Oilman2 and I have a kind of gentleman’s bet going on the price of oil.
For now, we agree on cheap oil, but once the general world economy hits the “Ure Discontinuity” as deflation digs in, I think the price of oil will become almost irrelevant.
I’ll leave it to him to ‘splain…
Attached is a graph of WTI crude spot prices from 1970 to present. I have indicated memorable events on a timeline.
Now, we all know that everything is a business model…so….
The correction was in 2009 – we hit 40 bucks, and then QE1 was released.
Look at the historical price, then note how reality disappeared in the first decade of this millennium. EVERYTHING was used by traders and national oil companies and every business related to oil in order to wrangle ever more dollars out of the system. This is when prices at the gas pump got linked to crude prices as well, via internet and POS terminals everywhere.
My opinion?? This had QE bubble written all over it – hot, loose money looking for more gains.
We corrected back to $40, which is likely the actual workable price if you accede that we hit Peak in 2005. The climb before the Rec/De-pression had China’s hot economy, the Housing Bubble and Financial Deregulation as the cause for the run-up.
The current one is simpler – QE1 hits and then hot, free money goes-a-looking for even hotter returns. Oilfield service sector goes crazy because rig count is nuts, and thus equipment and materials pricing goes into stratosphere.
The why for the current collapse can be seen in the original Oil Embargo, The OPEC dump in 1986 and the OPEC desire to maintain world market share. Russia and Iran are collateral damage, as are the independent Oilcos getting hammered (wink-wink-nudge-nudge and lots of good properties and companies with DEVELOPED technology and reserves for the bigger fish to gobble up).
Shale oil was never and will never deliver energy independence – too little oil at too high a price (it will get more economical as service sector resizes – but ouch for me). However, it will make oil and be profitable – just not going to take over the world, at least not yet. Based on the first economic collapse from high prices, expensive oil may not work out so well…
This is what Hubbert and many others like Matt Simmons warned us about – the bumpy ride of oil prices on the back side of the Peak in world oil production. QE merely masked this by free money, and it did so at the expense of Saudi Arabian market share. What is happening now is likely what SHOULD have happened without the injection of free capital via QE in 2009.
Don’t take my word on the Saudi position – they have stated it over and over again during my lifetime. Sure, they might now need $25/BBL where in 1986 they needed $10/BBL, but they want their share. This is not the first time they have engineered demand destruction in the oil business.
The oil industry will not die – just retrench and get going again without the free capital, live within earnings or borrow REASONABLE amounts based on earnings instead of projections. We will go back overseas with our expertise and produce others oil and take a cut.
The other thing this should tell us is that globalism cannot handle $150/BBL oil – it’s right there in front of us….
Other views are welcome…I am just looking at the chart like everyone else…
I’ll roll out some forward market ideas for Peoplenomics subscribers tomorrow, but you can see where this gets us.
Not like the Saudis are making any secret about manipulating prices: Why, just this weekend the Saudis were boasting how they ought to be able to handle up to eight years of super-low prices.
Somewhere in here, we could get into a discussion of national strategies for continued and growing national influence.
What I mean by that is both the US and UK have a forward global strategy of dominating the world’s “deal markets.” We have a decently sized financial and hedgy group, and as long as they work enough deals to pay some income taxes now and then, after buying loopholes, of course, the US will remain a major player.
Asia has a go-forward of simple mass production. India, China, Singapore, Malaysia, Korea, Japan, it’s all about good value engineering and lowest cost of goods sold.
So if you were tenting on an ocean of sand dunes, what would your “national influence preservation strategy be?”
To me, it’s obvious: Control oil, oil prices, pick off key assets, and set about installing a government-replacing religion around the world. Do this for a couple of cycles and it becomes a very solid strategy.
Seems like there isn’t a morning that doesn’t go by when we don’t read about how ISIS is asking $200-million for a couple of hostages…in this case Japanese.
The Saudi’s have learned a great deal from watching the evolution of the Mafia in America., You begin with something everyone wants (booze in Prohibition, oil here lately) and rack up all kinds of money. Enough to build solid silver cars.
Then you develop some “arms length relationships” that can be wangled to achieve just the desired outcome.
So from their standpoint, an arms length deal with terrorists to market the new religious power that will rule when their oil runs down. And by other means, other relationships, to drop the price of oil to where picking up additional resource is cheap.
Do this long enough, often enough, and you win the game. Why? Think about it…
Asia is going to run out of raw materials and be swamped with too many people. America is going to simply bankrupt itself because we haven’t stopped suckling the derivatives teats, whine though we do that we’re really going to kick this credit Ponzi scheme stuff just as soon as we get one more fix….
ALL of which leaves us with markets about to scream upwards through the end of the month. After that? Well, that’s in Peoplenomics tomorrow.
But the Big Thought of this morning (from the hotdog-fueled brain cells) is that all country leaderships have long-term goals and dreams or delusions of great national destinies somewhere in the back of their minds.
For the US it’s money, for Asia it’s out-producing everyone and owning production, for China it’s becoming modern, for Europe, it’s holding together a quickly failing dream, the aristechcracy if you will… and for the Saudis? Control oil for another X years and then rule thereafter via the new religion Y.
About the only country that’s a wild card, then, is Russia. With Brother Alexei taking up the ultra-nationalist gauntlet and consolidating power, we wonder how Kaiser Wilhelm Putin will react, and whether anyone in Washington has a freaking clue as to how the world really works.
Wait! I know the answer to that one!
One Reichstag fire in Russia from a massive economic stimulus (rebuilding Russia as a war power) and then we will be ready for the Greater Depression bottom. All of which could be as much as 10-15-years out. After all, it’s still the Roaring Twenties.
But don’t tell ISIS that. They think it’s 1932 – the analog being to the Lindberg kidnapping…besides, the way history repeats is dicey…some things will happen a half-dozen years early, other things a half dozen years late. It’s still a rhyme.
If you can read music and follow the melodies. Or, is ISIS with the small number hostage takings just tuning up for the real Robert Hauptman finale? Like maybe taking a whole country hostage, for example?
The DDR Reader
No, we’re not talking the “double data rate” as in SDRAM. We’re presenting in its place the Daily Deflation Reader.
Is it time for “good” deflation to show it’s hand (a wet dream of those ignorant of how history flows)?
Asia has debt and deflation problems but here’s one opinion that India should be OK. (When this kind of story comes out, it’s often a fine time to sell the one that will be OK, lol.)
Agriculture.comp has a sensible story about inflation and you.
But in the end, with falling prices (remember last week’s CPI report?_) there’s no incentive to buy anything just now. There’s still more downside ahead…what we’re in now is a silly dance with feet still working, just wanting to be stepped on – again.
Credit Where Due: Eric Holder
Although he has oversea a lot of bad law enforcement (tolerance policy on illegal immigration, for one) he did get something right ending (in part) the federal civil asset forfeiture scam.
Wonder how many minutes before his successor undoes progress?
Of course, states will remain crooked, too, but it’s a first step in the right direction. A “right-on to Holder” on this one..
To Markets to Market
There’s a minor housing number due out this morning, which should be easily explained away.
Dow futures are up over 200, gold’s up a couple of bucks. And even the Baltic Dry was up 14 points to 753. Still, that’s a long-lead indicator, so sit back, watch the bounce on the way down and enjoy.
Because the Robots Are Coming to Take Our Jobs
Although we’re safe today, based on this headline. CES 2015: This Robotic Head and Eye Massager Is As Awkward As It Sounds
Still waiting for someone in Washington to have the balls to begin to tax machines based on the number of tax-paying jobs they destroy. But that’s like wishing for the Easter Bunny…although he should be along in a couple of months. Unlike Washington, which lost its senses over a century ago…