Precious and Industrial Metals

 

After the shock the prices decline as credit is adversely effected. High prices are their own cure as the less capable purchasers are excluded from the market. This is the consequence of competition for the marginal funds between fuel users and energy suppliers. The drillers’ victory is the ruin of everyone else, ultimately the drillers as well.

What happens when the credit dried up can be seen in Turkey. Countries import credit in one form or another, either as investment ‘capital’ by way of the dollar carry- or from mercantile trade. The capital is then used to gain petroleum. A country with its own oil supplies can pay with its own credit in its own currency but imports must be paid for with some form of hard currency: dollars, euros, yen or pounds-sterling …

 

 

Figure 2: Energy maps from Mazama Science: Turkey;s energy profile looks just like its neighbor, Greece. It has almost nothing in the way of native fuel supplies, the country must borrow to finance needed fuel imports. It has been able to do so with short term dollar- and euro loans which have recently become increasingly costly. The reason of course, is the absence of return on the ‘use’ of the fuel in Turkey and elsewhere. Retiring loans requires continual rounds of replacement loans. These new loans have become difficult to gain.

With rates set to rise in America and Europe, credit flees away from Turkey which is now deemed to be ‘risky’. Rather, Turkey is ‘modern’ even as it cannot afford to be modern. The outcome at Turkey’s feet is ‘conservation by other means’ in this case, the onrushing bankruptcy of that country. Look for Turkey’s energy consumption to decline as credit evaporates.

Turkey’s rush to modernize has meant the flooding of the country with millions of useless, energy-sucking cars as well as the associated infrastructure. All these things required credit to import, so does the fuel needed to run the cars. As with the hapless PIIGS, there is little the Turks have to offer in exchange for their imports other than the need for more borrowing tomorrow, thereby providing origination fees to financiers. Credit is constrained, there is a contest for loans, the bankers look elsewhere and Turkey is stranded along with its still-born modernity.

As is often the case, the country has seen violence in the streets as the promised prosperity is deferred. Turkish unemployment — particularly for youths — is very high with no end in sight. The current national government is under severe pressure; as with the Greeks, Italians, Irish and others, the next step is replacement with a technocrat regime aligned with one giant New York City bank or another and the slide into irrelevance and ruin.

 

 

Figure 3: Thailand’s energy import imbalance; its runaway energy consumption is funded with short-term dollar loans gained by way of the interest rate differential and the dollar carry trade. All of this falls apart with increases in debt and rising interest rates; Thailand falls into recession.

As with the Greeks, the Thais believed that progress is fetishes as seen on TV, items that Western industry was more than eager to provide. Western finance was also eager to provide financing: the outcome is a Thailand filled with useless cars that do not offer a return for the hapless car-users. Cheap Thai labor toiling is sweatshops does not provide the return needed to offset the cost of imported fuel.

What keeps Thailand from total collapse is the country’s organic fuel supply that is depleting. Once the fuel is gone, so will be Thailand’s ‘progress’. Meanwhile, the Thai government is under severe strain as the progress-deprived citizenry demands more … or else!

 

 

Figure 4: India’s fuel budget looks little different from the others: hopeless. India grows its human population along with its population of fuel-greedy cars … without restraint. The country’s galloping fuel consumption is paid for with funds flowing from its overseas’ trading partners. As long as US interest rates remained low, funds flowed toward India which has used them to finance its imports, both fuel and bullion. Now, credit is a problem: the tide of overseas funds has reversed leaving the rupee to fall sharply in price. This has led the Indians to import gold and abandon the rupee; the Indian establishment has taken aim at the gold when it would make more sense to take aim at the cars, instead.

India is less vulnerable to an outright energy shortage due to its domestic petroleum reserves, yet the country shows no sign of any effort other than that to exhaust its own fuel supply as fast as possible.

 

 

Figure 5: Different continent, same sad story. Ironically, analysts hold out the hope that Brazil will become a major oil producer and propel economic expansions in other countries. What it looks like is that Brazil’s production has peaked and will enter terminal decline … with deep-water offshore production barely able to keep pace with depletion elsewhere in Brazil. Meanwhile, consumption is galloping ahead as the country ‘modernizes’: not only is Brazil a major importer of automobiles but also a manufacturer. Nobody seems to recognize that the automobiles are problem, that there is little in the way of return for their use except as agricultural tractors, delivery trucks and construction equipment; that fuel demand unaffordable waste.

Both India and Brazil attract capital flows with high interest rates. This supports their currencies but increased borrowing costs are a form of rationing. At the same time, the higher cost of credit is itself inflationary, the countries face a double-whammy.

The expectation is that very high fuel prices will ration consumption. Fuel prices would increase to $150 – $200/barrel. The question never examined is how consumers are expected to come up with the needed credit to meet these very high prices.

– If prices are the means of rationing then prices must decline when the rationing process takes effect. Otherwise, the prices must continue to rise! However, because a price decline occurs does not mean that the new price is affordable. The same forces that make the highest price unaffordable are still in effect. The ability to meet the new price is diminished, this is the ‘cost’ extracted by the rationing process. This cost increases, the fuel price must continue to decline even as it is always ‘too high’.

Even @ $5/barrel, there are some excluded from the markets because that price is unaffordable; what matters is the increase-decrease of this group of excludeds.

– Generally, the demand for fuel has to be considered infinite; it exists everywhere in the world there is the TV and paper money. With the TV comes the advertising, that is: advertising = demand. It is nonsense to assume that demand can be destroyed or that it shrinks of its own accord. Any and all effects on demand are exogenous … just as demand is a creation of marketing, demand is destroyed only when the marketing itself is annihilated as during a war. This is a problem as the demand under ordinary circumstances will exist long after the means to meet it vanishes. Even if the means to satisfy demand is gone, the demand itself remains like a rat lurking hungrily in the hole, waiting for some- or any means to come to hand.

– Consumption of fuel is credit-dependent in every instance. If there is insufficient credit or it is rationed, consumption is diminished. Otherwise, consumption is inflexible. Right now, in the margins of the world, credit is being rationed.

– Very low interest rates along with asset-price ‘bubbles’, off-shoring jobs and allowing inflows of cheap, immigrant labor, the euro and its accompanying fiscal regime are all energy price hedges, all have failed or are failing. This is because the fuel ‘asset’ is destroyed by way of its use. As has been pointed out previously, with fuel, the road between worthless and worthless is very short: worthless in the ground, worthless as a gas in the atmosphere. This self-annihilating aspect of our way of life is unexamined by other so-called ‘economists’.

– The credit system is breaking down in countries dependent on external capital (credit) flows. Brazil, Thailand and India all depend on dollar credit inflows from Wall Street by way of carry trades. Blame is fixed on the US central bank and ‘tapering’ however, this is only partially true. Central banks cannot create new money only fix- or manipulate the price of certain assets. However, the central bank cannot oppose the markets for more than a modest period of time, after all, it is simply a part of the greater lending whole. Because of recession, because of very high and increasing real fuel prices, the demand of credit is diminished, there is deleveraging and a generalized shrinkage of private sector balance sheets (Keen). As the private sector returns to lending and chases asset returns, then countries such as Brazil must compete for funds which indicates higher borrowing costs. As has been pointed out here over and over, the cost of credit + the cost of fuel have become unaffordable. In 2014 as has been the case since 1998, the effect of those costs together will be felt more heavily around the world.