Oil closed above $81 today, with currency splits suggesting much higher price in the offing.
Oil is “too cheap” and should rise to $88 a barrel in coming months after the dollar’s decline against the euro, a DekaBank study suggests.
The CHART OF THE DAY shows how oil prices, in yellow, have moved in relation to the euro-dollar exchange rate, in blue. DekaBank says that at an exchange rate of $1.50, oil should cost $88 a barrel. The euro rose to $1.50 yesterday, a 14-month high, while oil cost $80 per barrel, the most in 12 months.
“Oil is too cheap at the moment,” said Christian Melzer, a Frankfurt-based foreign exchange analyst at DekaBank, which manages more than $240 billion in assets. The study shows that over the last 10 years “oil prices have adjusted to changes in the euro-dollar exchange rate,” he said.
The euro has gained 20 percent against the dollar since mid-February. In the same period, the oil price has surged 125 percent.
Trying to figure out what will happen next is difficult. One way to start is to look at finance and consider it as separate from the physical economy that is driven by oil. The oil market is where finance and the physical intersect.
Since finance creates its own liquidity by lending it into existence, there is no shortage of funds available right now to propel oil prices much higher. It matters little that the finance economy is creating more dollars than euros, they are all more or less the same thing. The cross- currency trade simply adds instability. The outcome of the three or more bodies interacting is likely to be more volatility.
The most interesting question is when will finance make the quantum move from passing interest rate derivatives back and forth to buying into the oil market with desperate fury? This could be addressed through a regression, but the question is really one of minds and opinion.
This is the NYMEX monthly chart and not quite up to date.
Will speculators believe that oil will be one of the few safe places to ‘cash out’ and is now the time for that belief to take hold? Open interest is very high, much more so than any year other than the past two. There are many speculators, already.
Some believe the economy is recovering and demand for fuel will increase.
Some believe that spare capacity is overstated and price pressures will result from inelastic demand. The reason for this capacity shortfall being the lack of forward investment in production, both during the credit crisis as well as longer term.
Or, the banking interests might feel the dollar/oil relationship would allow them to force a dollar devaluation that would not be available in any other dollar/currency or even any dollar/commodity trade. This would imply a vast misunderstanding of how oil has effected the current economic unwinding so far and what the outcome of this devaluation would be.
Since it is the least understood, it is probably what will be attempted. Welcome to the ironic universe! Where the outcome that causes the greatest harm to the greatest number is the most likely.
Behind these options lies herding behavior, institutionalized to the point of ossification within the current market- making schemes of finance. All take the same sides of all trades and do so repeatedly with the same sorts of (cataclysmic) results.
Chances are oil price will charge past $90 and rest for awhile in $95- $100 area, looking thence to retest the $147 high of last summer.
The American – and world – commercial/industrial enterprise has taken root and flowered with oil under $35 a barrel in both real and nominal price.
Petroleum does not exist outside of all that has been created to support its use. Oil is not simply an input, it is a platform. Whatever you see about you – sprawl, highways, parking; the wells, tankers, refineries and pipelines, the shopping, the incessant and pointless travel, the infrastructure and the means of its use – represents the sunk system or platform costs of petroleum. Each small rise in the cost of oil strands more of the platform, rendering claims against it other than the ongoing oil cost more difficult to pay. Oil @ $80 a barrel does not simply represent an upfront claim on GDP, it amplifies all the other claims against that part of GDP that enables petroleum use. At a certain price level – over $35 a barrel – some of the competing claims begin to be crowded out.
In the US one of these claims has been (expensive) labor. Labor has been the source of ‘hard’ capital- at yield and customers for goods. Removing expensive labor has been a large contributor to our current calamity. Yet, the sum- cost of petroleum has made the expensive labor unprofitable for businesses to employ.
So, it’s off to China with you, Mr Expensive Labor Man, where wage slaves along with a smaller petro- platform ‘subsidise’ American business profits … at least they did for a little while.
Max Beckman; Frau mit KerzeIlargi has an almost nostalgic take on the ongoing:
I have mentioned a number of times in the past that the economic system we grew up in is finished. It’s not the sort of thing that I have necessarily wanted to harp on too much and too often, because I realize that most people simply won’t understand what I mean. But I think today might be a good time to re-visit the topic. If only because my statement is starting to find more proponents.
There’s Joe Bageant, who says in Raising up dead horses :
The fiesta is over, the economy as we knew it is dead.
And adds this, as funny as it is true:
[Obama’s] economic team of free market billionaires and financial hotwires includes most of those who helped Bill Clinton sell the theory that Americans didn’t need jobs. Actual labor, if you will remember, was for Asian sweatshops and Latin maquiladoras.
We, as a nation one third of whose population is functionally illiterate, were going to transmute ourselves into an information and transactional economy.
Ain’t gonna sweat no mo’ no mo’ — just drink wine and sing about Jesus all day.
As well as:
The sharks are still running the only game in town and they have never had it better. To be sure, with the economic collapse some of the financial lords won’t pile quite up as many millions this year. Others will however have a record year. All are still squatting in the tall cotton.
Paul Farrell at Marketwatch has this take: Death of the ‘Soul of Capitalism’:America has lost its soul and collapse is inevitable.
Get it? The engine driving the great “American Economic Empire” for 233 years will collapse, a total disaster, a destiny we created.
“Wall Street America” went over to the dark side, got mega-greedy and took control of “Washington America.” Their spoils of war included bailouts, bankruptcies, stimulus, nationalizations and $23.7 trillion new debt off-loaded to the Treasury, Fed and American people. Who’s in power? Irrelevant. The “happy conspiracy” controls both parties, writes the laws to suit its needs, with absolute control of America’s fiscal and monetary policies.
Even Ron Paul says that:The [monetary] system will not be revived. We have to devise a new system
But Ron Paul makes some twisted turns in his reasoning. Which, through no intent of his own, point to where the real problems lie. Paul claims that if no banks or other corporations were bailed out last year, “we could get back on our feet again” by now.
“Yes, there would have been a lot of bankruptcies, but it would all be over now; we’d be going back to work again”.
And that is very far from the truth.
(As an aside, I was thinking earlier that the government’s implicit permission for Wells Fargo to present crooked and/or incomplete data is a subject that should be be put before the Supreme Court. Does the US government, from a legal point of view, have the right to endanger the financial welfare of its citizens by letting corporations omit data from their financial statements? I remembered that because I think Ron Paul’s Audit the Fed initiative badly needs to go the same route: Ask the Supreme Court if Congress has the legal status to audit the Fed, and until you have the answer, stop talking about it.)
Back to where Paul misses the truth about the end of the economic system. Sure, not baling out the broke banks would have been a start. It would, however, not have solved the problem, not even close. The libertarian class, of which Paul poses as a great defender, and to which Mike Shedlock is a proud subscriber, claims that the issue is not capitalism or the free market. (After all, these are their deities.) For them the trouble all starts -and ends- with government and its rules and regulations.
But that’s precisely where the issue gets all mixed up. For one, the bail-outs are not the beginning of the sorrowful saga. And we don’t need to, though we could, return to the 1913 establishing of the Fed, or the 1933-1971 steps that took the US away from gold. There is enough in the last ten years to make a solid point.
Allowing investment banks and securities firms access to taxpayer deposits, ref: the 1999 Glass-Steagall repeal (Gramm-Leach-Bliley Act), and liberating the derivatives trade, ref: the 2000 Commodity Futures Modernization Act, are the two pieces of law that directly led to a situation in which banks were allowed both to 1) become as big as they are now (too big to fail) and 2) to leverage their bets as much as they have (which wiped out their capital).
And you don’t really have to be all that smart to realize that both acts are de-regulatory, and made the markets more, not less, free. Now look around you and tell me what you see 10 years later. Not what the likes of Shedlock and Ron Paul envisioned, I’ll bet.
Ilargi doesn’t even get to James Galbraith. Here’s (quoted) Joe Bageant:
When Barack Obama took office it seemed to some of us that his first job was to get the national silverware out of the pawn shop. Or at least maintain the world’s confidence that it was possible for us to get out of debt. America is dead broke, the easy credit, phantom “growth” economy has been exposed for what it was. A credit scam. Even Hillary Clinton and Obama’s best efforts have not coaxed much more dough out of foreign friends. But at least we again have a few friends abroad.
So now we must jackleg ourselves back into something resembling a productive activity. No matter how you cut it, things will not be as much fun as shopping and speculative “investing” were.
The fiesta is over, the economy as we knew it is dead.
The national money shamans have danced around the carcass of our dead horse economy, chanted the recovery chant and burned fiat currency like Indian sage, enshrouding the carcass in the sacred smoke of burning cash. And indeed, they have managed to prop up the carcass to appear life-like from a distance, if you squint through the smoke just right. But it still stinks here from the inside. Clearly at some point we must find a new horse to ride, and sure as god made little green apples one is broaching the horizon. And it looks exactly like the old horse.
Here’s Gail Tverberg talking about collapse, that being on the mind along with credit overhangs;
It seems to me that a “fast crash” occurs in steps, perhaps over a 20 year or more period. It is likely to be more closely tied to a decline in credit, international finance, and international trade than to geological decline. Peak oil is very closely tied to peak credit, and it is the lack of credit that start interfering with our current system.
The issue is that we live in a highly networked system. Once one part of that system starts to unwind (because of lack of credit, or lack of investment due to lack of credit), then other parts stop working as well. We are likely to find it more and more difficult to obtain imports of all types, including replacement parts for cars, electrical transmission, and oil production. Demand may drop way back as well–but because of a lack of credit.
And so it goes …
Collapse, like gold and dollar decline is a crowded trade, best to stay clear. The debt excess is irrelevant and meaningful only to finance. ‘Financialism’, not capitalism is ending. When finance – which provided the service of marshaling private capital for ambitious public and private purposes – exits, it will take its overhang of pointless and useless debt with it. There is no way any of finance’s claims against the physical world – or its inhabitants – can be perfected. The greatest amount of all the debt is banks lending back and forth to each other to create balance sheet entries. Much of the debt is old- rolled over and over; its point long forgotten.
Finance can raise up Lazarus’s oil price and then watch Lazarus himself – the economy – fall back into his coffin. Finance’s power is simply to issue claims, it requires public participation – acceptance of the claims – to make them meaningful.
The greater the amount of debt created, the less relevant to anything real it becomes. The more impoverished and plentiful the debtors become the more pointless claims against them become.
The trillions in unfunded mandates will simply not be met, promises will be unfulfilled. People will fend for themselves rather than cashing government welfare checks, which simply won’t be sent; dividends will not be paid, pensions will disappear, balances due and debits will not be tendered. The banks will close and people will lose some money, but the bank- money will be of little worth so that the losses will be small.
I think the idea of ‘debt leading to collapse’ is a misunderstanding of how American ‘Kulture’ works. If something is annoying or antagonistic – a government agency, Supreme Court, investment bankers, disco, Richard Nixon – there is no violent revolution or other grand gesture; upheaval or distress raised against it in the streets, the issue is simply ignored. The problem’s particular internal dynamic renders itself irrelevant.
Collapse implies a form or structure against which disorganization takes place. Irrelevance dissolves structure, there are no rules because participants refuse to acknowledge them.
Nixon’s Watergate made a splash in the newspapers and in the Federal government ambit … and people outside of Washington stopped paying attention to the government.
The government became irrelevant – where it mostly remains to this day. Nixon was the precursor to Ronald Reagan and Newt, ‘political gridlock’, hyper- partisanship and ‘rule by lobbyist’. Government has very little traction in most peoples’ lives. Their interactions take place at tax time and during retirement. People simply ignore what the governments tell them to do.
The massive debt is likewise irrelevant; there is no more care whether a person owes $500,000 to a bank on a house, thence to a second bank, then a ‘servicer’, then many investors overseas, etc.? The tenant squats in the house, he defies the ‘owners’ (lenders) to remove him which they won’t because the ‘loss’ shows up on a ‘book’ somewhere, all of which become less meaningful as more and more squatters take over more and more houses, or take land and build their own houses as they please.
North America becomes more like South America, poor, semi- peaceful and disorganized, where people take over pieces of land and create whole communities, such as the favelas in Rio. Nobody has any title to any of that land, its ownership is perfected by possession. Possession is maintained by greater force; the police do not enter the favelas. The land records are incomplete or do not exist. At some point, new claims emerge which are more congruent with reality as it exists on the ground, rather than in the conceits of financiers.
I recall driving with a friend in Cuenca, Ecuador looking at all the new houses built in the main public park running through the middle of town. It would be as if some persons built some houses in the middle of Central Park.
Who was there to stop them?
The great debts are owed to other massive debtors in circular fashion, the end is to create ‘liquidity’ and nothing else; there is no purpose to it. The debt/liquidity is created in one building and destroyed in another building across the street. It is only those debts represented by the claims can be perfected will be made to stand. The rest will simply evaporate.
The idea of collapse represents rigidity in a system that maintains the inertia of structure even when the purpose of the structure vanishes.
Who will perfect the claims? China just gave several of the ‘Mega- Banks’ the stiff middle finger over oil price hedging – derivatives contracts. This is the wave of the future. How does a (hated, loathed and despised within any given community) banker remove a (heavily- armed) squatter from a property he covets. How can a lender perfect its claim when the chain of possession is hopelessly muddled as inescapable outcome of the lender’s own actions? It cannot, and so the lender fails and good riddance.
Ipso facto, credit collapse means the end of what is irrelevant to most of us, the end of debts and the end of credit. Still the oil problem remains, with the (relative) value inexorably increasing.
Welcome to the ironic universe.