Be careful of what you wish for, you might get it.
— Proverb
Figure 1: Triangle of utility function by rational agents; by TFC Charts, (click on for big). In a cash economy the inability to afford crude oil would manifest itself as the steady decline of ‘too high prices’. Our economy is built around structured finance; once credit structures are undermined they collapse.
There is a ‘perfect storm’ underway; of insolvent customers, over-stressed finance, willful ignorance on the part of the establishment and denial. Both commodity prices and US Treasury yields are indicating another recession. Customers and drillers are asking how low will fuel prices go and how long will they stay there?
Fund manager Jeff Gundlach responds that no one will know until they stop falling. “That answer isn’t meant to be cute,” he says. “When you have a market that showed extraordinary stability for five years — trading consistently at $90 [a barrel] or above — undergo a catastrophic crash like this one, prices usually go down a lot harder and stay down a lot longer than people think is possible.”
Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Workers have been able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, diminishing the productivity of credit.
There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. The borrowing requirements of the driller increase over time because he is constrained by geology while the customer is limited only by access to credit and to wasting infrastructure. At the same time, the customer must take on the drillers’ debts by bidding for- and buying fuel. The relationship between the sets of borrowers conforms to simple game theory:
Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrowed or didn’t borrow. Not borrowing by both meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices! During this period, there was no need to allocate between drillers or customers.
From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the Undertow argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Figure 3: Post-1998, brutal new game theory: mutually assured (demand) destruction!
Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers, returns diminish and borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by costs.
The alternative is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller now compete for the same credit dollar: the customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers.
Unlike finance, petroleum is a bottom up business. At the end of the day every drop of oil/refined product has to be bought by a customer. Because there is so little return on what he does with the product he must borrow to pay for his purchase. He borrows, his boss borrows, his government borrows, his nation borrows other countries’ money (borrow by way of foreign exchange). Our economies are nothing more than interconnected daisy-chains of loans. Over time these chains have grown to amount to hundreds of trillions of dollars. As debt piles up it can only be serviced and retired by taking on more loans.
Even as the US makes less in the way of physical goods like clothing, shoes, washing machines or table radios, its Wall Street firms manufacture the bulk of the world’s credit; this is needed to substitute for absent monetary returns for just about everything else. Driving a car does not pay for the car (times- 1 billion cars), nor does it pay for the fuel, the roads, the massive governments including costly military endeavors, nor does driving pay for the ordinary costs of finance … risk premia and interest carry, which have ballooned exponentially. Other than for the smallest handful of customers — transit, construction, farming, delivery, emergency/first responder — customer use of fossil fuels and other capital is non-remunerative waste, for pleasure-fun, convenience, status, etc. The fashionable wasting processes — including fuel extraction industries — are collateral for more and more loans.
The simplest of models is all that is required to see where this ends up: subtract the costs of petroleum extraction from the small use that provides an actual return. This difference is the price that the economy can actually afford to pay without the use of credit. With extraction costs rising — which cannot be denied by anyone — and with actual returns being very small, the output of the model looks to be a negative number. What that implies is the price of fuel will fall all the way to zero with nothing to be done in the way of ‘administrative adjustments’ to alter this outcome.
Managers appear to be helpless because they have thrown everything at the economy but the kitchen sink: key men have been propped, banks bailed out; interest rates across all maturities are near zero, real rates are negative- or nearly so. Governments around the world are at the borrowing limit, there is little in the way of good collateral remaining for central banks to take on as security for new loans. Conventional marketplace fixes such as debt jubilees/write-offs, re-distribution, bailouts, stimulus, austerity policies, monetary easing, etc. are efforts to reclaim resource capital that no longer exists. Remedies accelerate unraveling process by increasing gross debt (claims against capital) while exposing remaining capital to consumption at higher rates. The capital ‘pie’ cannot be created anew or redivided, only a new and much smaller pie is to be had and carefully tended. Our smaller pie of non-renewable resources is what we have to make use of, to last us and the rest of the world’s creatures until the end of humanity.
Managers certainly understand but refuse to acknowledge that resource extraction over extended periods has consequences. Nations, regions, individuals and firms have experienced temporary shortages of fuel, credit and other resources in the past due to wars, droughts and other disruptions. A grand civilization at the height of its power has not exhausted its prime mover since the Romans stripped their empire of firewood beginning in the first century BCE, precipitating its decline.
Energy Commodity Futures
Commodity | Units | Price | Change | % Change | Contract |
---|---|---|---|---|---|
Crude Oil (WTI) | USD/bbl. | 48.82 | +0.89 | +1.86% | Feb 15 |
Crude Oil (Brent) | USD/bbl. | 51.18 | +0.08 | +0.16% | Feb 15 |
RBOB Gasoline | USd/gal. | 133.95 | -1.48 | -1.09% | Feb 15 |
NYMEX Natural Gas | USD/MMBtu | 2.88 | -0.06 | -1.97% | Feb 15 |
NYMEX Heating Oil | USd/gal. | 170.08 | -2.54 | -1.47% | Feb 15 |
Precious and Industrial Metals
Commodity | Units | Price | Change | % Change | Contract |
---|---|---|---|---|---|
COMEX Gold | USD/t oz. | 1,212.20 | -7.20 | -0.59% | Feb 15 |
Gold Spot | USD/t oz. | 1,215.30 | -3.28 | -0.27% | N/A |
COMEX Silver | USD/t oz. | 16.54 | -0.10 | -0.58% | Mar 15 |
COMEX Copper | USd/lb. | 276.15 | -0.55 | -0.20% | Mar 15 |
Platinum Spot | USD/t oz. | 1,221.25 | +1.81 | +0.15% | N/A |
Graphic by Bloomberg:
– Energy deflation is when increased fuel demand relative to supply does not cause prices to rise but undermines the ability of consumers to meet the price even as it falls. This is what is taking place wherever one makes an effort to look. A component of the onrushing crash is the easy money policy in Japan/Abenomics added to the other bits of monetary stimulus in other currency regions. It isn’t the end of the policy that is causing the crash but the policy itself as purchasing power flows from customers toward big business (drillers) and lenders. More easing => more purchasing power diversion => less credit => lower fuel price => more bankruptcies => more credit distress => more easing in a vicious cycle. What drives the process is the foolishness of central bankers who do not understand the consequences of their (obsolete) policies.
– Drillers rely on loans, lease flipping and share offers than upon revenue from sales, this is largely because of higher costs which would otherwise leave them underwater. The fracking boom and other expensive second-generation extraction regimes are as dependent upon structured finance as the real estate plungers were in the US beginning in 2002. The ‘waterfall’ decline in oil prices suggest that financing structures are coming undone. Finance innovations such as CLOs disguise risk and shuffle it around rather than eliminating it. When risks ultimately emerge they overwhelm the structures intended to manage them; hedging strategies rebound against hedgers, those that can race for the exits, the rest suffer severe losses as the prices collapse.
– It is possible that energy companies’ hedging strategies are contributing to the ongoing crash the same way ‘portfolio insurance’ abetted the stock market swan-dive in 1987: that is, sales of contracts in futures markets in order to hedge finance losses, elsewhere.
Because the leverage structures cannot simply reconfigure themselves after they collapse, oil prices cannot ‘bounce back’; a replacement credit regime must take the place of the broken system. Shadow-banking was vaporized by the housing crash in 2008; it was imperfectly replaced by a generalized credit expansion by way of Treasury borrowing along with central bank moral hazard: both of these offer diminished- or negative returns which is why this regime looks to be failing now … with nothing to replace it.
– Every dollar of price decline cuts output. Any oil that would be available at the higher price is removed from the market when prices fall. As the price declines, the only fuel available is that which costs that amount to extract or less:
Figure 4: Prices for selected petroleum-fuel plays from Scotiabank (click on for big). Sub-$50/barrel prices looks to shut in as much as 3 million barrels per day, a cutback equal to a third of Saudi Arabia’s output. Price decline is the industry’s fuel cutback mechanism, no other actions by drillers, nations or organizations such as OPEC are needed. This is another component of energy deflation; the only issue is how cuts will affect the customers.
Fuel cutbacks do not occur overnight: contracts between drillers and refiners remain in force and there is inventory in storage. Drillers will borrow as long as they are able to, hoping for a miracle. As the contracts are satisfied and inventories depleted uneconomical supplies will be shut in leaving what remains of lower-cost fuels. Under the circumstances, this remaining supply would likely be hoarded as it would be worth more than other possible uses.
– ‘Dollar Preference’, from the Debtonomics series is the convergence between the value of oil capital and the dollars that are exchanged for it. Fuel by itself is worth more than the real-world enterprises that waste it regardless of what means are used to adjust the price. Enterprises earn nothing on their own and are essentially worthless. They exist solely to borrow, gaining- and making use of credit is their primary product: other goods and services are intended to justify credit issuance in ever-increasing amounts. Part of this stream becomes the property of well-positioned ‘entrepreneurs’: enormous unearned borrowed profits are what drives the system. When debt = wealth, there is an incentive to take on as much debt as possible, keep what you can for yourself and to shift the retirement- and servicing burdens onto others.
Management is paralyzed by the internal contradictions of the debtonomy. We cannot get rid of (some of) the debt without getting rid of (all of) the wealth. We cannot get rid of the debt because we would need to take on even more ruinous debts immediately afterward to keep vital services operating such as water supply. If we get rid of the debts the prices will fall leaving debt-tending establishments without investment funds. Our debts cannot be rationalized, the absence of debts cannot be tolerated. The debt system is rule-bound. Debts that were increased because of favorable rules face annihilation because of the same rules, changing the rules threatens debt elsewhere. Nowhere are there real returns to service the debts much less retire them. Nothing remains but the arm-waving of central bankers. As the banks create more debt (against their own accounts), their efforts are felt at the gasoline pump which adversely affects debt service.
The debtonomy is Gresham’s Law applied (on purpose?) to goods and services; the bad drives out the good, the worst drives out everything else. The ‘bad’ enterprises which groan under massive obligations possess a competitive advantage over the virtuous ones that earn without taking any debts on. Debts are artificial earnings which are used to price the good companies out of business then engulf their markets. The final step is for the debt-gorged monstrosities to fall bankrupt due to their massive size, these are then bailed out by the even-more bankrupt sovereigns.
Energy guru Chris Cook uses the term ‘Upper Bound’ to describe the fuel price level that constrains economic activity. The price rise can be caused by increases in the available credit or by a decrease in the amount of available fuel relative to the current credit supply.
What happens at the other end of the bound? If the upper is tough to deal with the lower is good, right?
It goes without saying that the crude is vital. The ‘Business of debtonomy is debt’ but the presumption is of fuel waste for a ‘higher purpose’ which is embodied within our progress narrative. Without continuous waste debt becomes an unsupportable dead weight on all enterprises. Here is the confusion over the effects of fuel shortages on economies: ending waste is thrift, it is economical to do so. Ending waste is fatal to our debtonomy which needs the waste to justify its existence: economic thrift is an un-debtonomic catastrophe.
It is different this time: the decline of the fuel price means there is less fuel made available to waste, that the high cost variety is off the market. Low priced fuel means there are no businesses with credit. Lower price fuel is worth more than any enterprise that uses it, the lowest possible price means the industrial scale fuel waste enterprises are ruined, both producers and consumers.
The decrease in the dollar price of crude is ipso facto marketplace repricing more valuable dollars. The lower bound is where dollars become a proxy for crude and are hoarded. At that point all things are discounted to the dollar because the dollar traded for crude is more favorable than a trade of anything else for crude, that includes other currencies as well as dollar-denominated credit.
Just like the upper bound where a dollar is worth less with each increase in fuel price, the lower bound represents a dollar that is worth more because of its price in crude. A low crude price has a dollar that is worth too much to be used for carry trades or interest rate arbitrage which is the primary business activity within the debtonomy.
The lower bound is reached when currencies are discounted to dollars. A reason for this is the universality of the dollar. Because the US has been for so long the world’s consumer of last resort, goods that were sold for dollars in the US are tradeable everywhere in the world for the same dollars. The dollar purchases of the past and dollars in circulation now are the purchasing power of the future.
The dollar is also the world’s reserve currency, dollars being used to settle trade accounts. The trade of goods between countries whose currencies are illiquid may have foreign exchange risks that exceed the profit to be had by way of the trade. The exchange of the currencies for dollars bypasses the risks because the universal dollar is a liquid, stable substitute for third-party currencies. Reserve status of the dollar and its universality provide leverage that other currencies do not possess.
The trade of dollars for crude sets the worth of the dollars rather than do the central bank(s), this trade takes place millions of time a day at gasoline stations all over the world.
Motorists determine the worth of money; this strands the central banks. In their futile attempts to assert some sort of relevance the central bankers and policy makers manipulate interest rates, pillage bank depositors, ignore moral hazard and bail out their friends. They seek to reduce the worth of money relative to other money. In doing so the bank surrenders what small fragments of policy-making ability which remain to it. Bankers can set interest rates to zero but no further, can whitewash the accumulation of risk but cannot set the money price of petroleum except to make it unaffordable which precipitates the catastrophe the bankers are desperate to prevent.
The catastrophe the bankers are desperate to prevent is the destruction of demand, where fuel falls into strong hands and dollars are hoarded because they are proxies for scarce petroleum, energy in-hand.
For this reason, dollar preference effects net energy which is consumption taking place in energy producing countries. This consumption is entirely dependent upon consumer goods that are affordable because of high fuel prices. Russians produce automobiles and other Russians buy them because the national oil companies are able to sell their product for +$100 per barrel. The price subsidizes both Russia’s debts and her energy waste. Ditto for the energy consumption of Saudi Arabia, Iran, US, Kuwait, Iraq and all the rest. When energy prices fall so will energy consumption in producer countries if only because lower priced oil production will be too scarce to waste.
At $10 per barrel, Russia will produce very little fuel, only from the cheapest and easiest to produce fields and will trade it for hard currency only. Domestic sales will take place in black markets for dollars or gold, few Russians will have dollars and those that do will hold onto them for emergencies. Hard currency earned by the export of crude will be used to buy food and medicine, not imported luxury automobiles and television sets.
Diminished net exports are dependent on high prices which are in turn dependent upon constantly expanding credit. When cash is preferred over credit there is nothing to support the high prices or fuel waste. Cash is hoarded and credit is evaporated.
The end-game of dollar preference is crude-driven dollar deflation as took place in the US in 1933. Dollars were held as ‘gold in hand’ and business in the country was the buying and selling of currency to obtain gold which was necessary to settle contracts. The deflationary impulse was ended when the world’s governments ended specie and fixed convertibility, cutting the currency links to gold. The need will be for the US to end the dollar’s convertibility to crude, to go ‘off crude’ as countries went ‘off gold’. The alternative is for dollars to vanish from circulation and cease to be a medium of exchange. Local currencies emerging in the dollar’s place will be of little use in the obtain of fuel imports, the country will be limited to the petroleum that can be sustainably produced on its own soil.
Dollar preference is self-limiting. Dollar preference in 2015 is the demise of the euro, yen, ruble, peso, real … their unraveling illuminates widespread mismanagement. Doubts about currency regimes take root. The differences between the euro, yen, sterling, yuan and dollar currencies are minuscule. Euro debts are no different from the debts of the others, European waste is no different from the waste of others. There is nothing special about the dollar other than a military machine that is debt-dependent and failure-prone. Dollar preference condemns the rest which starts the clock on the ultimate death of the dollar.
“Our economies are nothing more than interconnected daisy-chains of loans.” Splendid! If party conversation ever turns to this topic, I will quote this and refer to the website.
Re: rising costs of extraction. I am wondering if it’s possible that costs are actually falling with the plunge in crude. Is it possible that input prices are falling nearly as fast as WTI? Is a well that cost $6-8M to drill in June 2014 now $4-6M?
For fracked wells, costs will drop. Considering that a significant component is equipment fuel, those costs per well are likely to fall … but not right away. Biggest cost is leases and these are slow to be repriced. Labor would be another large component but layoffs are already underway … but if yr drilling your labor costs will remain high.
“With extraction costs rising — which cannot be denied by anyone — and with actual returns being very small, the output of the model looks to be a negative number. What that implies is the price of fuel will fall all the way to zero with nothing to be done in the way of ‘administrative adjustments’ to alter this outcome.”SfV
I know at least one Jackass Shill who will deny it. LOL.
While the mathematical boundary is ZERO, the practical boundary is a good deal higher than that, because the political stability and functionality of many Gobermints will completely collapse long before the price of crude falls to Zero.
Perhaps the Saudis can withstand a $40 price for a year or two, but I doubt the Alaska State Goobermint can make it more than a year. The Venezuelans are set to blow up any day here.
The biggest problem of course comes from the Ruskies, who once they can’t trade Rubles for anything and bare shelves migrate from Belarus to Moscow, Vlad the Impaler will be forced to take some SERIOUS ACTION. Short of pitching out some Nukes, what action might that be? I’m projecting a shut off of the NG valves to Europe. Any other ideas here?
Don’t miss the Crystal Ball Vidcast with Steve and the rest of the crew we did on Sunday!
http://www.doomsteaddiner.net/blog/2015/01/04/collapse-cafe-crystal-ball-2015/
375 Views ALREADY!,/b>
I’m working an a new Rant on Oil Price collapse right now as well, and Part 2 of Tom Lewis should be up this weekend.
RE
Steve,
Another good article! Dense! I will have to reread this a few times to absorb everything.
Because your work is a somewhat difficult to grok (mostly because it requires a huge shift in perspective based on calling things what they are instead of the sugar-coated, self-congratulatory fantasy terminology that we normally use and which makes understanding impossible (e.g., “waste” or “extraction” instead of “production,” or as in the above article, “borrowing” instead of “earning” – that one was an eye-opener!), I have a suggestion that, while benefitting me personally, might also help newcomers.
How about putting on the sidebar an “Undertow Primer” listing in somewhat logical order the foundational ideas and explanations of the Undertow worldview? E.g., until this article, I hadn’t known about the Undertow view that Peak Oil happened in 1998 (based on financial returns). That article is pretty damn important! Obviously, your articles on debtonomy and the crucial explanations of what a conduit scheme is would be there, as the latter explains your oft-made statement that tycoons borrow their wealth, in addition to providing the ground for understanding why/how the whole industrial enterprise is such a huge scam/racket. I cannot help but feel that this would be helpful to people (like me) who have come lately to the blog, and want to get up to speed. I admit I am too lazy to go back and read every post but beyond that, there is the benefit of having the critical components laid out as a primer that helps us lazy thinkers to put it together. I really wish you would write a book laying it all out, but short of that, the “Primer” would help.
Regardless whether you think that worth doing, thanks for your work!
As a long time follower of this blog I also had some difficulty understanding Steve’s jargon the first few tines I visited his site. The views expressed are completely contrary to conventional waste based economics so therefore seen to have no uniformity among writers holding these veiws.
I wasn’t trying to incerase Steve’s workload by developing an actual “primer,” as helpful as that would be. My thought was that he would simply list already-written key, foundational articles in a somewhat bottom-up, logical fashion on the sidebar, so that someone coming to this blog for the first time or late in the game would have a handy place to start.
I’m working on it …
The primer is a book so …
Btw, the statement, “Figure 1: Triangle of utility function by rational agents” was world-class cutting snark!
You mean that people don’t actually know what’s good for them?
Many “rational agents” are already aware that they will have to default. But first they will load all possible risk onto the public sector and try to put as much real stuff in their pockets as possible. We in the US think that it will be an advantage to be “the last man standing.” I don’t think that is true. The first to default will be able to take advantage of the systems that are up and running. When the US gov’t throws up its hands it will be the end of the world. Then there will be an attempt on the part of those who consider themselves entitled to confiscate as much real stuff as possible. They will be finding depleted soils, dirty water and few fossil fuels.
ellen – “But first they will load all possible risk onto the public sector and try to put as much real stuff in their pockets as possible. ” and “Then there will be an attempt on the part of those who consider themselves entitled to confiscate as much real stuff as possible.”
This was the plan 5 years ago but when there were no negative ramifications from their actions these activities became their business model.
Actually, the real “fun” will begin after they have seized everything, and we all see what they will be able to physically hold onto when the impoverished masses simply start taking back what they need. The Elitz game plan works only as long as they can keep the police and military as their employees and enforcers.
There is a reason that feudal land owners were warlords. Not wizards and grand poobahs of financial and legal manipulation.
Steve i have been lurking at your site for a long time now, and i want to thank you for these posts. They put so many things i see around me in perspective.
I have a question, which i know you have explained before, but it is still evading my complete understanding…
As the price of oil collapses, production declines. I do not think in the near future, however, that demand will fall to zero. So wont the price eventually go back up? Demand for a product in short supply? i know that the majority of people are broke, but that means there are still a minority of people who are not. I can afford $5/gal gas if need be (forget external costs…in current dollar terms I can). It seems like this will be a bouncing waterfall. It will plunge, then over a few years it will climb back up a bit, only to plunge again…repeat…
so what is the end game for an upper middle class person like me? my spouse loses his job because of economic collapse, so i can no longer afford the gas? we’ve got savings for a while… or are we talking full-scale economic collapse where my electronic, fiat money is worthless?
also, any time scale on this?
I second the request from RE for primers.
I can see how much thought and work goes into your incredibly insightful, dense articles. So writing primers might not be high on your list. But there are some basic tenets that you present which are really ground-breaking, but require big leaps in understanding for the average reader.
You have transformed how I think about economics and human civilisation. That’s quite a big feat!
That request came from Tagio, not me. I’ve been reading Steve so long I know how he defines all his terms, even “Fashion”. LOL.
RE
Hello everyone again,
Steve: Amazing work you’re doing here. Thanks for it.
I have a few questions for you (and for everyone). How do you think this will play out in the next weeks/months/years? I understand that is really difficult to forecast such a complex situation, but is there any way to know a few days in advance from your point of view that severe panic will start to unravel? My current view is that markets are getting tense, volatility is increasing, ECB is talking about more QEs, dollar is sucking up all the other currencies…, but they still believe in the illusion of eternal and increasing debt/growth.
Another question is: What do you mean by “steady volume, open interest:little sign of panic”? I understand that there are players trading in the oil market actively, but I would like to hear your view on the issue. Would this be another signal prior to the implosion of the oil drilling system?
I remember that the ETP model forecasts a 75 USD average per oil barrel for this year 2015. From my opinion the market can withstand these conditions for another year and the can could be kicked down the road, but they are running out of instruments to mask the coming collapse.
I also wonder what effect could have the elections in Greece. It seems almost sure that Syriza is going to win and that financial markets could react severely, maybe pushing lower the oil price.
It’s a pretty complex situation and I am afraid that we are running out of time. Deep down inside I feel that this time is actually “the time”.
Best regards,
There are time lags between the mugging and the bruises. Look at the 2007 mortgage origination problem as a guide. The real crisis didn’t get underway until a year after Fannie Mae and Freddy Mac decided not to buy any more defective mortgages from lenders.
It is fair to say that whatever will occur over the next six months will leave customers in a world of hurt … pushing oil prices lower. Sadly, there is no way to improve the customers’ lot; efforts only amplify purchasing power shifts toward the drillers = even lower prices = more pain for customers. This is real-time view of what post-peak, post-modernity looks like.
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Found a link to this intersting article by Chris Cook on Gail’s OFW site, in which the author makes the argument that for the last 5 years at least the oil price has been determined financially (i.e., it’s rigged, like everything else) and not by supply and demand, and that the increased prices were sustained by QE.
http://www.eurotrib.com/story/2015/1/1/195652/1093
That article led me to another by the author, “Iran’s Window of Opportunity,” http://www.atimes.com/atimes/Middle_East/MID-01-221214.html, in which Cook describes what he thinks is a US Saudia Arabia deal circa Jan. 2009 to keep prices high and which only recently collapsed, probably unforeseen by the parties. More interestingly, he proposes a new international trade association that links producers directly with end users based on prepayments for energy credits, bypassing the the financial intermediaries and the commodities traders who manipulate prices. The point, Cook argues, is to transition from “from a market paradigm of “energy-as-a-commodity”, where market participants compete for transaction profits, to a market paradigm of “energy-as-a-service'”, where participants collaborate to maximize shared surplus energy value.”
As Keanu would say, “Whoa.”
In response to a commenter on his Window of Opportunity article, Cook tellingly states:
“There’s no reason why an energy price could not be agreed at a high enough level to throttle demand. It’s then a matter of how the resulting surplus should be shared equitably between these constituencies of end-users – and in particular re-invested in renewable energy and energy savings ”
Steve, I wonder what you think about this proposal. It sounds like it has the purpose/intention of establishing a system for reserving/allocating oil to and for those who are still capable of making some sort of “productive” use for it, or in Cook’s words, are capable of using it to “maximize shared surplus energy value,” because their intended use is sufficiently “productive,” cutting out all us deadbeats who just use it to drive in circles, by ending in large part the ability to acquire energy by simple payment (open to anyone who still has dollars) in favor of direct relationships with producers. Don’t know if that would really work to curtail waste and redirect use to a better long-term purpose (e.g., establishing a Hunger Games world wherein a small Elite still enjoy the good life in a few bubble cities and everyone else goes back to the 17th century), but the proposal is an interesting sign of the times.
Part of the problem with oil price is middlemen, the bulk of the oil problem lies with the end-users.
– If middlemen control the market then the price reductions should have no affect on drillers … middlemen will lose their unearned (rentier) income, but the oilcos should still earn profits from actual sales.
– Sadly, drillers and support have been struggling to earn profits even @ high prices. There is little if any unearned, rentier income; the culprit is high extraction-related costs. Fracking and off-shore mega-projects are inordinately costly.
– Majors are facing bankruptcy which does not suggest price setting power, if oil manipulation works why are companies like Pemex, Chesapeake or OGX in Brazil blowing up?
– Many petro-states themselves are also in terrible shape, this is also suggestive. If oil manipulation worked then why not make good use of it … to save oil producing countries like Mexico, Nigeria or Argentina from ruin?
– It is hard to see how a state with pricing power would suddenly lose it. How would one state overcome the self-interest of all the others? Even the futures’ traders missed the boat, they believed, a) there was/is a shortage (backwardation) and, b) that fuel prices in the future would decline … but only by a few dollars per barrel over the course of 2014.
None of this suggests pricing power or control. At bottom, the customer rules. If the middleman, refiner, speculator, oil trader, oil sheik or Beverly Hillbilly decides to sell his goods for a high price he must find someone who is willing and able to pony up the (borrowed) funds. Otherwise, he’s stuck with a bunch of oil that he cannot sell (he might not even be able to access his oil).
“If middlemen control the market then the price reductions should have no affect on drillers”
I must be missing something. What if the price manipulation was to purposefully finance the marginal oil production at the expense of the consumer – with fingers crossed, that the economy would simply adjust over time? This would be the last ditch effort of Western Modernity to keep itself alive. The KSA is simply a turncoat.
“What if the price manipulation was to purposefully finance the marginal oil production at the expense of the consumer – with fingers crossed, that the economy would simply adjust over time?”
The same is true for every business, this is how debtonomy works. The adjustment is always more credit and inflation … hmmm, that isn’t working right now. Time for another beer … 🙂
Next step will be shut in plays as loans dry up; sorry, no inflation for you. If we weren’t @ Peak oil before we are now. There is very little low-cost crude left, it isn’t that the cheap stuff is overpriced, it’s gone.
The ‘price manipulation’ theme is similar to ‘Blame Saudi Arabia’ version. It’s always someone else’s fault but our own.
As for over-supply: indeed, this is true particularly in North America were extraction is both landlocked and experiences extreme rates of depletion. Wells are exhausted so rapidly that it is uneconomic to install either oil- or gas pipelines to them, it’s more cost-effective to use trucks and deliver crude to rail terminals. Rail and truck shipping is expensive: transport costs have to be subtracted from the price-as-delivered.
Demand is without limit everywhere there is TV. Actual consumption is constrained by credit … otherwise the world would easily consume an additional 7 – 10 million barrels per day or more. These missing barrels are why the world economy has been stumbling since 2008 despite every effort on the parts of drillers, governments, banks, media, etc. It’s also why crude prices have been steady @ over $100/barrel, IMHO, not so much price manipulation.
I had to think about Steve’s theory that peak oil arrived in 1998 quite a while as I had firmly imbeded the 2005 date in my mind when physical production peaked. But when I look back on my own experience it makes a lot of sense.
I owned a small contract metal manufacturing business from 1987 untill 2009 and when I think back on it things really changed around 1998. Before that most of what we did was ,what I will call, usefull stuff such as: food processing equipment, dental tools, computer parts etc. Then gradualy afterword things became more financialized and our customers products tended towards debt financed energy wasters. By about 2004 it was all motor home parts, monster truck bumpers and paint ball guns. Before 1998 customers were well established, paid their bills on time and cared about quality and reliability more than price. After 1998 it was all about price, as companies farmed out to China to prop up the falling margins caused by the growing unaffordability of energy. We were left with customers too flakey too do business overseas, or with unpredictable sales volumes. Business was good from 1998 untill 2001, but it had a bubbly feel to it and when things came back after Greenspan’s tech bubble crash everything was different. Business felt very temporary, like it was built on shifting sands. By 2008 the writing was on the wall and I sold out to my partner before another downturn could gut any equity we had left.
I recall that the “Main Street” economy even in “good” times seemed very anemic starting in 2002, and that was around the time people started financing high-consumption lifestyles by using the equity in their homes as a sort of automatic teller machine and so many jobs were being outsourced to other countries or automated. Also, I recall that in 2004, BushCo had to steal the election in order to win *again* (and they were so blatant about it!). You would think if the economy was doing really well that wouldn’t be necessary.
The other ‘Steve’:
http://srsroccoreport.com/record-global-oil-demand-even-as-the-price-of-oil-declined/record-global-oil-demand-even-as-the-price-of-oil-declined/
This stuff is making my head hurt; time for a home-brew.
I just OFFICIALLY NOMINATED Steve for the Nobel Prize in Economics on the Diner Blog. 🙂
http://www.doomsteaddiner.net/blog/2015/01/11/the-nobel-prize-in-economics-goes-to/
RE
Sweden, not Norway, RE …
I can tell you just quashed my big chance at a Nobel Prize with that faux pas.
I rectified the error and attributed the Nobel Prize to the correct set of Scandinavians. 🙂
Hopefully the Committee did not see the original article before the proofread. LOL.
RE
@RE: You better hope they didn’t see it before that. I know from my experience of living in Minnesota how very rigid those Scandinavians can be! 😀
Crude dives again, on its way toward $40/barrel …
http://www.bloomberg.com/markets/commodities/futures/
“The breakeven oil price, the price level needed to drill a new well, for Divide County is $85 a barrel, according to the state; for Williams, it’s just $37. The difference is due to geology, among other factors.”
http://www.reuters.com/article/2015/01/11/us-northdakota-oil-idUSKBN0KK0IU20150111
Just $9/b till we reach DEFCON 2! Gas here is under $2/g.
Trading at $45.75 now. $13 away from 2008 lows at $32. Amazing.
I take it back … CME just came out with info stating futures/options trading volume has dramatically increased over the past year:
http://thereformedbroker.com/2015/01/13/commodity-trading-explodes/
I suspect the market will re-test the 1998 lows before all is said and done (-$12/barrel). Meanwhile, stocks = market in Zimbabwe during the hyperinflation period. Gold looks better all the time …
Now that there is no QE, where is the money to prop stocks coming from?
As long as the financiers ignore each others’ insolvency they will simply lend increasingly large sums back and forth (until some small child points out the ‘Masters of the Universe’ have no clothes on … ).
Wow that is seriously bad. Re: gold, they may not be able to keep a lid on it the rumors of difficulty in obtaining physical supply at sufficient quantities are true.
Question for you, Steve. I was re-reading Debt-o-nomics Part 2, to try to get a better understanding of your insights, and I ran across this extremely intriguing statement/bombshell near the end, in the discussion of the effects of dollar preference: “The need will be for the US to end the dollar’s convertibility to crude, to go ‘off crude’ as countries went ‘off gold.’ The alternative is for dollars to vanish from circulation and cease to be a medium of exchange.”
Can you elaborate? How does one end dollar convertibility to crude, and who delivers the coup-de-grace?
It’s rhetorical as the only way to go off oil is to de-industrialize. The alternative is depression; the model is the Great Depression.
There aren’t meaningful energy alternatives, either … that would allow business as usual. I doubt if anyone could mine coal, uranium, lime rock, phosphorus, potash, iron or synthesize nitrous oxides without lots of crude oil/natural gas. Drilling for oil requires energy, more all the time. We’re left with some water power … not much to work with. Solar, wind, nuclear, biofuels are simply ways to transform fossil fuels into other, more fashionable forms … BTU stretchers, at best.
Of course getting to that point would take a long time providing the climate disruptions we’ve created allow it.
Ambrose is losing his mind.
http://www.telegraph.co.uk/finance/bank-of-england/11342779/Half-the-world-covets-the-UKs-precious-inflation.html
Usually he only contradicts himself from one post to the next, today he managed to do it right up in the Headline of a single post:
“Half the world covets the UK’s precious inflation
Inflation is now a rare commodity in most of the developed world but the UK’s falling prices are also a tax cut we should all enjoy”
Excuse me? How are the UKs FALLING PRICES evidence of INFLATION?
Some other CHOICE TIDBITS from this article:
“The Bank of England ploughed on with full-blown quantitative easing even through the inflation scare of 2011. That showed courage. Historians will judge this to have been a masterful decision. “
MASTERFUL! hahahahahahahahaha
“It is no great mystery why the world is edging from “lowflation” to deflation. It lies in the structure of globalisation over the last quarter century. Above all it lies in China. “
Forget the Saudis, forget the FSoA State Department, forget the Deep State Conspiracy Charles Hugh Smith blames it all on, it’s the goddamn CHINESE causing all the problems! lol.
Now for a really fun one!
” One has to admire Frankfurt’s QE gang of Mario Draghi, Peter Praet, and Vitor Constancio. They understand the problem perfectly. They have been battling for almost a year to overcome resistance to radical action.
One also has to admire the Bundesbank’s Jens Weidmann for arguing that sovereign QE on a large scale amounts to fiscal union by the backdoor, a constitutional leap without democratic consent. Both sides are right. It is the EMU construct that has led to this impasse.
The Inflationistas and Deflationatos, the Austrians and the Keynesians are ALL RIGHT, and ALL to be ADMIRED here! Ambrose won’t insult anybody! He wants them to take his phone calls! lol.
To close here, the Final Words of Ambrose. They speak for themselves.
” Should that moment ever threaten, the Bank of England will have to turn on the printing press yet again. Next time let us do it differently. Let us use the money to rebuild our crumbling infrastructure, or dust down the old “Chicago Plan”, or simply do the proverbial Helicopter Drop of money until the problem is solved.
It is always possible to defeat deflation if you really mean it, and if you are a sovereign nation. But that argument is for another day. “
WHAT A MAROON!
RE
“The implied production profile would be highly unstable if WTI prices continue to trade around $40 for most of the first half of 2015. For this reason, a modest recovery in prices before mid-year seems more likely than allowed for by the Goldman forecast.”
http://in.reuters.com/article/2015/01/12/shale-output-northdakota-kemp-idINL6N0UR2XA20150112?feedType=RSS&feedName=everything&virtualBrandChannel=11709
Got that?
Productivity beat the Red Queen in lane 2
Consumer demand will return right on cue,
So investors, sit tight
Energy Independence is in sight
The Bakken just has the flu!
🙂
Read The ‘Alchemy of Air’ to really understand what industrialization has done to the world and how it happened. I recommend the first few chapters and the last three if you don’t have time to read the whole thing. This is a very important book, written by Thomas Hager.
I don’t know whether anything could have been done to stop industrialization once you had crude oil and debt based money. My guess is that, if anyone survives what is coming, there will need to be extreme prohibitions against growth, both of economies and population. The first and most critical step is to make usury a crime incurring extreme penalties. Every human activity that tries to grow large and ‘efficient’ will have to be deconstructed by law. I think we are far from that right now. Certainly will not be fashionable!
Ellen, the most draconian punishment for a tycoon is to make him pay his own bills.
What you see in ‘business’ today is panic … (after) the Swiss National Bank pulled the plug on that country’s ongoing support for the euro. Part of the panic is the realization that ‘the public’ can no longer ‘support business’ by lending to it, by putting themselves on the hook for tomorrows’ loans to the wealthy (and those who feel entitled to become wealthy).
The only remedy needed is to make capitalism do what it claims to do, for businesses to operate at a profit and for those which cannot to fail; to do these things honestly, without external subsidies, credit and mis-priced capital. This remedy is underway right now, under everyone’s noses.
The SNB CAPITULATED! 🙂
Now it’s getting interesting!
RE
Working on a New Rant for this one at the moment!
DOOM! The Gift that Keeps on Giving! 🙂
RE
There appears to be an ongoing fuel shortage in PK currently…
http://www.geo.tv/article-172115-Severe-petrol-shortage-across-Punjab-enters-fifth-day-
NEW RANT now UP! SWISSIE CAPITULATION!!
Retitled it. 🙂
RE
I have been wasting fossil fuel for the past week, but it is time for a Bakken update (November 2014):
https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf
110 new wells (fewer than the month before) and fewer barrels per day per well. And so it shall unfold.
It will be interesting to see if the price declines further with cutbacks in output. If this is so then energy deflation will have taken hold: any increase in output would force prices lower (marginal oversupply or ‘fake glut’) while any decrease would also force prices lower (destruction of marginal demand). Once this dynamic emerges the end-game is very close, with all supply side actions having the same recessionary affect on prices. Of course, energy deflation in inevitable, if not during this particular crisis then during the next one.
The ‘unaffordable’ oil will be shut in and what remains will be the leavings … the puny remainder of our inexpensive oil, almost nothing in the US, some in Canada and the Middle East. I am amazed that no other economist has seen this, they keep believing everything is going to get back to normal. It’s like they have all overdosed on barbiturates and have fallen into a trance. Absolutely dumbfounding … Once stock is taken of the inexpensive crude, it will be hoarded. Almost nothing, not even gold — certainly not force — will compel anyone to part with it. The US might be left with something on the order of 20% or less of its current available petroleum supply: what can be had from stripper wells and from worn-out conventional fields. It is absolute certainty there would be very stringent rationing program.
The next step would be a command economy, not necessarily a good- or a bad thing just a reshuffling of the rules.
The entire infrastructure of life in major American cities is designed to make having a car (not to mention a head of full of ego-fantasies and denial) more or less a necessity, so if we were left with our allocation of basic petroleum, yes that would necessitate a major re-ordering of how we do things. But we’re such a nations of morons and adult-children, that you have to wonder how on Earth we would manage it!
A medieval Italian hill-town in an agricultural region might be yr best bet.
America = built all wrong. We could have done it right starting 50 years ago but we let the auto industry call the shots. “Good for business,” they cried. Now … ?
It’s going to be interesting to see how folks cope. Not only does the living infrastructure of the country needs restructuring but this must be done under the lash of global warming and with diminished resources, political chaos and a media-driven urge toward war.
I try to envision what the command structure could possibly be and the process by which it could be instituted. If the US government decided right now to conserve and to ration fuel something like that might work. I used to think that could happen. Now it appears that even admitting to the need to do such a thing would crash the faith-based economic system. The results of that appear to me to be unpredictable. There will be chaos for sure – we don’t know exactly what it will be or how bad or how it will express itself. Chaos is anathema to a command economy that would rely upon consensus about what to do and would have centralized control. They could command the corn to grow but……
I mean, if the USDA commanded me to grow turnips they could give me seeds and maybe some fuel but are they going to truck in a bunch of slaves to do the work? Does anyone think that our leaders are working on a plan to de-industrialize?
One observation (actually an inference because no one can really observe it:) the power of the international banking cartel and its control of supposed sovereign governments is immense and has been so for at least 100 years. It is the intellectual/cultural glue holding the industrial fossil fuel based system together. However, I cannot believe that it will survive the eventual collapse of the bond market. I am not even sure that the top guys really understand the system anymore since their positions are likely inherited rather than merit-based. They may really think that monetary measures will keep working or that a nice war (their likely preferred fiscal solution) will wipe the slate clean and require governments to turn to them again. They may not be bold or smart enough to hire underlings who will tell them the truth – whatever that may be.
When the cartel disintegrates the grab for collateral will begin – we know this will happen. But what will there be worth taking? What would you do with one billion dollars backed by nothing but hope? That is the question. As RE says, what will you do with the oil? Or the gold for that matter.
The Swiss have already admitted that the current regime is untenable and have abandoned a critical phenomenological position: that the euro is a permanent fact-on-the-ground and must be dealt with. This is after the faults of the administrative structure behind the euro have made it — and the ‘progress’ implied by it — impossible. To the point of our discussion, the Swiss have already begun to ‘decline’: they’ve taken (their) money off the table and gone home, they will go their own way.
Now look at how the Swiss organize themselves: they are modest, a democratic republic, somewhat crooked (Swiss banks), prickly, self-reliant, inward-looking, not as dependent upon machines, cars and gadgets as their neighbors. It would seem to me that the Swiss will manage. They will refuse to engage in pointless wars, will keep to their own business, make use of renewable energy as they can and maintain their somewhat boring sense of national identity (no big Muslim influx, for instance).
Americans will run around like their hair is on fire, blame negroes and Jews for everything, get into gun battles with each other, march down the streets singing the Horst Wessel song and otherwise act like idiots. The Eastern Europeans look to do the same thing, the national tendencies of both America and Eastern Europe are overly romantic and melodramatic; w/ the East being tragically subject to repeated conquests. The question mark is Russia, what will it do, will Moscow make more mischief or have a change in course to become more ‘Swiss-like’. Of course, other parts of the world are already coming undone.
The primary economic fallacy is that economies allocate scarcity. Instead, economies manage the costs associated with surpluses onto third parties. No surpluses = big problems, the economies punt, shifting management to coercive power.
My guess is after a period of chaos the US will become an impoverished police state like North Korea. Citizens will be required to grow turnips and eat them, maybe with grass and shoe-leather. The Swiss will eat cheese and potatoes but you will never hear of it, the word ‘Switzerland’ will be some place fantastic like an imaginary land in a fairy tale.
@Steve: It would probably be some homegrown equivalent of The Horst Wessel Song. The English-speaking population of North America will probably always be very xenophobic, so while you may have some ideology justifying racist and authoritarian behavior, you won’t see jack-boots, goose-stepping, or extended-right-arm salutes on Main Street.
“Once stock is taken of the inexpensive crude, it will be hoarded. Almost nothing, not even gold — certainly not force — will compel anyone to part with it. “-SfV
What’s the point in hoarding it? Once the system that burns it crashes, Oil left in the ground is close to worthless. You have to get rid of it as fast as you can at any price you can get for it, that is precisely what the Saudis are doing.
Exactly what purpose will any even moderately easy to extract Oil be used for once the surrounding industrial economy crashes? Cooking food maybe? Burning Corpses? It’s not gonna be used for driving carz around, that is for sure.
The Oil will be sold off in a Final Liquidation Sale, at whatever price they can get for it for as long as the money keeps functioning. Then it will be no more, and we will live without it. Or not.
RE
I agree generally and it appears to me that is what is going on – final liquidation. When you run out of money you sell what you can in order to stay afloat for as long as possible. I think Steve is correct in wondering whether things will stabilize one more time. I am guessing ‘yes’ – maybe.
The final liquidation sale might indeed be underway right now, RE. Selling oil and natural gas below cost is certainly a sale, whether it is the final liquidation is hard to say.
As for why hoard … aside from historical evidence for hoarding of scarce value … ?
https://www.youtube.com/watch?v=Yop62wQH498
Goat cheese, turnips, potatoes, we should be so lucky. Will anyone be allowed to be a peasant? Modernism made fun of peasant life so people would stay where they were needed in the coal mines and the factories but we would probably all be a lot healthier if we ate more roots and tended goats as opposed to cows. However, I really am worried that your command economy will send me a truckload of unhappy office workers with hoes and expect me to teach them how to be peasants. Who will issue the command “Thou shalt de-industrialize?” Not I, said the little red hen.
As for the Swiss – they are in a tough geographic position. Historically they have had to keep their heads down and be useful to their warring neighbors (known as neutrality.) Will they be allowed to pull the plug on the world economy and then sit smugly by nibbling cheese? Maybe not – especially since they no longer keep the rich folks’ money secrets. Clearly they think they can though.
Do you remember the BBC series “Riley Ace of Spies?” Back when I had a TV it was a favorite. I now imagine there are legions of insane Rileys scuttling around planning to take over this and that as the opportunity arises. (He was plotting to take over Russia as I recall.) I think that is what it will look like when people begin to run around like Achilles with their hair on fire. There will be megalomaniac crackpots partout partout. What a spectacle this is and hardly anyone but you is really blogging it!
When will it be time to hock the family jewels (if we have them?)
“As for why hoard … aside from historical evidence for hoarding of scarce value … ? “-SfV
Of course, you HOARD things of Scarce Value, but do you HOARD things which are rapidly LOSING value?
Oil really only holds value in the context of the industrial civilization that uses (wastes) it. It’s only value in an agrarian or H-G culture is as heating fuel, and it’s not extractable anymore once you are in either of those paradigms.
So anyone who still HAS some Oil needs to get rid of it as fast as they can while the Industrial Economy that uses it still values it. This explains the behavior of the Saudis explicitly.
RE
Industrial (un)civilization is not going to vanish overnight. Every attempt is going to be made to keep it going. The physical structure of development is not going to change: America will still be a big country, there will be intense demand for low-horsepower vehicles, for example. What will shift are the rules that govern how the structures are used, these rules are changing now and people will adapt … or else.
We’ve had a long period of spending that is not coming to an end, what follows is a long period of not-spending. Even the ‘Brand X’ economists are correct about this like that proverbial stopped clock: they whine about too little consumption. There are drivers for this: the assault by the over-class against the rest is leading to a class war: cheaper oil suggests that the struggle has been joined, if not in the US but certainly elsewhere in the world. Thrift (hoarding) is the most certain weapon of the non-rich against the rich … who become so by borrowing immense amounts. When the non-rich refuse to spend they are denying the rich and their lenders the necessary repayments. The outcome is ruin for both rich and the banks who (as it always turns out) place their bets on the wrong horse.
Another reason for hoarding is simple human nature, to rely on oneself (one’s own) instead of a faceless and sinister ‘establishment’. Since it is difficult to hoard more than a few gallons of liquid fuel, it is easier to hold onto some medium of exchange: it won’t leak all over the floor or catch on fire. Hoarding money is a way to hoard fuel as well as a way to gain access to it, just as hoarding money was a way to gain- and hold gold in the early 1930s (prior to Roosevelt’s inauguration).
The world is caught in a paradox, maybe two of them simultaneously: at one hand there is the ‘paradox of thrift’ which is deflating economies everywhere. There is also what I call: ‘Schroedinger’s Gas Can’, which is both empty and full at the same time. There is too little fuel relative to overall demand (which is practically infinite). This explains the high price (+$20/barrel historical price). At the same time there is always too much fuel at the margin: cadres of customers in their turn are forced out of the market: for them any price of fuel is too high. What we see now is the working through the different cadres, one after the other, on the way down to those who can actually use fuel and gain a return from it.
Not sure about that timeline. De-industrialization might come over a very short timeline indeed, relative to the time it took to industrialize. Ugo Bardi’s “Seneca Cliff”.
I like that “Schrodinger’s Gas Can” though. I’ll glom it for some use here eventually. 🙂
RE
You’re a disappointment to yr mother, RE! You should be able to come up w/ witticisms without having to pinch them from moi.
Things started to fall apart pretty quickly in the US beginning in 1930-31 after the Great Crash. By the end of 1932 most of the banks in the country had closed w/ very little money in circulation, business activity was greatly reduced. Enter Roosevelt, the banks were recapitalized and dollar depreciated (against gold). However, the public was demanding much more: a restructuring of the relationship b/w tycoons and their customers = New Deal.
In the 1930s the country was possessed of immense resources (along with associated purchasing power). An industrial recovery was practically inevitable, even the war could not prevent it. The problem of defective relations between economic agents was more-or-less solved. The problem now is scanty resources, relationships really don’t matter so much b/c everyone is in the same leaky boat. Even if the denouement is agonizingly slow, the outcome will be permanent.
The only way I can see a command economy successfully implemented is if there is something or some entity to blame the cause on and to convince everyone that the situation is only temporary. People have to believe that they are sacrificing for a common good and that if we do we will eventually come out of it and all get back to getting rich.
If it becomes understood that “its different this time” and that due to converging constraints growth is over and deflation is here to stay, then all hell breaks loose domestically which it sure looks like we are preparing for.
This is exactly why I believe war is absolutely necessary to TPTB. Its infinitely more preferable to fight some outside entity than your own people.
Steve,
Be it due to price, shortage, or rationing, how long untill J6P will no longer be able to fill his SUV with Gas?
When it cones to the Swiss defending their’ country one would do well to look at history. Swiss pike Men and archers were renowned for taking down heavily armored cavalry. There was a hefty demand for Swiss mercenaries until at least the 1690s and despite the pantaloons and other ceremonial junk the Swiss Guards at the Vatican are a very well armed and trained force to be reckoned with. Swiss men are given military training when young and are subject to mobilization until age 55. They keep guns and equipment at hone and can be on the defensive in an amazingly short period of tine.
Regarding ‘final liquidation’ – from a certain perspective, sure. But in general, I disagree.
“At OPEC’s meeting, top exporter Saudi Arabia urged fellow members to combat the growth in supply from competing sources including U.S. shale, which needs relatively high prices to be economic and has been eroding OPEC’s market share.”
http://www.reuters.com/article/2015/01/15/us-opec-oil-idUSKBN0KO14X20150115
Look, you could have said the same thing in ’08. The banking system almost collapsed, oil and the stock market took a nose dive, housing stopped dead in it’s tracks…it looked seriously grim. But did the lights go out? Were the grocery stores empty? Long lines at the gas pump?
Instead, while the middle class was busy filling out SNAP applications on the dashboard of their new homes, Wall Street created a bubble in US domestic energy production. And the band played on for another 6 years. I fully expect the price of oil to find a bottom amidst a slew of layoffs, bankruptcies and mergers while the roadies set up for the encore.
@jb – people borrowed on houses to blow up the housing bubble, then on student loans and on carz. What do you think is the next “want” that people will be happy to fulfill by borrowing? Steve says that customers must borrow to pay the drillers. So what will the collateral be this time and who will be considered credit worthy? As I recall, Steve opines that, when the end is near, the Central Banks will start making unsecured loans. So is that what will happen and will it work for awhile?
@ Ellen,
The banks provided the credit and skimped on the paperwork so that people could borrow to blow the housing bubble. Perhaps the next bubble won’t be in the US? We’re primed and ready for a ‘major break-through’ on storage electricity any day now…. Or, go with something traditional; how about tulips?
Also, what do you do with a billion dollars? How about buy off key military personnel?
Actually, I think that the car loan bubble is going to continue to expand – student loans too and maybe even home loans with little money down. They are giving seven year car loans now and students are still borrowing. If the FHA increases low interest loaning it may be enough to keep things going for awhile but only if the Fed doesn’t raise rates. Car loans are secured by carz, student loans are now guaranteed by the government and FHA loans are also underwritten by the taxpayer basically. Most people are so oriented towards the short term that they don’t really think about the fact that, in seven years, their cars and degrees will probably be worthless.
But, if the Fed has to raise rates I don’t see how the lending can continue. And I think they will be forced to raise rates, don’t you? Maybe some sort of fiscal devices will come into play but how could that happen with this congress?
Ellen, there seems to be some pressure on the shorter end of the yield curve, w/ 3yr and 30yr within a few basis points (fraction of a percent) of each other. The policy end of the yield curve will remain near zero (probably) but a few years out might be inverted.
… that would be a clear recession signal.
Rates should go up … if only to properly represent risk in the credit markets. Right now risk is leaking into the currency (and fuel) markets due to central bank rate repression in the credit markets. As such the central banks have little leverage when things go wrong.
@ Ellen,
The student loan bubble may have already burst, time will tell:
“College enrollment declined by close to half a million (463,000) between 2012 and 2013, marking the second year in a row that a drop of this magnitude has occurred. The cumulative two-year drop of 930,000 was larger than any college enrollment drop before the recent recession,…”
www(dot)census.gov/newsroom/press-releases/2014/cb14-177(dot)html
There are half dozen or so universities that have already cut tuition. I suspect more to follow suit in the years ahead. Maybe the next bubble will be in university bonds?
http://www.theguardian.com/higher-education-network/blog/2014/apr/30/universities-issue-public-bonds-funding-gap
You said: “Most people are so oriented towards the short term that they don’t really think about the fact that, in seven years, their cars and degrees will probably be worthless.”
Agreed. Like Steve says, everyone has been led to believe that the winning lottery ticket of modernity is just around the corner a.k.a. ‘ the sun will come out tomorrow.’ Nobody wants to change course (buy their kids a farm and go medieval instead – actually, I do know someone who did this, 401k and all.) so expectations will remain high, until they can’t. Then we will go kicking and screaming into the open arms of a command and control economy.
Ellen,
Central bank unsecured lending tends to be pretty subtle. They try not to give the game away … the Bank of Japan has been flirting w/ unsecured lending and the run out of yen has been immediate. But a major trading currency like the yen (or euro) doesn’t flop all at once. Even in small countries like Argentina or Belarus death does not come quickly; the agony is prolonged for years. Big countries with ability to gin up their own credit can also change course and buy time. For example, the same Bank of Japan has decided to forgo more easing = counterproductive.
http://www.reuters.com/article/2015/01/19/us-japan-economy-boj-idUSKBN0KS0MO20150119
I seriously doubt anyone in any of the central banks have figured out the connection between easing and the oil price crash. If they tried they got it backward.
“Instead of quickening the pace of asset purchases under QQE again, the BOJ may expand the size of two loan programs aimed at encouraging banks to boost lending and extend their deadline beyond March, sources say.”
What is Qualitative Easing (the extra Q)? Does that mean they collateral worth goes down and the volume of purchases goes up? Clearly I have not been following the Japan story carefully.
Naturally, the quality of collateral diminishes as the best is extracted by the central bank first (just like ‘sweet spots’ in an oil play). When the quality of the remainder is called into question it becomes necessary for the central bank(s) to emphasize it, there is nothing else they can do … The government can create collateral just like a bank can create funds, doing one to generate the other (monetization) becomes a form of unsecured lending. The central bank lends against blatantly defective collateral becomes a trigger for runs out of deposit banks and a flight from the currency. The central banks are basically public-relations firms their goal at present is to manage a ‘walk’ out of banks and a crawl away from the currency to weaken it, not precipitate panic and a crash. They ‘hint’ at unsecured lending and play with words; they are clever but either too much or not enough. In every event, the outcomes are never in doubt.
Right now the Japanese seem content to forgo any new rounds of easing seeing as how the previous rounds have been such outstanding failures.
http://www.reuters.com/article/2015/01/21/us-japan-economy-boj-idUSKBN0KT2ET20150121
Well, Mario Draghi just announced Quantitative Easing With A Slab Of Smelly European Cheese On It, and the Euro is responding about how you would expect. It looks like it’s off to the races!
Yah, and the Chinese announced they are hiking wages for Goobermint workers by 60%. How long does the peg to the Dollar last with that idea?
RE
Once the Euro is worth US$1.10, it’s pretty much on a parity with the dollar. That’s bad news for the Euro. And I’m reasonably certain it will hit that point on Monday after the Reds win the election in Gyroland.
Though actually, at the rate it’s falling right now, that just might happen before I have even finished my breakfast!
With apologies for the OT, I listened to the most recent Radio Ecoshock program this morning and was introduced to Thomas Goreau. Goreau is proposing removing CO2 out of the atmosphere by planting forests and putting the carbon back in the soil. This has other benefits such as reducing the need for FF based fertilizers, restoration of habitat, etc. He goes further by rewarding those who reduce CO2 through planting and penalizing the emitters. This is very similar to Steve’s ‘reward conservation’ approach and Nate Hagen’s ‘natural capital = wealth.’
https://www.youtube.com/watch?v=oTMiii-BRtU&index=33&list=UUyhQvTItE7QkMCC-QnlwbRA
That’s a good video, a good plan, too. A first step would be ‘negotiating’ the removal of palm oil plantations and a moratorium on land-grabbing.
A bit of wishful thinking?
http://takvera.blogspot.com/2013/06/soil-carbon-sequestration-limited-in.html
We have to hope that climate change doesn’t catch the trees by surprise. The people who believe that we face NTE would say that the trees are the least able to withstand rapid warming since they can’t pick up their roots and walk away. One of the funniest all time blogs was at Wits End a couple of years ago and was called “Our Revels Now are Ended.” The blogger had attended the limits conference in PA and had had a dust-up with Orlov. I read a lot of what she wrote and got quite worried about the potential for large trees to deal with global warming. So plantations are not only unjust but unwise. We have to do a lot of hedging when we re-forest. But, because our leaders at all levels are unable to recognize the real threat they make all sorts of awful decisions even when their motivations are honest (sort of.)
For example, Massachusetts is very proud of its record in creating green energy. But here’s the thing. They are fast tracking the permitting of industrial scale, grid-tied solar “farms” – note how they call them “farms” – on large forested tracts in the middle of wildlife preserves. I no longer think that the active generation of solar electricity is green
Our notions of appropriate scale have been so warped by the industrial system and banking that all of our proposed solutions merely make things worse – thus the solutions merge with the problems.
We really are left to do what we can do in our own backyards and neighborhoods. No one can negotiate anything on a scale that will matter. I guess that is not to say that people shouldn’t try if they have the energy. We need to get to a point where humanity is utterly revolted by what is going on. Maybe that could happen fast but I surely don’t see it so long as the corporations control the TVs and everyone is watching. We would have to get pretty lucky. I am looking forward but with with fear to what happens to the Greeks if they actually dare to challenge the European establishment.
Steve – how much of a chance do you think there is that this financial system can limp along for another two years? My sense is that we must stop mining and burning within that time frame or there is no hope at all.
It seems the monetary authorities have exhausted their bag of tricks. They can ease or not ease; there is really nothing else. Banks lend or not lend, borrow or not borrow; this what banks do, all that they do, central banks along with the rest.
The fiscal-side decision makers are frozen on the spot. They cannot offer more to some groups without robbing others: Peter to pay Paul. It is hard for the bosses to even consider offering less to their constituents because their opponents simply offer more and take their jobs. Under the circumstances, the crash outcome seems inevitable with a chorus of fools promising more, more, more.
The will of the public is contradictory, nobody will demand his own death or harm to his own children so that he might get an abstract ‘good’ such as ‘prosperity’ or ‘security’. The public wants more of what industry offers but only if the costs can be hived off onto others. This is why the discussion about policy is so important, we ‘succeed’ industrially because we convince ourselves of a lie; that there are no costs to ourselves, that everything that comes from a factory is free, a product of our incredible cleverness, not the one-time destruction of capital.
These costs are accumulating in the finance ambit right now; that is what the oil price crash ‘means’. It isn’t about oil or drilling or energy companies or even ‘peak oil’, it is about the ongoing failure of finance to meet the drilling industry’s indirect costs: those of the industry’s customers as well as its own. If the GFC is a guide, the first failures occurred in 2007, a bit over a year before Lehman Brothers blew up. It takes some time for a blow to the banking sector to manifest itself as trauma. Consider the annexation of Crimea and the war in Ukraine as the first strike; there will be a pause that lasts about a year or sixteen months … with the crisis emerging full blown @ the end of this summer or during the autumn. That is a reasonable guess, not a hard prediction.
Certainly the system will limp along, but every recession has been accompanied by decrease in greenhouse gases and water pollution, this will be no different. The real question is what sort of system can the bosses cobble together after the recession is fully underway. Right now the various ‘little Keynes’ have had their say and then some: they have misinterpreted Keynes and they have falied. There are no economists with stature offering functional alternatives: they promote more easing, more lending/borrowing with interest rates already as low as they can go; they offer more junk made in China, they demand less ‘regulation’ more mandatory reading of ‘Atlas Shrugged’ …
Global temperatures are hard to predict because much of the atmospheric energy is absorbed by the oceans in two distinct forms: by changing the chemical composition of the water and by way of convection currents within the oceans themselves. Acidification is slow to reverse so energy bound up as carbonates will remain absorbed for a long time (with its own set of consequences). The other binding process is uncertain because nobody now can figure out whether heat in the bottom of the ocean will be released back to the atmosphere quickly or slowly. It may take hundreds or thousands of years (absorbed rapidly, released slowly), no mistake about it there is a lot of new energy added to the oceans in the past 100 years.
Jb – Reasonable concept but way too little way too late.
First off simply making carbon emissions more expensive will only slow them down a little and plantings at this point will only begin to have significant draw down in 5 to 10 years.
We are essentially at 1 degree above base now. Due to the lag in CO2 there is about 1 to 1.3 degrees already in the pipeline and that lag time appears to be shortening, that brings us to over 2c above. It is also documented that when the aerosols in the atmosphere are removed, which is projected to happen with economic collapse, we will have an almost immediate increase of 1 to 1.3 degrees. This brings us up to 3 to 3.5 degrees which is at or above what is the the high range for climate sensitivity triggering runaway climate change. All of this is probable even if we ceased all carbon emissions today.
If we shut down all carbon emissions and most people wander around like Johnny Appleseed planting anything and everything they can think of then we might have a chance. If we are going to talk about it then lets at least lay out the facts.
Or we can all just buy EVs, pay a little extra every month as a carbon emission penalty and plant a garden, problem solved.
@EE – yes, I think it is too late and was always too late. Any movement that tried to stop the industrial machine in its tracks has failed miserably and is mocked starting with Luddites and going right though the environmentalists of today. If you discuss this dilemma with most people today they will just laugh at you. Any movement that gets close to changing things will meet with angry repression.
The thing has got to run itself out and I don’t know how that will happen. Personally, I think it will have to be some sort of a global sudden stop and I am worried that will not happen soon. Yes, that will probably remove aerosols so it is possible that the earth we live on is ruined either way. But no one knows for sure except that the longer the waste goes on the worse it is and every reformist’s solution just ends up making things worse.
No reason not to plant trees and lots of different kinds in the places you can reach without burning fossil fuels or borrowing money but whenever anyone talks about terra praeta on a massive scale I think about the giant industrial machines getting ready to burn up all of the trees to make charcoal. There is a company trying to do just that right now, I think.
Once we stop burning and borrowing then we can see who is left and what we humans can do or whether mother nature will just take over. Right at the moment we can only change our own behavior and wait. So I will skip the EV and plant the garden, I guess.
@JB – have you looked at Geoff Lawton’s permaculture videos? He has one on heating a glass house that is really interesting as a backyard solution.
EE: ‘buy EVs…and plant a garden,’ – You must be joking. Steve said: “we ‘succeed’ industrially because we convince ourselves of a lie;…” Skip the EV, just plant the garden – and your neighbor’s while you’re at it.
Ellen: Lawton – yes, I subscribe to his video emails. Finding time to watch and implement them is the hard part . I’m urban with mature oaks. Last year I planted chinqaupin, paw paw, currants and camellia sinensis. I’ll see what survives the winter and replant / infill plant again this year. I dearly wish I had done this in ’09 (natural capital = wealth). Neighbor called tonight looking for 2 eggs, my hens were happy to oblige.
Steve: “it is about the ongoing failure of finance to meet the drilling industry’s indirect costs…” Thanks for the distillation. (I’m really trying hard not to panic.)
We planted paw paws 6 years ago and last year got the first two fruits. I takes them a long time to bear fruit and they need to be pollinated by flies or by hand. I finally figured out that the flies weren’t doing their thing so I got a very small soft paint brush and a bowl and went out and did them by hand. No so easy to do actually. You can find illustrations on line but they don’t tell you that a single drop of moisture on your brush makes everything sticky. They are really tasty though. Well worth waiting for. I have no idea how to preserve them unless you make jam or freeze.
It probably sounds like I am kidding when I talk about turnips but I really think that root veggies are going to be important. They store well and they are very healthy and not too bad tasting with butter. Chickens love them too. If you run out of butter you can use coconut oil that is healthier anyway and it keeps forever so you can stock up.
I gave up panic awhile ago partly because I am more worried that the industrial system won’t collapse than that it will. Plus a little part of me believes that Michael Hudson is correct when he says that the parasitical financial system has conned us into believing that we will die without it. Maybe we will or maybe we will find some other better way to organize society. In any case, it has to go.
Looks like the Greeks may find out first. Election results sound promising so far…..
It’s a Hobson’s Choice: either collapse sooner to increase long-term chances of avoiding human extinction or collapse later to decrease chances of avoiding extinction.
Oil rigs down year over year. How long before US monthly production is down year over year? May 2015 v May 2014?
Output per drilling rig has been falling for awhile:
http://peakoilbarrel.com/rig-count-drilling-less-oil/
Fewer rigs + declining output per rig = ‘difficult’ outcome. Drillers have been able to tread water but those days are coming to an end. I suspect we’ll start seeing declines by the beginning of Summer.
Speaking of growing stuff (I’m too old to start farming so I will likely starve with the rest of the city folk) what I have been able to grow (besides houseplants) are yams and ordinary potatoes. Most root plants will tolerate poor soils as long as they receive enough water. Ordinary potatoes like cooler temperatures, yams like it hot, potatoes want to be a bit drier, yams a bit more wetter.
I suspect you may be referring to orange sweet potatoes when you refer to “yams”:
http://www.ncsweetpotatoes.com/sweet-potatoes-101/difference-between-yam-and-sweet-potato/
And the common white potato did indeed make it possible for the Irish people to thrive on that boggy little maritime island in a way that wouldn’t have been possible otherwise. But when a blight afflicted the potato crop, then Katy bar the door! Of course the soil of Ireland was producing other foods, but the Irish were allowed to starve by the Anglo landlords because those other foods were intended for export; and that’s when the Irish people realized they were better off being their own country than being a colony of the English crown.
Re: living on roots – no idea how it will work out but so long as old people have social security payments coming in (or some cash) and are willing to live in a rural setting with their own kids or other people’s kids they can offer something in exchange for the potatoes. Isn’t that what Sharon Astyck did? She got her grandparents to buy a farm and then lived with them taking care of them till they died.
Frankly, if our society actually collapses to the point that competent elderly middle class people are starving in Virginia, the belly of the beast, as you describe it, all bets are off.
(Let us know where to send the turnips if you get peckish.)
No problem I appreciate it! I prefer potatoes and beans to turnips, however.
🙂
Crude down to $44 Handle! Dow down 400 Points!
Like the Good Old Days of 2008!
RE
Wheels are coming off.
Rates cannot fall … oh well.
I had a random thought: No more new oil wells drilled in the world by 1/1/30. Is that a possibility to anyone?
No new wells by 1/1/30 sounds plausible:
“About the year 2030, population peaks and begins to decrease as the death rate is driven upward by lack of food and health services.”
http://www.donellameadows.org/archives/a-synopsis-limits-to-growth-the-30-year-update/
Even if we end up with a command and control economy where all abandoned parking lots (there will be plenty) are dug up and turned into permaculture food forests, it will take years before some of the trees and perennials bear fruit. Like Ellen said, her paw paws took 6 years. Think of what happens to the social fabric in the meantime.
It’s beginning to sound like Greece might be the first country to ‘go medieval.’ I’m hoping Tsipras will come clean and tell the Greeks to start digging.
Hello Steve,
Do you think that the FED will raise interest rates during the next months?
They insist that the economy is doing great and the moment for take off (interest rate hike) is approaching. Do you think that they are finally going to do it?
How do you think this would impact the global economy?
Best Regards,
The Fed is conflicted. It needs to raise rates so it can cut them later, during a crisis. At the same time, the market likes the reassurance that the central bank ‘has its back’ and can lend on demand. Big business likes low interest rates so it borrow and buy its own stock shares.
Yellen appears sensitive to ‘bubble’ talk. The real problem w/ the Fed is a shortage of good collateral to buy/lend against; this works against easing. The Fed can lend but will hint at making unsecured loans by doing so. I think they will hold off on that for the moment because this is very risky with unforeseeable outcomes. To forestall a bank run Yellen does not want to trigger one.
Yellen is also trapped by the current ‘oil glut’ meme. The ‘low prices are good for business’ idea is hard to abandon, any change in policy right now is risky. As we can see there are prices that can be too low, at the same time, any change is likely to force prices lower.
Risks in the economy cannot emerge in interest rates b/c of deflation + central bankers are working hard to force rates down and cap them. This means risks emerge where markets cannot be easily ‘controlled’ for more than the shortest periods such as commodities and currencies. Most of your rate-related risk is now being priced into currency pairs or the oil market where each currency has a different ‘swap rate’ for fuel.
With the banks it is damned if you do, damned if you don’t. Best to run around in circles and pretend … I look for more talk about raising rates but that never actually occurring.