Energy and other commodities markets are ‘out of control’ (Bloomberg). Occam’s Razor: people are broke and cannot afford high prices.

Indexes

INDEX NAME	VALUE	CHANGE	TIME
UBS Bloomberg CMCI	1,455.05	-14.34	11:43
S&P GSCI	585.62	-5.38	10/03
RJ/CRB Commodity	294.61	-1.77	11:32
Rogers Intl	3,407.87	-36.60	11:43

Energy

The West is going to find out the hard way what happens when the bulk of our oil supply costs too much to bring to the marketplace. There are no large reservoirs of $20 – $40 oil that are waiting to be tapped. The world’s cheap oil is gone, there is some moderately priced crude available but ‘new crude’ is deep sea or ‘difficult’. This new crude takes money and energy to bring to the market, money/energy that simply isn’t there.

“Oh, they’ll just print the money!”

‘Printing’ money does not create anything new in a meaningful sense. It only shifts costs around, from one entity that cannot pay to another entity that also cannot pay. Our crisis is about the (in)ability to pay: if any could, they would and there would be no crisis. Entities cannot pay because fuel costs are too high, welcome to the vicious cycle.

Oil prices are high and people have gone broke paying them. When people are broke it doesn’t matter to them whether there is any oil or not, or what oil costs.

The false hope is that an excess of cheap oil exists now in some secret place waiting to be diverted to the production of the expensive variety. Another fundamental misunderstanding is the failure to grasp the extreme vulnerability of business- and labor profits. Labor is business’ customers, labor profits (wages) are business’ revenues. Profits and wages are matters of the smallest percentages. Very modest increases in costs undermine profits and wages, Absent revenue and profits for more than shortest periods enterprises capsize.

Only governments can sustain losses indefinitely … Eurozone administrators, are you paying attention?

Businesses within the physical economy have been teetering at the edge of profitability for four years and more. Note the real estate industry which has been on the ropes since 2007. Businesses cannot afford the pricey oil, unfortunately, this the only kind of oil left on the markets. Even at lower prices, oil is very costly because revenue and profits decline faster than do the prices of oil. If in the end, high prices put a company out of business, a decline in prices won’t magically put the company back into business.

Profits are dying, be afraid!

Nominal price does not matter: changing the price of a barrel of oil by manipulating the so-called ‘value’ of money changes the ability to pay for that barrel of oil at the same time. Return on use of the barrel not changes in money determines the ability to pay and nothing else.

It’s pleasant — and productive — to keep warm in the dead of an icy winter but is is necessary to refrigerate the sand of a Dubai beach? Where is the return?

Current approaches to economics are faulty.

In 1932 Professor (now Lord) Robbins published the famous essay in which he describes economics as the subject that deals with the allocation of scarce means between alternative uses. No doubt this was the expression of a long tradition but the date of publication was unlucky. By the time the book came out there were three million workers unemployed in Great Britain and the statistical measure of GNP in the USA had recently fallen to half of its former level. It was just a coincidence that the book appeared when means for any end at all had rarely been less scarce.

Robbins isn’t just ‘some dude’, he rationalized economics as a science, his ‘allocation of scarce means’ is economic dogma. Every serious economist from Hayek to Samuelson pays homage to Robbins as they do to Adam Smith. The problem is, Robbins’ understanding is backwards.

Economics is the management of costs associated with surpluses, the shifting of costs away from the aggregators onto others. Economies ‘are’ cost-shifting entities, rationalizing the cost shifting process is what economists do!

Surpluses are the property ‘innovators’ and ‘entrepreneurs’ with the costs directed onto customers, the ‘commons’ or future generations. Surplus/profits for the wealthy are borrowed by owners, customers are given the burden of debt- retirement and service costs. This is the reason for credit systems. Economics has nothing to do with scarcity outside the artificial scarcities created as surplus opportunities or sinks for surplus-related costs. Real scarcity does not allow allocation ‘solutions’. Those subjected to scarcity are left with empty bags, and blunt policy instruments such as physical rationing.

The Robbins’ approach to economics is wealth-serving propaganda. This is because these costs in a ‘properly functioning economy’ are never borne by those who incur them.

The world is immersed in a shortage right now. The economists are having none of it. One would expect economists to be all over each other with brilliant allocation ‘solutions’. Instead is professional nonsense: denial, stimulus and austerity. Best evidence is that stimulus hasn’t worked and austerity is inevitable. Both economics and economists are useless.

Economics cannot manage shortages, the tools to do so do not exist because they have never had to. Our ‘progress’-derived shortage conditions are unprecedented, we have never before had machines powerful enough to create planetary-scale shortages. For the span of history, humans have been immersed in surpluses, we presume nature’s bounty because nature has always been bountiful. Our choices have been between great surplus and greatest surpluses. It is unsurprising that energy shortages do not gain much attention. Past shortages have all proven to be ‘false alarms’.

It really IS different this time!

Flight giant American Airlines circles the drain: not a word about energy or fuel costs:

Pilots are usually the focus for airline-industry labor agreements, helping set the stage for other accords. Negotiations with American’s three major work groups are so bogged down that federal mediators are no longer participating.

Unions for the pilots, flight attendants and ground workers want to recoup at least part of the $1.6 billion in annual concessions made to avert bankruptcy in 2003, while American says it has an $800 million-a-year labor-cost disadvantage to rivals that reorganized in court in the past decade.

Analysts’ Upgrades

AMR isn’t stoking any Chapter 11 concerns, according to a report yesterday from Daniel McKenzie, a Rodman & Renshaw analyst in Chicago. He raised his rating on the stock to “market outperform” from “market perform,” citing the plunge in the shares and no sign of a bid for court protection.

Avondale’s Robert McAdoo, who is based in Prairie Village, Kansas, raised his rating on AMR to “market perform” from “underperform,” saying in a report today that the company “should have no trouble meeting its obligations” even with a projected loss of $1.06 billion this year. Capstone’s Steve Wilder in New York raised his rating to “buy” from “hold.”

David Swierenga, a former chief economist at the Air Transport Association trade group who now runs consultant AeroEcon in Round Rock, Texas, also suggested that yesterday’s selling went too far.

“There is nothing in the fundamentals that singles out American right now,” Swierenga said in an interview.

Nothing in the fundamentals! You’ve got to be kidding! The airline customers are going broke, they cannot afford air travel yet the airlines must digest still-exorbitant energy costs. The airlines seek to survive by cutting wages and pensions as the only way for them to save fuel is to stop flying. Better to blame American Airlines’ pilots for intransigence rather than fuel guzzling that is integral to the industry.

The outcome of the current ‘finance crisis’ will be airlines conserving fuel. In fact, the way to characterize bankruptcy in America and among its imitators is to use the term ‘conserving fuel’.

The housing industry’ is ‘conserving fuel’. With fuel-sucking airlines and real estate ‘conserving’, it is no wonder fuel prices are declining. Once fuel becomes cheap again, it will be on account of the increased number of business entities ‘conserving fuel’. ‘Denial America’s analysts and economists continue to ignore this dynamic, hoping it goes away before anyone notices.

Also circling the drain is the so-called Eurozone. Plus- one-hundred dollar per barrel crude oil has pretty much ripped the intestines out of the EU. What’s left is the decent burial, if the participants can afford it. Right now it doesn’t look good.

the post-mortems will not likely mention energy costs. Europe’s American Dream will die without anyone knowing why!