(Re-)Covering Oil and War
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Russell Lee Tracy, California. Tank truck delivering gasoline to a filling station 1942 The first thing that popped into our minds on Tuesday when WTI
[See the full post at: (Re-)Covering Oil and War]Ilargi,
I believe you are correct. This plunging oil price is a clear signal we are entering a worldwide economic depression. The world is choking on unpayable debt.
We’re saved! Now that oil, (and coal,) are no longer being burned, they won’t emit all that nasty carbon into the air. So will that be more deaths worldwide now than if we had a functional economy, or less?
One thing I am confused about (no, really) is how low energy prices can be bad for the economy. It seems axiomatic that high energy prices would be bad for the economy of “getting things done” and fulfilling man’s desires. This would be true of all input costs. So how can it also be bad for energy prices to be low? Is it in the sense of being a dislocation so severe that it becomes not “temporary” but more medium-term?
Surely, as we see from money, adding or removing it, changing price levels, is always disruptive, although it ultimately creates nothing. (it’s a transfer mechanism for existing wealth). Is it similar in this case that the economy would tolerate any energy price somehow, it’s the wasting of resources adjusting to that level–or that constantly changing level and expectation of what level–that’s bad?
Again, if energy is lying around waiting to be used, e.g. a new top-grade coal mine opens or oil is sitting in a tanker ready to burn, it would seem that men just received an enormous windfall. Cheap energy means they can make, do, and build what they want with the least penalty possible; that’s ostensibly what kicked off the Industrial Revolution (moving from limited plant energy and animal labor to abundant British coal). Or is “price” a bad indication of “ease of access”? That is, oil now costs 5c, but nobody has 5c anymore. How can low input costs be bad? Anyone?
Dr. D,
I am certainly not an economist, but my theory is that you cannot starve the raw materials sector (farming, mining, fishing) without doing severe damage to the whole economy. The raw materials sector is where the only renewable wealth resides. Almost every other activity is merely shifting payments back and forth and trying to skim some profit off of the transaction. What we have now is what I refer to as the “skimming and scamming economy” where profits are generated off of the people who produce real wealth from basic materials.
This can last for quite some time, but eventually enough producers go bankrupt that supply diminishes and pricing returns to normal. In the 30’s at times farmers could not give away their production at any price. There was no money to buy commodities, even at ridiculously low prices. The low prices and the accompanying economic depression lasted almost 10 years.
So, my theory is that starving the raw material sector will assure a depression as there will be no profits to “trickle up” to everyone else. Just the opposite of accepted economic conventional wisdom.… oil is sitting in a tanker ready to burn,…
… trying to skim some profit off of the transaction. …
… there will be no profits to “trickle up” …
???
When can the oil that is in storage be sold at a profit?Hotrod said: ” The raw materials sector is where the only renewable wealth resides. ”
— “renewable”?? That is one of the problems – oil is not renewable, rare earth for solar panels is not renewable, coal is not renewable, the destroyed environment is not renewable. None of it is renewable in the “raw materials sector”.On top of that, the Reason that prices are so low is that Demand is so low. When the engine of Chinese debt is removed from the picture, there is nothing left of the old Stagnant neoliberal economy. The US economy has been hollowed out along time ago, which is why so many companies that once were European or US are now Global corporations. They are Global companies so they can use Trade treaties to trump laws of national governments.
At least the unprofitable coal and extreme oil extraction may mean the Environment and the planet will get a break. They know the days are numbered for extreme profits from extraction. When the pieces of our economy stop bouncing there will be not money left for Extreme extraction, at least I hope that is the case. But for now they are squeezing the earth’s resources for all they can – they know the days are numbered. Even the Debt pump seems to be dry.
I’ve been worried that TPTB may decide that War is the only answer. It got us out of the Great Depression at the end of the 1930’s. We know the US Military machine is the largest in the world by many exponential numbers. Our weapons have gone to supposed enemies to be used against our poor soldiers. Our “used” military equipment has gone to local city police in great bargain sales. Will the next economic boom be in more prison camps, guards and privatization of it all?
Re: “Squeeze oil and you squeeze the entire economic system.”
I see low oil prices as being largely a result of the current state of the world economy (and some poor business decisions), instead of causing the bad economy. Falling oil prices may be correlated with a worsening economy, but correlation is not causation. The portion of the global economy that directly benefits from lower oil prices is much larger than the portion that suffers losses from falling oil prices, no?
I certainly never said that low oil prices caused the bad economy. Repeated a thousand times that the financial sector doesn’t need any help in blowing up. It’s the other way around.
But taking out of the economy the enormous amounts of liquidity involved in all sectors linked to oil, and doing it as fast as today, is bleeding the system dry.
Even if that liquidity would show up somewhere else -which it largely doesn’t-, the system would need a lengthy period of time to adapt to the changes. As things stand, we’ll see a lot of bankruptcies and job losses in the energy sector, as well as the financial markets.
Interesting to see this reply on zerohedge:
Because Illargi missed the fucking point entirely.
The caloric energy value of the oil did not change -the rate of emission of the unit of measure for accounting for it and the costs associated with the financialization of it did.
The money/unit of accounting for the caloric/energy output of the oil was debased an confounded with derivatives.
The ‘marginal value of debt’ and ‘inflation’ have nothing to do with calories/energy and everything to do with compounding usury and rents pyramiding.
ENERGY IS THERMODYNAMICALLY DEFINABLE.
CALORIES ARE CALORIES.
‘MONEY’ IS NOT.
‘MONEY’ WITHOUT A BASIS FOR MEASURE IS NOT DEFINABLE.
IMHO: ‘SOUND MONEY’ = STATIC UNIT OF ACCOUNT RATIO TO DELIVERABLE CALORIC/ENERGY OUTPUT.
NO ONE CAN COUNTERFEIT CALORIC OUTPUT.
PERIOD.
It is very bad for energy prices to be low.
Low prices equal low profits for the oil companies. Drilling is a business that needs constant heavy financing to operate, for it is a capital intensive activity. Low profits means serious financing problems for the drillers, with more collateral needed by the banks than just oil stored in barrels, lets say drilling equipment or Saudi Arabia’s future income from taxes. Let’s not forget that $20 per barrel means inability to pay back loans to the banks. This situation, apart from causing some Big Oil companies to fail, it also means that SA is compelled to selling Aramco stock to NYSE (to rise money to cover for the loss). Aramco is worth around $3 trillion, 4 times the GDP of the UK and by far much more than the net worth of other Big Oil combined. As a result, the worst-timed IPO in history will either deprive the markets from that much liquidity, causing all sorts of problems, like e.g. a financial collapse (the worst case scenario) or will result in low demand (who has money to burn in a recessionary economy?) and cause a collapse in the company’s stock price (the ‘less worst, but very bad’ scenario). Then JP Morgan and HSBC, the people behind the IPO, could get into serious problem; but nothing compared to the trouble the Kingdom could have to face when it won’t be able to pay the salaries of the Saudi citizens or that of the various black-robed, blood-thirsty, head-choping, human flesh eating mercs, with black flags on white Toyota trucks, that need to keep up their Captagon high on a daily basis…
Furthermore, China itself is the real problem. Low demand in oil, steel and other commodities means a collapse in global production (what’s left of it). Low oil price also means the collapse in transportation fees that make cargo shipping, from China to its distant markets, gradually unprofitable. As this article says, only Supertankers (and Supercargo if I may add) are now profitable, due to economies of scale. The result could very well be flash shortages (low supply) to basic commodities, like food, electricity, clothing, iPhones etc. So no more empty megalithic cities designed for a million people but house only a few security guards or the 8-lane superhighways that lead to no place in the desert for China, anymore.
And we haven’t even touched the matter of Peak Everything (as opposed to just the famous Peak Oil which is partially behind this collapse in oil price we see). Both in reality are mainly financial matter. Peak Everything includes, but it is not limited to, the global metal and rare earth extraction reaching its peak production (i.e. its financial viability threshold), way before oil becomes a product for military use only. Without these rare earths, no more Playstations, Oculous VRs, toy drones, iWatches or gold-plated iPhone Bluetooth, WiFi, energy bank selfie sticks. Without metals available, no more Frankfurt ECB fortresses, malls, Teslas, expanded Google headquarters, Amazon delivery drones or iCars can be in store to buy with more and more credit.
As a result, all this we see is not just a matter of low oil prices. It is a Mega Storm of Super Clusterf*cks that is coming our way. Chaos is already inside the system, eating away everything in its path.
No war…at least not WW1 or 2 style war. So war will not be the panacea that everyone talks about, certainly not the panacea of past wars. Maybe more chaos…much much more chaos…everywhere, even here at home but no nation against nation for obvious reasons.
The oil boom, or I should say the LTO oil boom is what brought the economy around here in the US, Canada too to a certain degree. Hundreds of thousands of very good paying jobs and the booming local economies that that brings.
I said it many times high oil price kills the people economy, low oil price kills the FF economy which effects everything. There is no sweet spot, no price where everyone thrives. I believe they call this PEE COIL or something like that.
Was thinking maybe it’s not a matter of if the oil is high or low. The problem is the debt (again). If Oil were cash-only, sure oil could be low because the “value” that used to be there would have rotated into retail, farming, some other sector. It wasn’t its day in the sun but summer doesn’t last forever—it’s summer somewhere else. Sure it might knock off the worst examples, but it doesn’t destroy the industry or the host economy.
What do we have now, worldwide? A chilling shortage of unimpaired collateral. Everything has been monetized and borrowed against down to eating, child care, taking photos, and talking to each other. That would work except that there’s no new collateral to expand into–someone’s not going to make their loan schedule if the economy (meaning financial numbers, debt) doesn’t grow.
But we’ve got worse than not growing, we’ve got outright shrinking, which would just be a thing except that the oil price sets the value of the oil patch, which sets the value of the collateral, which is the backing for the loans. And oil is an ENORMOUS multi-trillion$ industry. So what happens when you wipe out multi-trillions in collateral leveraged 30:1 when there’s no new collateral to be had? Leverage works both ways. Then the multi-trillion oil patch becomes a multi-$30-trillion dollar financial hole, too big to bail, too big to fail. It eats governments, and not just S.A., but Norway, U.K. and the U.S.
So what does that mean? Is it “deflation” exactly? It’s not a shortage of money. Maybe what we get is a shortage of faith that the money means something when the governments no longer do, are no longer in control? Fiat depends on faith, confidence. But it would seem “money”, “fiat” won’t lose confidence. More like faith in stocks and bonds fail first when you realize Amazon, Exxon, and Chicago aren’t going to pay you back. Ever. Faith in you and I fail, as you don’t know if you join the cooperation system with investments and loans, that you won’t lose even your ante. You’d rush to that “fiat” instead, wouldn’t you? And if the money is hoarded, not loaned to Exxon or Chicago (presumably for useful things) then velocity drops near zero. Capitol “D” Depression.
So it isn’t the oil price but the debt/leverage juicing the drop the way it juiced the rise.
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