Jan 052015
 January 5, 2015  Posted by at 11:26 pm Finance Tagged with: , , , ,

DPC Court Street, Ames Building, Young’s Hotel, Boston, MA 1906

Well! WTI below $50 and Brent below $53 when I start writing this. Who knows where they’ll be by the time I’m finished?! The euro down below $1.20, US stocks flirting with -2%, major European ones off -3%, Italy and Greece over -5%. Welcome to the real world, baby! Didn’t think you’d see it again so soon, did you? Welcome to the world where the Kool-Aid recovery does not reign supreme.

Not that you’re not going to hear that anymore, and 24/7 incessantly so, but there’s no recovery with these oil prices, no matter what anybody says. The damage must be gargantuan by now. Everybody’s invested in oil. Sure, lots of shorts and stuff by now, but that’s not going to do much good. Not for pensions funds, or for governments. This thing will not blow up or over softly.

There’s not an oil major or minor or a producing country left that makes a profit at these prices, and there’s no sign anywhere to be seen that the drop will stop. If this keeps going, someday soon somebody’s going to go to war. Maybe domestically, maybe across a border, but it’ll happen.

There are dozens of regimes out there for whom oil prices have become a huge threat to their powers, their status, their lives, and there are dozens of others waiting in the wings, eager to take over. The move is just too big not to lead to bloodshed.

The eurozone is perceived as a major threat to the global economy, but not necessarily for the right reasons. Sure, that looming Grexit is not good for Brussels, but Germany and its courts might be a bigger issue. Mario Draghi will need to announce something along the lines of a QE-like measure on January 22, but can he even without risking to blow up the whole casino?

What’s more, with oil and the euro where they are, and especially where’s they’re headed, what good would any new Draghi policy do, however big it is? Europe today, like the rest of the world, has bigger problems to deal with than yesterday’s inflation rates.

Oil below $50 and falling is bigger than any other political or economic issue. Remember when they all said low oil prices would boost the economy through higher consumer spending? Heard anything much about that lately?

For western countries like Norway, Britain, Holland, oil and gas producers, the loss in – tax – revenue is debilitating. For US states like North Dakota, Texas, Alaska, it’s worse. These are not the kind of entities that can turn on a dime, they write long term budgets, the same way oil companies do. There’s a time lag in consequences, but that doesn’t mean it’s unwise to be ready to get out of Dodge.

Thing is, prices DO turn on a dime. And now they’re stuck with a zillion broken promises to investors and voters. And while the executives and politicians will at worst get thrown out, the other side of the equation is going to be stuck with the tab. And in order to save their skins, the ‘leaders’ will raise that tab wherever they see fit.

This oil thing is the real deal. There’s no Plunge Protection for that. And for all we know nobody that counts wants any. For all we know the American behind the curtain wizard convention plans to use it to destabilize a whole list of additional countries. And for all we know Russia – and perhaps China- have seen that coming from miles away.

If and when an oil producing (!) nation like Turkmenistan devalues its currency by 19% against the dollar, something’s really amiss, and tectonic plates are shifting in a part of the world where balances were already, and always, delicate. And once plates start shifting, who’s to tell where they will end up?

It’s no longer about which factors bring down oil prices, that’s old news; it’s about what oil prices bring down. You know, the next – logical -step. And they bring down more than anybody seems to be aware of. Good luck with saving a dollar a day on your gasoline bill. The world’s power brokers feel they have it all under control – they don’t, nobody has the means to control the entire world – , and they have no qualms about sacrificing you to get what they want.

The oil price drop is a much bigger event than the US subprime housing crisis, it’s bigger than everything put together that happened in 2008. And this time, central banks are lame sitting ducks. Omnipotence is a harsh mistress. She tends to backfire.

Home Forums This Oil Thing Is The Real Deal

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    DPC Court Street, Ames Building, Young’s Hotel, Boston, MA 1906 Well! WTI below $50 and Brent below $53 when I start writing this. Who knows where the
    [See the full post at: This Oil Thing Is The Real Deal]


    Two questions for you, Ilargi.
    1. What’s the logic—or illogic—of going to war because of falling oil profits?
    2. Did Turkmenistan really devalue their currency? That is, was it an actual choice?


    We hear the new Republican majorities in Congress plan to push through the Keystone pipeline as a first order of business. Who do you suppose will inform them no Canadian tar sands oil will be produced at current prices to flow through said splendid conduit?


    Pay no attention to the clowns in congress inserting their heads up their own asses. They are just selling snake oil to their base constituency. The goings on up on The Hill are for entertainment purposes only. Almost nothing that happens there means a thing. All the big decisions are made by some alchemy involving entrenched institutional elites. Or maybe I should say partial sorts of ad hoc actions are taken, or not, by said interests.

    It’s twilight of the elites baby but it’s going to be a very long process.


    It will be interesting to see what the impact will be on the Canadian Economy and more specifically, the Canadian housing market which has been on a tear for the past 6 years. Canadians now have the highest debt levels on record. Canadian Banks have had the wind at their backs for years. They are found in almost every Canadian investors portfolio – have they shielded themselves from the oil and real estate sectors problems?


    Hi All. Just discovered you via greaterfool. (Thanks Tony)

    I’m trying to get a snapshot of this blog, who writes here and from what perspective? (Canadian, US or somewhere else)

    Thanks Bill


    <i>Remember when they all said low oil prices would boost the economy through higher consumer spending? Heard anything much about that lately? </i>

    Actually, that’s exactly the way it was spun on our main news programme here in New Zealand.

    Going to war over this? Hmm, I just can’t see the reasoning there. Could you enlighten us, Illargi?



    Welly welly welly well!

    I have to admit Bill, didn’t think any of the “blog dogs” would make their way over from the Church of Garth to TAE – but happy to see you made it! 🙂

    Round these parts I go by Variabe81, but over at Greater Fool I was dubbed “Tony from Calgary” (to protect my identity i suppose?) when I wrote to Garth back in 2010 (after reading a report on Canadian housing by the Centre for Alternative Policy which woke me up to the reality of the Canadian housing market) about concerns I had over the housing market and my Baby Boomer parents’ then-huge mortgage.

    In Gath’s defence, he gave great advice on the housing market and debt which helped steer me in the right direction, allowing me to offer guidance to the folks on how to extract themselves from a debt-based life in a mature/informed way.

    But over the last few years he’s sadden me with constant attacks/discrediting of blogs like The Automatic Earth with espouse sustainability/long-term thinking over 7% diversified portfolio returns & profit at all cost. It’s as if he saves you on one hand by waking you up to the risks of housing, only to push you into a ponzi stock market with the other (no doubt because Garth is shilling for a living and making his daily bread off advising individuals on how to invest). But I guess I’m naive to expect an ex-politician and editor of a newspaper to ACTUALLY care about peoples’ futures as opposed to just prentending to care (the previous being easier and more profitable).

    Anyways, I ramble too much (though it is permitted here, as opposed to over at the GreaterFool) and have yet to answer your questions about TAE. So without further ado…

    This is a place where the discussions (and they are discussions; not one-sided preaching where dissenters are mocked) generally focus on the two biggest issues facing us as a species and as individuals: energy and finance/economics. Other topics certainly pepper the conversations such as social psychology, geopolitics, “real politik”, environmentalism, climate change, etc. Basically, TAE tries to provide the biggest “big picture” view, and takes a system analysis approach as not to look at each topic independently, but at how they integrate and impact each other. And I wouldn’t suggest this blog has a Canadian or american perspective – more of a international/global perspective – though most of the people who frequent this blog and comment on it seem to be westerners or those who have some ties to western culture.

    Ilargi seems to be carrying the weight of the blog with his writing these days, and many of those articles tend to be “status updates” of what is happening in the world on a daily basis as well as explanations as to why things may be unfolding the way they are. From my point of view, Ilargi can come across (for better or worse, though always appreciated) as someone who is frustrated/tired with a world that seems to make less and less sense every day, pleading for some one to make sense before it is too late. It’s certainly a feeling I can relate to…

    Then there is Stoneleigh (Nicole Foss). Unfortunately we don’t see much written from Stoneleigh these days as she’s currently on a bit of a sabbatical to New Zealand, but she is an excellent writer in her own regard – perhaps her writing has less of the passion/emotion captured in Ilargi’s writings, but her works are more akin to a research paper which clearly communicates the key points and makes them easy for the reader to understand. Many times that I found myself in heated discussions with colleagues/peers on topics such as finance, energy, environment, etc., my mind would drift back to Stoneleigh’s writings, giving me the intellectual ammunition I required to make my points clearly and concisely.

    There is a link somewhere to the TAE primers, and I think they are incredibly informative to anyone who is trying to better understand deflation and how it will affect us all. If anyone else could post that link for Bill, it would be appreciated.

    Welcome again Bill – glad you made it to the party, as something tells me 2015 is going to be very interesting.



    As one who follows the oil thing another point should be noted. Oil producers can reduce production but definitely have a hard limit.

    For example if for cost cutting I no longer employee as large a fleet of trucks to haul oil I then become stuck. I can hire more trucks when oil picks up again but its a slow process. If one loses the network of shipping, no matter what the price of oil swings to, I cannot just pick up and deliver.

    The oil sands are in a much worse position. Its a mining operation. Each truck arrives by schedule. Repairs have to been done in a very short window of time. The truck delivers oily sand which is put through filters and then centrifical separators before being processed. If this becomes cold there is no process to fix it. No equipment exists to restart in the event of a complete cool down. The show must go on. The only other option is to allow a shut down and rebuild with new equipment to restart. So far as I know there has never been a shut down long enough to warrent a rebuild.

    Now when the price of oil went up to $150 there were tankers sitting just off port waiting because suppliers wanted a better price. Refineries had the problem. Each refinery knew it couldn’t afford these prices. Each refinery knew it couldn’t run out of oil. A restart for a refinery would mean a list of problems. Some of the previous oil batch of refining is used in the next new batch of oil, using this up requires a longer period of initial refining. Losing the network of drivers due to a prolonged shut down poses another grid lock. Hiring a large group of inexperienced drivers will have many hickups. If the staff at the refinery don’t come back there is another group of people to hire. The likely hood of reaching production quotas for a year aren’t likely.

    In this environment each refinery waited to see who would run out first. A bunch off the East coast were the unlucky candidates. They were quickly forced into receivership no matter what choices they made. China then went and purchased the plants and brought them somewhere in Asia.

    I see the same thing with current oil. Bankruptcy and sale of assets. No real restart. Due to the new supply of oil not meeting demand the prices will rise significantly.

    Dr. Diablo

    Great comment on process engineering.

    A lot of people don’t appreciate the also-vital structure of assembly, delivery, and human habit, which is every bit as important and hard to create smoothly as product design or finance. Reminds me of “I, Pencil”, by Reed


    @bkanic – I echo Variable81 that The Automatic Earth provides the biggest “big picture” view. I’ve been reading here almost since its inception. There is a link to the primers at the top. They are excellent.

    – I think the better question is, who gets the monetary benefit by having the Keystone pipeline pushed thru this Congress.


    Steve, Tony, I think the logic of going to war is clear. There are a lot of people in power who depend on oil revenues to stay in power. Blame games are easily invented. They will have to do something. Moreover, the US will be glad to of service when it comes to divide and rule policies, certainly in Russia’s backyard, Azerbaijan, Turkmenistan. I don’t know all the intricacies in all these countries, or which one is most likely to get involved in a proxy war, but as oil prices keep going down, the pressure increases. And yes, Steve, Turkmenistan devalued its currency vs the dollar. Belarus did the same, Kazachstan is expected to follow suit soon. It’s all about the falling ruble, obviously.

    Formerly T-Bear

    @ Ilargi #18154
    Remember that in war conditions, governments freely deficit spend attempting to assure survival. Limits on spending are suspended, those providing needed goods and services receive the additional bounty provided by war policy under national emergency that otherwise would not readily happen in normal economic conditions. Another way of appreciating is economic demand is amplified greatly beyond normal conditions thus driving production and profits. These are effects that MMT attempts to induce without the condition of war as motivation.


    I miss Stoneleigh, too, but I am heartened that her absence resulted from taking her own advice. She did as Gandhi urged, to be the change we seek. Perhaps we should help each other adapt for survival even as we piss and moan about the powers that be. If I have a dollar, it seems pointless to hold it until it becomes worthless. I must spend it to enhance my family’s security or invest in the manufacturers of war materiel. Those in the latter category don’t need my investment, but my family does. Family wins.


    Thank you IL for such diligent efforts on almost a daily basis. You are my first and sometimes only mouse click of the day and I dearly wish I could send a few paypal vists your way more often. I along with some of the other commenters got twisted backwards with the war risk comment. LIke WHO for example? The US perhaps. True of course and who would we fight(unsuccessfully of course) next? We’re running out of countries to invade or destabalize. I am glad you emphasize again and again of the danger of plunging oil prices while the economic goons du jour of the MSM which includes NPR most especially, point to the bright side of $2 gasoline. What you know and I know and the goons don’t of course is that oil(Energy)=The economy. Ergo oil goes down, economy goes down. At this point most of us realize that we in most countries are being led by donkeys. We are like those African migrants trapped down in the hold of that freighter plowing thru the ocean toward Italy with the ship on autopilot with the bridge dark and the captain and crew long gone . But immediate threat of war??? Nah…….don’t see it.



    Wow! That’s quite the introduction. Thank you. I look forward to reading and contributing.
    I’ve been reading Garth for 5-6 years now and have been wanting to gain another perspective. I almost never comment on his blog and barely read the comments anymore.

    But there was something about ‘Tony from Calgary’ comments”
    “See you at the Automatic Earth. Only a matter of time now.”
    It was suspicious enough that I had to investigate….so I Yahooed it.

    I’m not bothered that Garth offers financial services to people who ask.
    There’s a lot of people who still think the party is going on. He’s promoting financial literacy to people who have no where else to go. That’s a good thing. Imagine the other 99.999% that don’t read his blog, they don’t even know what deflation is.

    “something tells me 2015 is going to be very interesting”…..That’s how I see it too.

    What country or cities do some of you reside in?


    There’s a lot of them…Should I read them all?



    Yes, sometimes I’m a bit hard on old Gartho, but that’s probably because it irks me to see someone who’s such a skilled writer and who obviously has the trust / adoration of so many of my fellow Canadians using it to his own benefit to push financial services when he could (should?) be helping them become more a) aware of what is really going on and b) more self-sustainable (at least that’s what I feel the Automatic Earth offers that GreaterFool does not).

    And while it’s good of him to talk deflation, I doubt many of the blog dogs (even the more astute ones) understand what deflation truly is – that is to say, deflation is not just falling prices (which is just a symptom, like a cough is to a cold) but a monetary event in which money within the system contracts. When considered in the sense that these deflationary pressures are both massive and global, the potential outcome is far worse than most likely imagine (i.e. not your typical business cycle downturn, or localized “recession”, that Garth tends to describe when he talks worse-case scenario).

    As far as which primers to read – of course, read them all! 🙂
    Haha… but yes, I recognize it’s a lot of material to consume, so I might recommend just reading this one first:


    That should at least summarize the “big picture” view espoused by the writers here at the Automatic Earth. You can then pick and choose which which sub-topics you find interesting to explore in greater detail as you find the time / interest.

    I think when I was new to this site I gobbled up all the financially-focused primers first, then social psychology articles, then energy and finally the environmental & community / society articles last, given my interests. But it probably wasn’t until I had read a few articles from each area that I really started seeing how the “big picture” came together, creating a system which has driven our precarious debt growth / resource extraction / overconsumption and how it could quickly reverse itself.

    Also, if you get to the point you feel you need to do something to prepare for deflation, I think this is a great starting place:



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