Cheap Oil A Boon For The Economy? Think Again


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    ‘Daly’ Somewhere in the South, possibly Miami 1941 I thought it might be a nice idea to question a certain someone’s theories using their own words, w
    [See the full post at: Cheap Oil A Boon For The Economy? Think Again]


    Your essay is right on the money. However, what industry or segment of our society is not loaded down with massive debt? We are now in the “musical chairs” economy where there is too much unpayable debt and not enough time and growth to ever pay it back. Anyone who directly benefits from these lower fuel prices would be wise to pay off debt as fast as possible-which will only speed up the deflationary process. What a fine mess we’re in Ollie!


    30$ x33 billion barrels makes 1 trillion tax cut or 2% of global GDP.
    However if Iwere a stock analyst on the energy side I would be running thenumbers for all the energy companies. They are all now debt leveraged like the big banks before the 2008 crisis. So if it keeps going like this negative cash flow burn rate will force whole industry to its knees. Mergers, nationalizations, field shutdowns follow. For any other industry this would be bad but isolated but less oil will boomerang prices. Problem is all professionals will be gone along with infrastructure and so noone will be there to take up the oil investments again in shale, offshore, tarsands. National oil companies in Russia, Gulf will survive if governments survive economic loss. Eonmobil, BP, Total bankrupt, Russia in default, gulf states, venezuela in revolution?

    Sounds like a Saudi gamble to kill alt -oil production and risking own hide in a game of chicken to see who pulls the parachute string first.


    Ilargi, with the sudden drop in oil prices as well as the dollars surge, do you think the Fed will hold off raising rates in 2015?


    I was hoping that someone would clarify something for me.

    I am under the impression that the currently operation “fracked” wells are a “use-it-or-lose-it” proposition. That if the wells are not pumped constantly, they lose their production.

    Is this true? I sincerely hope it is not, but I can’t seem to find information on this.

    Golden Oxen

    If this debt problem were just confined to the oil industry it would be bad enough, in my experience with markets however, that is hardly ever the case.
    Once a bomb goes off and a fire starts, it rages through the entire forest, in this case, the entire junk debt jungle, and it won’t stop there.
    When I think for a moment of the debt and leveraged speculation dependent on this fracking bubble expanding, it gets truly frightening. Suppliers, jobs, real estate values, equity and bond positions, leases, state and county tax revenues etc.; one can easily entertain the thought that the grand party has ended and it’s time to run for the exits.
    Don’t be tardy, they get crowded in an instant and one can be trampled to poverty if hesitant.


    Karl Denninger posted re the Financial Institution Bankruptcy Act today:

    “The Financial Institution Bankruptcy Act enjoys broad bipartisan support and has received little public examination. Not much will be said about it on Monday either. The bill will be considered under suspension of the rules, meaning it cannot be amended and will be subject to limited debate, though to pass the House it will need to attract a two-thirds vote.”

    Karl commented:

    “It sounds good on the surface — it creates a specific section of the bankruptcy code for big banks. That’s good. What’s not so good is what it doesn’t do.

    It doesn’t prevent taxpayer bailouts.

    It forces a 48 hour stay on counterparty demands – potentially ruinous in a “fast” market where leverage is very high.

    And it has, and will receive, little or no public exposure.”

    Are they gearing up for the inevitable?


    A commenter agrees with what rapier said a few days ago:

    “These crooks are running the system while Congress, the SEC, CFTC are completely ignoring them. Look at oil. It stayed up over the past 5 years and all of a sudden it collapses. The economy didn’t change much and never justified the run up and now the drop. I bet that the leverage on derivative exposure on oil hit a high at over $110 a barrel and now someone is cleaning up with the drop in price.
    I am betting that we will see the same action on the stock market when these crooks are ready to make some real money on the downside.”


    RE am under the impression that the currently operation “fracked” wells are a “use-it-or-lose-it” proposition. That if the wells are not pumped constantly, they lose their production.

    That’s kind of the wrong question. Such wells are spent in 3 years in most every case with the 3rd year pretty bad. They go downhill fast. Once the pipe is put down no matter what they will utilize it because of the sunk cost. It’s not about use it or lose it, it’s about start it or not.

    As to the question of why the Saudis are set on seeing the price drop maybe some day we will know, and what part the US played but we know now that it’s a profound blunder. It’s stupid which is what is to be expected. It’s twilight of the elites baby. The product of inbred stupidity.


    Professor LnL, while deploying the currency “Bazooka” is one of a few options on the table, you have yet to explain why the Debt Money Monopolists would deploy said “Bazooka” in the direction of their own assets. In fact, nobody with your position has ever addressed to this my satisfaction – and no, “because they are stupid” is not to my satisfaction and exposes the poor level of intellect that developed that line of “reasoning.”


    GO: Yeah, you can’t take Big Oil out of the picture and expect the rest to just move along. The entire shebang is fueled by oil, and thus the oil industry.

    Koso: The rate rise will come. They’re very busy painting a picture of recovery, see Bloomberg’s headline ‘Black Friday Online Sales Jump 22% as Jobs Spur Shopping’ today, exactly because they’re preparing to hike rates. They’ll ‘show’ us how well America’s doing, and say they have no choice but to hike. It may come sooner than we think, as in before the oil collapse translates into broader markets.


    I don’t buy that this oil price crash is a debt unravelling event, the long-anticipated great deflationary crash finally unfolding. I see no evidence of any sudden collapse in consumer demand to warrant this. There are more nefarious forces at play here.

    One could be that Saudi has now aligned with Russia and/or China and wishes to crash the west’s financial system. Why do this now? Presumably because the gold has run out and it is time. A nice diversion. However, Saudi switching alliances like that would be a big deal and if so I’d presume we would have seen a lot more drama coming from Washington about that.

    Another possibility could be that it is actually the West’s elites who are still working with Saudi Arabia as they always have, and deliberately crashing the West’s financial system and energy infrastructure. That way they can “buy when there’s blood on the streets”. Most of the weaker producers with low EROEI and high debt will go belly up, leaving only the strong producers standing, albeit in a fragile state. Those strong producers would be the Middle East, Alberta oil sands, various offshore projects, and the remaining legacy producers still pumping away their old wells. Then after the deliberately-triggered deflationary crash happens the currency will hyperinflate as that is the next rung of untenable debt down the ladder of lies, and real oil prices will skyrocket as reality finally sets in to the financial system after 4 decades. Then the elites will be left holding all the cards. Why are they doing this now? Probably the same reason as in possibility #1 above, because the gold is now gone!

    I don’t believe for a second that this price crash is happening on its own accord as a result of genuine market forces, and especially not from lack of demand.


    Mark – if they have a “deliberately-triggered deflationary crash,” they can then blame the drop in oil prices as triggering it. “Oh, it was out of our hands! Those damn oil producers are waging a war against each other.” But I don’t see much difference between a “deliberately-triggered deflationary crash” and “deliberately-created inflationary bubbles”. After all, how long can they be expected to keep the ball in the air?

    The crash should have happened in 2008, but they prevented it with sub-prime autos, sub-prime education, QE’s, free money to the elites, stimulus, and on and on and on and on. That’s been the “deliberate” and “artificial” make-believe world we’ve been living in. Artificially-created demand. They painted over the crash with lipstick, and now the lipstick is wearing off. Whenever cheap money is handed out, it flows to all the wrong places. Now we have a glut of supply.

    As Ambrose said above, he figures demand is down by one-third because of China and Europe, and two-thirds is a sudden supply glut. It was all artificial – ghost cities and bridges to nowhere.

    The only “deliberate” act was the artificial pumping back up. All parties end and they always leave a big mess to clean up.


    Raleigh, I agree with most of what you say. But if we now have a glut of supply, then where are all the overflowing oil storage tanks?

    Apparently the producers aren’t slowing production, according to what I am hearing here and elsewhere (they can’t afford to), so there is now a supply/demand imbalance which doesn’t make sense.

    The artificially pumped up demand for oil since 2008 was matched with artificially pumped up supply via the shale oil bubble — no way those things would have been possible in a normal interest rate environment without free Wall Street money flowing.


    Mark – nothing makes sense in this central bank-engineered world. It’s all artificial and engineered. Who knows what they’ll manufacture next month in the way of lies and propaganda! That’s why it’s near impossible to know which way to go, because apparently we can’t prepare for the future until they manufacture what it’s going to be. It’s insane, like living in a work of fiction.


    Thanks for the reply Ilargi!


    I think falling oil prices is a mixed bag. Obviously good for some parts of the economy. Obviously a disaster for over-indebted drillers, and yes, the loss of jobs in this sector will turn North Dakota into a ghost town. It was not too long ago that the conventional wisdom was that we would never see recovery because oil prices would never fall back below $100. High oil prices were the problem. Now it seems that the problem is low oil prices that are too low.

    I for one suspect that oil prices were manipulated lower to try to kickstart a “return to growth.” They already tried monetary policy. That failed. So why not try lowering the price of the most important commodity to the entire world?

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