. The customers have reached their credit limits, as a consequence they are insolvent: customers must borrow to retire their own debts. Credit breakdowns caused by driller defaults will smash the customers even harder … the bid will shrink leading to more defaults in a vicious cycle: this is ‘Energy Deflation’, similar to Irving Fisher’s debt deflation model.

Energy Deflation is Underway Right Now.

The price will decline to the level where use (waste) of petroleum is deemed to offer a return. Because there are no returns, there is nowhere for oil prices to go but to decline. At the same time, no matter how low the nominal prices fall, they will always be a bit out of reach for the marginal customer. Ultimately, only the elites will be able to afford fuel, time will tell how much of a fuel supply- and use system elites can support.

By refusing to institute voluntary stringent conservation we are set to experience ‘Conservation by Other Means™’ less fuel use by way of war, national ruin, credit and currency crises.

Saudi Arabia has nothing to do with this as they are fully committed to high-priced crude to pay welfare to their millions of unemployable citizens. This is also true for the rest of OPEC. There is also no real excess supply of crude as the flow of fuel supplies is 6- or 7 million barrels per day below pre-2005 trends. This ongoing shortage does not cause price to increase, it reduces customer purchasing power, instead. This is what the economists miss: oil prices will test the 2009 low, there will be the tendency toward even lower prices.

Tighten your chin straps: the next phase of the Great Financial Crisis has begun.

74 thoughts on “Oil Shock

  1. AugustusGloopius

    Keen observation about Fisher’s debt deflation and your novel analog of energy deflation. It will be interesting to see how governments continue to behave in the face of energy deflation (necessarily at the same time as debt deflation). Good post.

      1. steve from virginia Post author

        Zero.

        I’m serious-ish. Remunerative fuel (petroleum) use = about 8% of the total: delivery, transit, construction, emergency and agriculture. Rest of use is toys including military. Figure out how low the price must fall to strand everything but productive activities: about $10/barrel or a bit less than 10% of $108/b. Of course, there would be a lot less delivery, construction and toy use to mandate the $10 price so the productive use price might fall to $8 or even $5. Of course, by that time everyone will be flat broke and scuffling around looking for handouts while the bosses scratch their heads and try to figure out what to do next.

        The citizens will pretend the economy is ‘productive’ at … $50- or 45/b. The Fed will start more QE … and the price will plunge from there. Easing transfers funds from customers to drillers (and bankers). This shifting of funds is what caused the price collapse in the first place: drillers need customers to retire their (drillers’) loans at the same time the customers are being deprived of their funds!

      2. Reverse Engineer

        I’ve got it!

        Da Goobermint will fix the price at $100/bbl for the local frackers then issue out SCRAP (Supplemental Car Running Assistance Program) Cards for Happy Motorists to buy Gas @ $4/Gallon. To Fund the SCRAP Cards they simply jack up the Federal Deficit by another $1T a year!

        Seriously, they issue out SNAP Cards to keep the Food Consumption up, why not SCRAP Cards to keep up the fuel consumption?

        RE

        RE

      3. Mister Roboto

        It’s precisely because plummeting oil prices will crush the fracking boom that I doubt these bottom-feeding right-wing conspiracy theories that the price-crash is happening because the Saudis and the Obama Administration made some kind of deal to bring down Russia’s petroleum industry.

  2. Laserninja

    Steve, I figured there would be at least one more “dead cat bounce” left in oil prices, but I am starting to agree with you that the credit creation game is up. Yesterday I walked, home a different way from the light rail station, past the back side of a couple of new car lots. For the last couple of years these lots have been packed all the way back in to the hidden corners as the manufacturers pushed channel stuffing for all it was worth. But now it seems the lots are slowly emptying out. They have the Karz parked out around the edges with empty spaces in the center. I don’t think car sales are up, I think that even the Auto industry is running out of credit to pack the lots with unneeded cars to show fake sales. Maybe the customers are just buying up SUV’s cause of low gas prices!

  3. Usman

    Earlier, somebody mentioned how long it might take before rig count declining. ZH posted this interesting chart recently: http://bit.ly/1uolXpd

    Rig counts started declining steadily about 5-6 months after the peak in 2008 prices. Given that time scale, we should probably be seeing a higher rate of shut-in starting about now..

  4. Mister Roboto

    Well, I would like for there to be one last somewhat normal Xmas season before it all goes boomsies.

  5. Mister Roboto

    A thought provoking comment at Dmitry Orlov’s blog:

    Oil prices are collapsing because of the end of QE.Price discovery was destroyed long ago, so it is nothing to do with demand.That is market propaganda.The easy liquidity from the fed trashed the dollar and speculators sought refuge in commodities.This is a signal.It is not just that the money printing has ended for now, but rather some powerful financial forces “in the know” realize that rate hikes are coming and that the indebted West can no longer kick the can down the road.

    That does make sense. The fall down to $90 might have been demand destruction, but since then? That does seem a lot more like a bubble popping then a purely supply-and-demand-driven thing.

    1. Reverse Engineer

      I don’t think so.

      The collapse in Oil Price tracks the currency collapse of the Euro and Yen. The demand destruction comes from those economies, because their currencies are buying so much less Oil.

      The Nips and the Eurotrash have been thrown under the bus. The only folks still buying Oil here are FSoA and China, and they are getting hit too on the structural end.

      Far as the Saudis are concerned, they are Liquidating. They will sell at any price to whoever still has money to buy anything. EVERYTHING MUST GO! LOL.

      I’ll have an article up Sunday on this.

      RE

      1. Mister Roboto

        Well, I think it’s entirely possible that there is a substantial element of both factors involved, one likely feeding the other.

      2. steve from virginia Post author

        There is a price-war component to this bough-haha: the conflict between Saudia and Iran for Middle-Eastern hegemony. Having failed to oust Assad with its own proxies, Saudia now turns to the task of bankrupting its adversary. Saudis aren’t the catalyst but they are opportunistic.

        Look for:

        – Coup in Iran,

        – Ouster of Assad and his cronies and the withdrawal of Hezbollah back into Lebanon,

        – Riots-upheaval in Iran: both this and the coup would be the outcome of Iran ending fuel-driving subsidies. Those Iranians love their cars, too.

        More later …

      3. Reverse Engineer

        I got the definitive article on this about ready to go here, PEAK CUSTOMERS. 🙂 Still tweaking with graphics and vids, but will publish when the clock turns over.

        RE

  6. Pingback: Oil Shock | Doomstead Diner

    1. dolph

      RE, you can’t have deflation in fiat currency. All global currencies are fiat which means there can be no deflation.
      We are not on an oil standard. If we were, the dollar price of oil would be fixed.
      It doesn’t matter what the dollar price of oil is, it has zero impact on the ability of central banks to create as many units of fiat as they want, and it has zero impact on the ability of commercial banks to direct the flow of that fiat. If they want they’ll pull the junk bonds funding oil and put them somewhere else.
      The hyperinflation is happening where you and I can’t see it…in high end real estate and collectibles, where the obscene amount of money held by the oligarchs meets a limited supply of the real stuff they want.
      It doesn’t yet happen in our world because we have the opposite, an oversupply of everything (labor, goods, energy) relative to money.
      It’s only a matter of time before depletion sets in, industrial plants are stranded and we begin to see the inevitable hyperinflation as an unlimited supply of fiat meets a limited supply of food, energy, and other consumer goods.

      1. steve from virginia Post author

        Hyperinflation has many causes but one of them is currency arbitrage. The ‘Currency Crisis’ post has a breakdown and I have written about currency preference many times before:

        http://www.economic-undertow.com/2012/03/19/being-greek/

        http://www.economic-undertow.com/2014/02/15/debtonomics-currency-crisis-3/

        Banking system structure, strength of banks and ability of a country’s economy to take on banking system losses is what sets countries on a (hyper)inflationary or deflationary path. Keep in mind, the general increase in debt is inflationary in that the currency unit purchasing power is diluted with the passage of time (and increase in apparent number of units).

        Reverse Engineer makes a good point that hyperinflation is difficult in a credit regime (as opposed to a currency system) because there is a restraint on lending (due to repayment obligation). However, if a country faces generalized insolvency and credit is available, loans in local currency (yen) would be taken on in any amount in order to buy other currencies (dollars) at any price. This sort of ‘desperation buying’ would cause hyperinflation for a short period. The borrowers would not care that they owe large amounts because their forex purchases would be an attempt to escape from onrushing default & currency collapse as well as something that precipitates these things at the same time. This panic currency trading phenomenon can be seen to some degree in both Russia and Japan, so far without the hyperinflation.

        BTW: as ruble and yen unwind there will be less bid for fuel => prices will continue to crash. Nobody in charge seems to understand what is going on right now.

      2. Eeyores enigma

        Dolph – You have to keep repeating to yourself over and over that ALL MONEY IS LOANED INTO EXISTENCE. Every time a dollar is loaned into existence their is an outstanding claim of …say…a dollar ten, which means their is never enough money in the world to pay off all the claims. This will help you to understand inflation/deflation.

        Over the last 50+ years we have had constant growth driven by cheap almost free energy and other natural resources so there was always more and more loans being made. That paradigm is over. This is why we have bubble after bubble. They are simply opportunities to lend large amounts into the economy. If they are lucky they can generate a bit of inflation. If not then as claims are paid off there is less and less money in the world … deflation.

        Despite what you think the Federal Reserve doesn’t get to decide whether or not to have inflation they can only take advantage of an opportunity to goose a bubble along. They can force entities to borrow to a certain degree but that is also only a bubble with limited effect. If they could figure a way to get the average household to borrow large sums then we would have hyperinflation i.e. increasing amounts of money chasing limited goods and services.

        At least this is how I have come to understand it.

        Of course the other way prices of things can go up is if money supply remains stagnant while goods and services become more scarce. This is inflation also.

    1. Reverse Engineer

      I don’t think Vlad is worried about the Separatists at all here.

      He’s trying to crash the Western Banking System. I believe the Ruskies will Default, though first they will try to divest offshore assets in a firesale.

      I think he figures Mother Russia can go it alone, and maybe they can. They have local Energy and local Food production.

      This is the BATTLE FOR ALL THE MARBLES.

      More coming soon on the Diner.

      RE

      1. steve from virginia Post author

        RE, I suspect Putin is as baffled as the rest of the world’s establishment.

        – Risk cannot be measured by way of interest rates due to central bank rate-repression, so risk is priced into currencies, instead. Not just Russia and there is more risk to be priced by way of rupee, ringit, (Brazilian) real, euro, sterling, etc. As each currency is stricken in turn, the bid for petroleum will falter => more risk to be priced into currencies.

        – Currencies falter due to dollar preference (which causes other currencies to falter in a widening circle). Dollars become the currency that gains the ‘best deal’ for petroleum, even over the currencies of petroleum producers! This is certainly true in Russia. Look for dollar preference in Saudi Arabia (it has already appeared in Iran).

        – Currency depreciation does not aid the customers who must buy fuel with the funny money: even as the dollar price of fuel declines, the currencies that must be used to pay for the fuel decline just as fast- and faster. In countries like Russia (Japan) the worth of the ruble is not set by petroleum purchases but by dollar- ruble or euro- ruble currency arbitrage (hyperinflation) in forex market, on street-corner exchanges, in irregular/unofficial bourses (stores) as well as in banks.

        On the streets, there were signs that Russians had lost faith in their currency after watching how their incomes and savings got decimated. Bid-ask spreads of 20 rubles began appearing at some exchange offices where they offered to sell dollars for 85 rubles but would only buy them for 65 rubles. IKEA furniture stores and other “hard asset” retailers saw a burst in activity as folks were trying to convert their rubles into whatever else they could before these rubles lost their value entirely, and before retailers could catch up with price changes.

        — Wolf Richter

        – Monetary policy has become counterproductive. Some of this first emerged during the Indian mini-crisis a few months ago: any gain by the central bank in one area of the economy is overcome by losses in another. Abenomics is another example of negative returns from monetary efforts.

        We have entered the ‘Age of Less’ the age of consequences. Our new age will last a thousand years, maybe more. Modernity began in 1450 and can be said to have expired in 2008 = 558 years. The life-span of modern was determined by the rate at which resources could be brought to the fire; our new age will be measured by how long we can preserve what few resources our greed and stupidity have left to us; if we want any sort of human future learning how to manage properly is what we must do.

        Sadly, modern humans aren’t used to thinking along the way of ‘how little’. Nobody has a grip on how the new regime operates … it’s funny but also tragic. In Russia the losers will be ordinary Russians who don’t own energy companies or do business with Russian military. They will be burning their vodka to keep warm.

      2. Mister Roboto

        As a friend of mine put it back in late 2008, “When are the nuclear bombs going to start flying, that’s what I want to know!”

      3. Reverse Engineer

        “Modernity began in 1450 and can be said to have expired in 2008 = 558 years.”-SfV

        I don’t think you can really say modernity has expired until the lights are all off and the carz are all off the road. On its way out yes, on Life Support yes, Dead yet, no. We are still doing Vidcasts to a Global Audience of course with viewers on all continents except Antarctica! 😀 Over 500 Views already on the last one! That is pretty Modern stuff.

        I also don’t think you can say modernity began in 1450, that was still an agrarian society. I think you need to peg the beginning to the invention of the Steam Engine in the early 1700s. Making an estimate of Lights Out by 2030 and starting in 1730, I call the Modern Era 300 years in length.

        RE

      4. steve from virginia Post author

        I start with typesetting and the printing press and end when the energy Ponzi began its collapse along with the arrival of the Age of Consequences. Certainly there is overlap on both ends of the time-scale. The need for machines and information about them was a consequence of the Black Death in the 1340s which resulted in a labor shortage and increasing wage demands. A coping-strategy was the application of more machines and the credit-capitalist infrastructure needed to subsidize them. One of these machines was the three-masted sailing ship: truly a revolutionary form of technology, arguably more important than typesetting itself.

        Pre-modern there was insufficient economic activity (growth) to allow reconstruction after disasters such as earthquakes, famines, epidemics or wars. Prosperous cities, ancient Roman trading centers that were destroyed wound up abandoned and empty of human activity such as once-prosperous Ctesiphon, Aquileia and even Rome itself.

        In our post-modern Age of Consequences, one of them is the absence of sufficient economic activity (growth) to allow reconstruction after disasters.

  7. dolph

    You can believe in deflation all you want, it doesn’t mean it’s real. Falling oil prices is not deflation.

    Deflation only occurs when there is a surplus of everything relative to specie money. We don’t have that, we have a temporary surplus of energy relative to fiat money. And this is soon to turn into deficit.

    The mistake again is to assume that dollars are needed for oil, that dollars are somehow a hard currency that backs all credit. This is a critical mistake. Dollars are not needed for oil nor for anything, really. They are merely the fiat currency of one badly managed country.

    When depletion sets in, we will move into permanent shortages of energy and therefore everything else, right? Can we at least agree on this. Alright, once this is established, the next point is that fiat currency is never in shortage, even if there is credit contraction, because fiat can be conjured out of nothing to replace all credit destroyed.

    So there is the basis for hyperinflation…a real and permanent shortage of everything the economy needs (energy, people, resources) meeting up against something which by definition can never be in shortage.

    Even a cursory examination of history both recent and past reveals this basic trend towards hyperinflation, in hundreds of examples. I have yet to see anybody give even one example of deflation other than a brief moment in the 1930s when the dollar was backed by gold. This was quickly brought to a halt by a simple revaluation.

    Even if the hyperinflation occurs in stages…periphery first, then major currencies, then dollar, it’s still hyperinflation. I think this is inevitable.

    1. steve from virginia Post author

      @Dolph sez:

      ” … because fiat can be conjured out of nothing to replace all credit destroyed …”

      Not all fiats (even within one country) are the same. In the US all ‘fiats’ are private except for the $800bn or so of US cash currency … about half of which is outside the country. The rest = bank loans and claims against US cash: shares, debentures, trust instruments, futures contracts, options, swaps, etc. Because there is so little ‘official money’ almost all of the private sector fiats are worthless. Indeed, in a crisis there would be ‘hyper-something-or-other’ as shares in a bankrupt company would be little different fom Weimar papiermarks in 1923. But the shares would only be germane to a specific user group: those with interest in the company or in its shares. To the rest the worthlessness of the shares would not be relevant to anything.

      The US and the rest of the modern West don’t really have a currency system as much as a bank-exchange system. ‘Money’ is simply a modifying term to differentiate one set of numbers from other sets including weights and measures; what occurs is the transfer of otherwise meaningless numbers from one bank to others. There is very little in the way of cash exchange; between individuals or small purchases at convenience stores. The bulk of exchanges are electronic as banks credit-debit each others’ accounts at the direction of account holders.

      What matters … and what is fiat … is the form of the receipt. This is your claim against non-existent cash. If you sell a house for a half-million dollars the ‘cash’ is the deed along with the mortgage … the bank’s self-liquidating claim against that deed. If the worth of the house declines by half as occurred during 2008 – 09, the ‘money’ is not there only the now-defunct claim against it; the ‘owner’ will default and the claim will be reduced accordingly.

      Right now there are a lot of worthless claims: banks have had decades to shift their losses in the form of unsecured loans into the economy as a whole. Each claim (loan) represents ‘money’ that will soon be worth a lot less than the nominal amount of the loan. What will happen is the private claim will be rendered worthless (worth less) not the cash used to denominate it.

      Where cash worth matters is in countries where it is traded for other countries’ cash as in Russia. Rubles (no more ‘roubles’) are swapped wherever possible for dollars or euros. (Cash always has worth, never value.) There are plenty of foreign currencies in Russia b/c the country sells its petroleum/natural gas capital overseas. As panic spreads, there is more and more pressure for citizens to dump rubles on some other sucker at any price in exchange for foreign cash or some other ‘hard good’; by doing so the panic becomes self-sustaining; one sale being the incentive for more sales. If there are enough rubles … if the government starts issuing larger denomination bills/notes … the price of the harder-to-get forex will skyrocket. Indeed, there is a likelihood of hyperinflation in Russia, also in any EU country that abandons the euro as none of these minor currencies will be tradable for fuel except at a very steep- and rapidly rising discount.

      1. ellenanderson

        @ Steve: I agree about 1450. Of course you must know that Gutenberg needed a first rate money lender in order to build his printing press. I would argue that the Black Death created a moral/spiritual crisis which, in turn, made usury acceptable. The abundance of resources then discovered in the new world made it appear that there were no limits and that borrowing simply facilitated “progress” rather than the waste and destruction of any future for humanity. I would imagine that in most of human history resources were so limited that the destructive effects of usury were readily apparent. In the present case there was no punishment for more than 500 years – until now.
        Even if US citizens enjoy a strong currency we are still being punished. Having to watch the odious Mr. Cheney strut about is not conducive to my own sanity. And then I wonder whether the Sony cyber attack is the 21st century equivalent of the Spanish Civil War – just a practice session for what is to come.

      2. steve from virginia Post author

        The press removed the monopoly over information that belonged to the Roman Empire (Catholic Church). Before the press, any information had to be hand copied at great cost. Only elites and church repositories could have access to it, as a consequence literacy was confined to those who had the chance to exercise it. Obviously, the church edited and censored what it held, there was little information available about the ‘real world’ that could be made use of.

        Post-Gugenberg, information cost was reduced to nearly that of bound sheets of paper and ink. The church monopoly on information was broken and the Catholic political dominion was ended (completely broken in the ’30 Years War’). With access to a press anyone could publish ‘holy bibles’ and they did: Gutenberg printed the first followed by Luther accompanied by his heretical ’95 Theses’ in 1519. These bible-writers were followed by many others including- up to Charles Darwin. Luther’s Theses’ was an economic argument, as was Adam Smith’s ‘Wealth of Nations’ and Gibbon’s anti-clerical ‘Decline and Fall’. Darwin’s ‘Origin of the Species’ was his version of Genesis. The influence of religion over literature … at least the style of its presentation … did not end overnight.

        Speaking of literature, I read about Cheney and ‘rectal feeding’ and thoughts immediately turned toward deSade and ‘120 Days of Sodom’. Coprophagy or ‘shit-eating’ is a large component of that book, which is by the way, a political satire.

        What’s not part of the torture discussion is that the program itself was initiated by US government to enable- and give official sanction its in-house libertines … there no other policy end- or purpose to it. Read ‘120 Days’ and it is easy to see how those with enough reach will do anything, including commanding the flight of airplanes into office buildings, to create conditions whereby they might satisfy their lusts.

      3. Reverse Engineer

        1450 probably represents a good beginning date for this incarnation of the monetary system, as it coincides with Medici Banking.

        However, by no means can you consider life in the 15th century “modern”. Everything was still animal and human powered.

        To me, “Modernity” began with the substitution of Machines powered by Fossil Fuels to do work.

        RE

      4. Mister Roboto

        @RE: It has been observed that a miniature industrial revolution took place in western Europe during the fourteenth and fifteenth centuries when coke (coal subjected to the same process that turns wood into charcoal) started being used to forge damask steel and extensive use of water wheels were made. If I were to place the start of the modern era in the fifteenth century, I would make it 1453 when Constantinople fell to the Ottoman Turks.

  8. Reverse Engineer

    “Pre-modern there was insufficient economic activity (growth) to allow reconstruction after disasters such as earthquakes, famines, epidemics or wars.”-SfV

    Tokyo was rebuilt numerous times pre-industrialization after being leveled by earthquakes and fires.

    RE

  9. Usman

    http://bit.ly/1sGOENv

    Some interesting charts there. My question is.. what will be the extent of this pullback in production? Will production in the US eventually go back to pre-shale era levels? Any guesses on what that timeline would look like? I’m surprised no majors have filed for Chapter 11 yet…

    1. Ken Barrows

      If a major or other big player does file bankruptcy, it might as well be Chapter 7 (i.e. liquidate). The triangle of doom portends that new (marginal) production is not suddenly going to be profitable. Once you file bankruptcy, you are out of business for good.

    2. steve from virginia Post author

      Kopits was talking about it earlier so the idea of major oilcos failing is in play.

      11% of US oil extraction is from stripper wells … that output is probably safe.

      https://nswa.us/custom/showpage.php?id=25

      Note: fracked, offshore, tar-sands, asphalt/bitumen/paraffin production cannot be turned into stripper wells. These are a unique to America phenomenon: wells that cannot offer enough output per day go justify use by a major. Stripper operators are mom-and-pop businesses that buy ‘exhausted’ wells, work them over, add new above-ground equipment, etc. to gain the modest income the wells offer. Obviously, the returns from 10-barrel-per-day wells cannot keep a gigantic offshore platform operational so these wells are shut in flow declines below cost. Ditto wells in Alaska, in the fracking zone, in areas such as Russia with little in the way of low level enterprise (god-like companies own everything).

      Extracting fuel residue from conventional fields is almost as costly as fracking: the old plays must be re- drilled w/ laterals extended and fracked, well spacing decreased; fields are injected with water- steam and different gases etc. There is likely no more $3 barrels left in the world any more even in Saudi Arabia. $10 oil is probably so scarce that there would not be enough to run more than a handful of cars and other toys … maybe few million measly barrels per day. These puny barrels would be exhausted almost instantaneously if they were to be given over to meet current demand … so they won’t be, they will be hoarded.

      In six months we will start to see the extent of the damage … but it will only be the beginning.

  10. ellenanderson

    @Steve: you say about US adoption of torture that “the program itself was initiated by US government to enable- and give official sanction its in-house libertines … there no other policy end- or purpose to it.” You are absolutely correct. The moral depravity that modernity produced has reached its ultimate expression in the disgusting potty behavior of our public officials. You might expect that there would be a few warped creatures in any administration in any age but the “ho hum” response of the entire public sector, and the press is truly shocking.

    From the printing press to the internet. No higher moral authority stands between the writer and the audience to interpret or give context to the words. That is the existential dilemma that we have been circling around since we killed god. Was it Frankel who said “Now that my ladder’s gone I must lie down where all ladders start – in the old rag and bone heap of the heart.”

    Well I do take some comfort in the fact that the old leftist from the Sierra Madre has outlasted them all. Is that Natural Selection perhaps?

    1. steve from virginia Post author

      ‘Ladder’s gone’ is from Yeats, who was Irish Edmund Burke, btw, no socialist. Yeats was civilized … when that word meant something … now? We have cheap laughs as we strollez-vous past the graveyard.

      1. ellenanderson

        Right you are Yeats – I think it was quoted at the beginning of Viktor Frankl’s book “Man’s Search for Meaning.”

  11. ellenanderson

    Just noticed that someone has called the Sony cyber attack an “Act of War.” Here we go….
    Our punishment will result in the shutting off the entertainment spigot. Can’t wait mostly but I will miss this blog! Total freedom of expression is exhilarating if dangerous.

    1. steve from virginia Post author

      They aren’t going to shut down the Internet! Look at retail sector and the only companies that make any sales are all online. Keep an eye on the banks, however. There are big, bad things out there in bushes and it is hard to see clearly what dangers they offer.

      1. ellenanderson

        Yes, it is very dark out there but on the whole I am more curious than scared. How often does anyone get to witness something this big going down? You say Putin is probably baffled. Everyone who has devoted his life to gaining riches and power must be baffled. Nothing is going to work. It is over. We just can’t figure out how it will play out or when. If you spot something really nasty slithering through the Virginia Creepers please let us know asap!

        I don’t think anyone will shut the internet down on purpose but I do think that it may soon become a battleground for cyberpunks where no one will feel safe. It was designed for collaborators not warriors and it cannot really ever be secure. Yet all of the trappings of civilization from library catalogues to public utilities are now online. No one will have to blow up a power plant – it can be turned off digitally and then plenty of other things will blow up. For the moment it seems that all the players are equally vulnerable but now up steps North Korea or someone claiming to be North Korea.

        Also, at some point the free flow of information between peers may become inconvenient to someone with the power to stop it. Who knows? Very dark out there.

  12. ellenanderson

    Don’t want to post too much here but I did find something interesting about the bush-lurking-bankers linked from Gail’s site:
    http://peakoil.com/publicpolicy/the-global-bankers-coup-bail-in-and-the-shadowy-financial-stability-board

    From that post: “For three centuries, private international banking interests have brought governments in line by blocking them from issuing their own currencies and requiring them to borrow banker-issued “banknotes” instead. Political colonialism is now a thing of the past, but under the new FSB guidelines, nations could still be held in feudalistic subservience to foreign masters.”

    The legal status of the FSB in the USA is not clear. Republican Congress may settle that come next year?

    1. Mister Roboto

      The Republicans will probably make a big sparkly sign for the FSB saying, “The FSB is the Boss of Us!”

    2. steve from virginia Post author

      All of these ‘agencies’, ‘boards’ and ‘commissions’ (including the IMF and BIS) have little power other than the threat to cut off the flow of credit; that is, shoot themselves in the you-know-whattie. They are bureaucracies; the most paper of paper tigers.

      At some point a government (Italy?) will say enough is enough and start issuing euros on their own rather than borrowing them at extreme cost from Frankfurt banks. These banks will huff and puff but won’t do anything. To do so meaningfully would instantly bankrupt Germany. As a matter of ‘protocol’ visitors from one or more of these meddling agencies would be escorted around Rome (or Naples) by an extremely talkative guide for a few days, allowed to eat at some nice cafes, then put back on the plane to wherever they came from.

    1. Eeyores enigma

      No offense RE but I find your website a total mess. Tons of cut and paste, hashed over images and content, way more rabbit holes to go down than anyone could want.

      I scroll through now and then but I’m never able to find a spot to easily begin nor can I ever find a succinct point.

      I assure you this is not ADD as I am an avid researcher who grew up on Dewey decimal and still love it.

      Cheers!

    2. Reverse Engineer

      SMF (Simple Machines Forum) is one of the most popular Forum softwre packages.  It’s really very straightforward, its just a set of file folders.
      The easiest way to see what is going on in discussion is to go to the Recent Comments page.  There you will find the last 100 posts on all topics.
      RE

    1. steve from virginia Post author

      He dumped his hedges believing that prices would rise again, quickly. He also had to raise cash to fund a divorce settlement. I think Continental was one of two companies (wildcatters) actually making money at this fracking business. Now … ?

  13. dolph

    Well despite our differences I want to say it’s been a pleasure to interact with the people here and at other such blogs.

    Things are getting real fast. It’s approaching and what is clear is that the “recovery” has been a mirage. Trust me when I say that I didn’t want or expect this outcome in my younger years, but now that it’s here we have to deal with it. It’s going to be hard for people raised on Hollywood and utopian dreams. It’s going to get ugly folks, I wish everyone the best of luck no matter what the outcome.

    1. Mister Roboto

      Being a diabetic who will be toast as soon if I lose my job and the health insurance that comes along with it, I’m hoping for a quick demise. Of course, if the Spirit wants me to learn a bitter and brutal lesson on the consequences of neglecting your health when you’re young and dumb, it might not go down that way at all. {ULP!}

      1. Reverse Engineer

        At least for now, if you lose your job and your income drops low enough, you can sign up for Obamacare and its all paid for by tax credits.

        Anyhow, given that the ride on the Gravy Train of Oil is running out here, the old adage of Live Fast, Die Young and Leave a Good Looking Corpse takes on a whole new meaning. Look at the upside, even if you were perfectly healthy, you probably still would die pretty soon anyhow! LOL.

        RE

        RE

  14. Jb

    So how are the governments of Norway, Mexico, Russia, and the UK going to fill the budget gap from declining oil sales? In the US, if the marginal domestic consumer can’t afford the marginal domestic $80/b oil, and that’s all we have left, how will the US gov make up the difference as the consumer economy disappears? Are we left with ‘conservation by other means’ (which by the way = more simmering anger) and/or more borrowing?

    Pickens seems to think that the market will return in 2016ish. Fine, but that assumes the consumer will be able to borrow to pay for +$80/b oil. How can they borrow to pay for $80, I mean $110, err…$120/b oil if they are burdened by legacy college debt and rising health care costs? Unless there is some mobilization of the workforce? Or free money? Nobody seems to want more debt. Will we get another rinse and repeat from $2 gas? It sure seems unlikely; the demographics are turning Japanese. (Turning Japanese, I think they are turning Japanese, I really think so…)

    We’re all Egypt now? (Need link to Steve’s previous post of that title).

    1. Reverse Engineer

      Oil appears to have semi-stabilized @ $60.

      CHS suggested Da Fed will buy Oil Futures to prop up the price and buy up Junk Bonds through Proxies also to keep the local drillers floating.

      If they keep it propped up long enough, maybe the entire population of Europe and Japan dies off, leaving plenty of Oil for another round of Animal Spirits!

      Seriously, Belarus is hyperinflating, and one suspects many small currencies will start HI here, cratering their ability to consume Oil.

      In order to prop up consumption, the FSoA can load up on more debt and issue out SCRAP Cards to the local population here and keep the refineries in Bizness.

      RE

      1. steve from virginia Post author

        And if the Fed buys futures (lends to drillers) there will be more of a ‘glut’ because the customers have nothing to sell to the Fed at all. Instead the costs of the Fed’s subsidy will be shifted directly onto them, even as they are too broke to afford fuel without any additional subsidies.

        Subsidies just shift costs, they don’t eliminate them. As more subsidies, QE, loans and monetary devil worship are applied the more broke the customers become. At some point there is no market for crude oil at all.

        Trying to subsidize the customers won’t work either. As soon as they buy their allotment of fuel the subsidy is spent to the driller … the customer is back to being broke after being temporarily solvent. Not only that, the subsidy would come from the customer, him- or herself! Central banks cannot create ‘new money’ only shift around what is created by finance. New money from finance doesn’t increase purchasing power, either that of drillers OR customers, it only dilutes the purchasing power that already exists. Subsidies enable customers and drillers to work together efficiently to deplete capital as fast as possible. As capital is exhausted so is purchasing power. What remains after capital is exhausted is the residue of redundant, worthless claims …

        There is no easy one-step solution to this problem of energy deflation. We have very limited remunerative uses for petroleum and other fossil fuels. Those MIGHT pay for some bit of petroleum extraction, as for the rest … or whether there will be enough low cost fuels for any uses at all … time will tell.

    1. steve from virginia Post author

      Ken,

      It seems that a lot of what we see in these reports is statistical noise. The trends can be hard to pick out until they ‘smack you in the face’ like oil prices have done. Pretty smart analysts have been caught flat-footed and a big reason is the trends are so well hidden.

      An analytical issue is that the US imports a fair amount of crude- and crude like substances just to refine it then re-export the products. This is a + 1 mbpd trade; it is what Keystone is all about, import bitumen, send it to Houston and export products. US drillers are already exporting partially-refined crude; refiners cook it just enough to get past the crude export ban.

      I would guess that storage is up everywhere including US which might temp some terminals to take at the current ‘bargain’ price in the hope of becoming the swing producer some time in the future. I have also noticed stories about floating oil-tanker storage … a sign of oversupply relative to a stagnant market.

      The futures market is not in contango, however …

      http://futures.tradingcharts.com/chart/CL_/C5?anticache=1419451379

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