Guest Post: IEA Oil Dump A Disaster In The Making

Tyler Durden's picture

From Brandon Smith at Alt-Market

IEA Oil Dump A Disaster In The Making

It’s amazing. In the wake of the 2008
derivatives and housing bubble collapse, created by the U.S. Treasury
and the private Federal Reserve with engineered low interest rates and
easy money designed to artificially pump up the economy after the
effects of the dot-com bust, the faltering markets of 2000-2001, and the
rapidly depreciating dollar, we have now seen these same entities pour
Trillions, yes, TRILLIONS in fiat injections into every conceivable
corner of the markets. They have spent incredible sums on
toxic equities (worthless equities, and don’t let anyone tell you
different) to “ease” the debt spiral, they have propped up almost every
large international bank, they have propped up the Federal Government
and the Dollar itself with sizable purchases of our own Treasury debt,
and, they have even thrown money into the pockets of foreign
institutions and corporate beggars. Keep in mind, that all
the debt that these actions generate is eventually placed squarely in
the lap of one group of people; the American Taxpayer!

They have manipulated unemployment figures. They
have consistently released completely fraudulent CPI (inflation)
figures based on calculations which neglect numerous factors that used
to be counted only two decades ago. They have used
coordinated naked short selling in precious metals markets to hold back
the natural spikes in gold and silver values. They have
blamed every negative development in the economy (that they could not
hide) on extraneous circumstances and outside culprits rather than
themselves. They have done all this, to conjure the illusion of recovery for an increasingly agitated general public.

So much tap dancing and snake oil selling, and all it took, was the pain of $4 a gallon gas to wipe everything away…

That’s right, when the cost of driving to work,
driving to shop, or driving for vacation doubles, the naïve notion that
everything is perfectly normal goes right out the window. Americans complain a lot, but they rarely accept a bad situation as inexorable and take measures to fix it themselves. There is always the “chance” that things will get better tomorrow, or so we tell ourselves. We
just ride the wave, and expect the pack of sharks at our back will
never quite catch up to our boogie-board of blind optimism. However,
when something takes a Great White sized bite out our very wallets, we
take notice, and search the horizon for a bigger boat.

I have commented in the past that after only a few
months of high gas prices, the wind would easily be knocked right out of
our puffed up bailout driven recovery, and so far, that is exactly what
is happening. Retail sales are fumbling, vacation
destinations are crippled, the housing market continues to dive, in part
due to the relentlessly high price of energy. When people travel less, they spend less, they buy less, and they relocate less.

In response, the IEA (International Energy Agency),
an organization of 28 countries, has made a very sudden and startling
announcement; each member nation will begin dumping their strategic
crude oil reserves onto the global marketplace to flood the supply side
of the equation, and, in theory, drive down overall oil prices. The
IEA will release over 60 million barrels a day for at least 30 days
into the markets, half of which will come directly out of the strategic
reserves of the U.S. This is only the third time in the 37 year history of the IEA that this kind of action has been taken. Surely,
governments around the world have finally realized that inflation in
energy is going to completely derail what’s left of our financial
structure, and they are working to prevent this, right…?

Some economists and many in the public will cheer this decision as a fast and decisive solution to the growing oil crises. These people would be foolish. But,
perhaps we should look at the debate points from their side of the
field, or even the U.S. government and the IEA’s side of the field. Below, we will look at the arguments made in support of the IEA oil dump so far, and why they are utter nonsense…

Lie #1: Oil Prices Are High Because The War In Libya Has Diminished Supply

Better throw on some boots and grab a shovel! Digging through this crap might take all day…

I’ll tell you a little secret, something mainstream economic analysts would rather you didn’t hear: there is NO lack of supply in crude markets. Sorry, the facts are clear. I
realize that there are also proponents of ‘peak oil’ out there that
fervently want to believe that there is a current and substantial supply
side crisis in crude. Whether they are correct or not
about the eventuality of peak oil remains to be seen, however, we are
certainly not seeing any semblance of an oil shortage today, despite
events in Libya.

Libya’s crude production before the war accounted for only 2% of the world’s entire oil output. Oil prices were climbing back towards the high levels seen in 2008 long before the “Arab Spring” broke out in the region. In February, the IEA itself reported that the world oil supply rose to an all time high of 89 million barrels per day. After the Libyan conflict erupted, this production fell by a marginal 700,000 barrels per day:

http://nextbigfuture.com/2011/04/iea-reports-that-world-oil-supply-rose.html

The establishment’s assertion that Libya is somehow the direct cause of energy inflation is a distraction. Libya has little or nothing to do with anything.

Lie #2: The IEA Oil Dump Will Create A Supply Glut And Drive Down Prices

The position that a “lack of supply” is the culprit behind rising gas prices is an outright falsehood. In fact, markets are already awash in oil, and our government is fully aware of this. The
U.S. Energy Department has shown a global trend of falling demand for
gasoline, and, the IEA has even admitted that this trend is likely to
continue through 2011:

http://www.upi.com/Business_News/Energy-Resources/2011/05/17/IEA-sees-US-gasoline-demand-falling/UPI-99911305637281/

http://www.bloomberg.com/news/2011-06-23/-head-scratcher-petroleum-release-to-inflate-u-s-crude-glut.html

Anyone who follows the Baltic Dry Index also knows
that freight shipping has collapsed back down to levels near those that
appeared right before the 2008 debt bubble burst. This
means around the world there is less demand for nearly ALL goods, and
many commodities necessary for manufacturing, not just oil. Lower demand means greater available supply. Therefore, supply is in no way the issue when it comes to high oil prices. Again, the supply argument is a distraction away from the truth. Yet, this has been Treasury Secretary Timothy Geithner’s primary rationale for supporting the IEA dump:

"We saw a very substantial sustained
supply disruption. These reserves exist in part to offset those kind of
disruptions," Geithner told CNBC television.

http://www.reuters.com/article/2011/06/24/us-usa-economy-geithner-oil-idUSTRE75N5ZK20110624

So, to reiterate, there is ALREADY a glut in oil markets, and there has been since at least 2008. If there was actually a supply side crisis, trust me, you would know it. If
you want to study a true crude supply crisis, then you only need glance
back at the energy crisis of 1979 when Jimmy Carter ordered a cessation
of Iranian oil imports and the Iran/Iraq war began. When
you have to wait in long lines at the gas station just for a few gallons
of unleaded, then you might be in the middle of a supply crisis.

After we accept the fact that supply is high and
demand is low, we are then faced with an important question; why in the
world would the IEA report high supply and low demand, and then expect
to have any significant effect on oil markets by dumping our strategic
reserves?!

Lie #3: The IEA Oil Dump Was Designed To Hit “Speculators”, Who Are The “Real” Cause Of Energy Inflation

Back in 2009 after the first
major gasoline spike subsided, I spoke often about the mainstream
financial media’s strange obsession with “speculators”, and the
consistent use of talking points obviously designed to condition the
American public into associating all oil price jumps with scheming
investors in the shadows out to corner the market. My
theory back then was that once oil began to skyrocket again due to the
crumbling value of the dollar, establishment pundits and government
officials would come back once again to point a finger at the speculator
boogie man, and draw attention away from our inflating currency. Sure enough…

http://www.foxnews.com/politics/2011/04/22/obama-form-task-force-tackle-rising-gas-prices/

As we have seen, supply is not an issue, and so speculation should not be either. However,
if speculators have actually been hoarding stocks and supplies in order
to artificially drive up the price of crude, then the IEA announcement
should have sent them scrambling to phone their brokers to
sell-sell-sell! The shock to oil markets should have been extraordinary. But what happened? Not much to write home about…

The Brent crude index saw a relatively moderate
price drop from around $113-$115 a barrel down to $105 a barrel, and
currently, the price is showing potential to climb back up!

Initiating the release of the strategic oil reserves of nations across the globe caused an overall price drop of a few bucks? I guess speculators weren’t having much of an effect on the market after all.

So, if speculators aren’t the cause, and neither is
limited supply or high demand, then what IS the phantom driver of
inflation in energy? There is only one other possible answer; devaluing currencies. The
IEA can pour all the oil they want into the markets and it won’t change
a damn thing, because higher supply does nothing to strengthen the
foundation of the dollar, which is being swiftly eroded by the Federal
Reserve. Have they accomplished a minor halt to rising prices and visible inflation? Yes. Will prices bounce back even higher in the near future as the Fed continue to inject fiat into the economy? Absolutely.

The Consequences Of Reserve Depletion

The IEA announcement comes directly after the last
OPEC meeting ended in a bitter split between member countries over
whether to raise crude production levels. The decision by every country except Saudi Arabia to keep production steady was the right one, of course. However,
elements of the U.S. and the EU were downright unhappy with OPEC’s
unwillingness to help hide the weakness of their respective currencies. An
OPEC decision to increase production would have at least influenced
market psychology, and allowed prices to soften for a short time. So, without OPEC support, the central banker controlled apparatus turned to the IEA to open the floodgates of petroleum. OPEC nations, as one might imagine, are not happy…

http://www.reuters.com/article/2011/06/23/us-opec-iea-idUSTRE75M6J520110623

There are several threats associated with this
development, and there is a distinct possibility that these have been
deliberately provoked, if one considers that a weakened America ripe for
centralization is the true goal.

First, OPEC countries could easily retaliate against the IEA by dropping their own production levels. Not
only will the IEA action be meaningless (as we have shown above), it
could also directly trigger a REAL supply crisis if OPEC decides to dam
up the river. The U.S. is very unpopular in the Middle East, Africa, and Venezuela already. Now, the IEA has just given these regions a perfect excuse to dish out some economic vengeance.

Second, traditionally, if there is a real supply
side crisis caused by OPEC, our most important stop-gap would be to tap
into our strategic reserves. Unfortunately, we have just put those reserves on the market without batting an eye. So, in essence, we paid a very high price for a bullet that we will one day shoot ourselves in the foot with. That
is to say, we have dumped our strategic reserves and set in motion a
possible disaster which those reserves were supposed to save us from! Its mind boggling!

Third, there is very little stopping OPEC at this
point from decoupling from the U.S. dollar completely, especially if
crude prices continue to rise despite the IEA dump. The
fact of currency inflation and dollar implosion will be so exposed that
no one, not even “Tiny Tim” Geithner, will be able to deny it. Once
the illusions of “limited supply” and “speculation” are cast aside, the
global focus will end up squarely on the dollar, and the IEA dump will
have sped up the process dramatically.

I don’t know if anyone else has noticed, but this country has been thoroughly gutted over the past few decades. Our industrial base has been dismantled and shipped overseas to the benefit of foreign nations and corporate feudalists. Our grain reserves, once ample, have been depleted to an all time low.  Our currency has been systematically debased.  And
now, our oil reserves, without rational cause, are being sold off only
to feed the catastrophe our government is supposedly out to stop. Are
the American people being prepped like a glazed ham for the fires of
the globalist oven?  Is this really all due to coincidence and stupidity
as skeptics claim, or is there something else at work here?  I
find it hard to believe that the IEA and our government are not aware
that their proposed strategies conflict with their own source data, or
that they are completely oblivious to the destruction they are about to
reap upon our economy. The latest IEA decision is just one
more piece of evidence of an agenda of deliberate financial
destabilization trending towards a disaster that serves the interests of
a select few, to the detriment of all the rest.

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Everybodys All American's picture

2012 can't come soon enough.

66Sexy's picture

Low oil prces make the dollar look stronger and covers up the consequences of raised debt ceilings..

It silmply enables more government debt through the deception of a stable dollar. Consumers see price stability in oil and think 'all is well'.

narapoiddyslexia's picture

Its bullish for stocks. Apparently. 

SRV - ES339's picture

2012 can't come soon enough

... assuming you mean getting rid of Obama, who will replace him, and do you actually believe the Banksters grip on world finance will fade with a (Kleptocrat backed) Tea Party wacko in the White House?

best of luck with that... rotflmfao!

NotApplicable's picture

Ha! Voting is exactly what caused this mess. Good luck on fixing it with that lousy tool.

Zero Govt's picture

"2012 can't come soon enough"

Like that'll change anything ...Dream On Bro

AnAnonymous's picture

China's benevolent role over the world is growing each day.

Azannoth's picture

I bet it was made from 9/11 scrap metal, chinese have a sense of humour

Byronio's picture

I think you've offended the Chinese readers here...

We are supposed to be grateful for losing our country, our jobs, our habitat to them and others.

China Wants To Construct A 50 Square Mile Self-Sustaining City South Of Boise, Idaho

The following quote originally appeared in the Idaho Statesman, but has since apparently been taken down....

"The Chinese are looking for a beachhead in the United States," said Idaho Commerce Secretary Don Dietrich. "Idaho is ready to give them one."

Indeed.

If relations between the U.S. and China go south someday, we will deeply regret giving China so many open doors.

 

AnAnonymous's picture

50 square miles in Idaho? But laughable.

The US is buying front and center land in other countries by square thousand miles and what? 50 square miles?

 

The US is not the solution, the US is the problem.

Flakmeister's picture

First off, oil production is not 89 mmbpd.... that is "All Liquids".  He looses almost all credibility with this error.

Moreover, Libyan production was close to 4.5% of net exports, i.e. oil on the market. Moreover, as a fraction of the sweet crude on the export market, the ratio is closer to 10%...

That being said, the IEA release is a mistake. Note that the amount matches up with the total loss of sweet crude from Libya and is also timed to have the maximum effect given well known seasonal factors. It is an attempt to drive the price down in order to give The Bernank and the ECB some breathing room. No way QEIII or any other form of monetization can occur with oil above $100....

 

AnAnonymous's picture

The article's author is part of US citizens for whom propaganda is making a living. Still the same drivel over and over again. Best is that guy must think he deserves every single cent he earns. That is the only credibility propagandists bother about. Facts, who care about them as long as misinformation, disinformation brings money?

 

US world order.

Raynja's picture

Its 60 mmb total, not per day.
The whole analysis ignores the elasticity of demand and geopolitical concerns.

The release is a bad for citizens, just not for the authors reasons. Maybe someone should let our transitory chairsatan know that flow is actually more important than stock

CrashisOptimistic's picture

The ZH folks really HAVE to understand this, Flak

"ALL LIQUIDS" IS NOT OIL.  There is not 89 mbpd of oil being produced and that is why things are disintegrating.

Guys, heads up.  When oil comes up from the ground, it brings with it Natural Gas Liquids (which is not the same as Liquid Natural Gas).  Things like butane and ethane come up.  They have only 60% of the energy density of crude.  They Are Not Oil.  But they are counted as All Liquids, and because fields are dying, more and more of production that comes up is NGL.  

There is another category called Condensate.  This also is a bit light in energy density and is not crude.

Bottom line: You can't pour 1 barrel of NGL into a refinery and get out the same number of gallons of gasoline power as you would get if you poured 1 barrel of crude into the refinery.  Period.  This is a crushing reality of physics and the numbers are being juggled.

Read the NYT article about natural gas in shale of a few days ago to see how the industry obfuscates numbers to attract the greater fool to buy a lease overpaid for.  This is the nature of oil/nat gas plays.  The whole industry is based on camouflage.

You have to understand it deeply at a geological and physics level or you have no hope.  An economist out of Yale assigned to be an "oil analyst" at some bank will not understand all this.  Beware.

Flakmeister's picture

Another bit of smoke and mirrors is "Refinery Gains" where the volumetric gains in cracking the heavy sludge left at the bottom of the column is counted as "production".... moreover, the result of the hydocracking mainly Ethane which is primarily a feed stock for plastics.

Refinery gains do not represent new supply in the sense of "new energy"...

Citxmech's picture

Take a gander at any of the net EROEI over time charts and you'll quickly see why we're in a world of hurt. 

It's got nothing to do with what's available coming out of the refinery - it's got everything to do with what it takes to get the raw product from ground to market - and those required expenditures are rising exponentially.

Decreasing marginal returns and debt-based societies don't mix. 

aerial view's picture

Time to remove the meaningless words free markets, democracy and capitalism from all American dictionaries as well as truth, justice and the American way.

jerry_theking_lawler's picture

america is not a democracy. america is a democratic republic. that was written in blood in some old 'useless' documents in Washington DC that can be 'interpreted' to fit the needs of the leaders....what a sham.

CH1's picture

On paper it is a democratic republic.

Congress is for sale to the highest bidders. K Street dictates what they do.

cossack55's picture

Add the words "Agenda 21". Sleep tight.

overmedicatedundersexed's picture

Anyone who makes sense or has policy that is correct..need not apply. The bilderbergers the trilateralists the sociopaths in change have a plan that is working and the serfs better like it.

Greeny's picture

Obama, collecting Fat paychecks from Fat Cats of the Wall Street

for his Election campaign, His target is 1 Billion $USD.

Imaging to spend that much for another 4 years of doing nothing?

Joe Davola's picture

Giving a politician a billion to do nothing would likely save us a trillion or two in the long run.

oldmanagain's picture

Mostly garbage.

But it might sell on Zerohedge.

speedy's picture

The IEA will release over 60 million barrels a day for at least 30 days into the markets

 

Err. not 60 million a day, 60 million over 30 days.

Smokey1's picture

+1

Yes. That small oversight tends to nuke the entire article.

Flakmeister's picture

Well done... I missed that.

AnAnonymous's picture

If you are after each mistake the article propagates, good luck. It is a useless task. Propagandists make their money out of making errors, distorting truth etc People buy their propaganda (id est funding the propaganda effort) because they want to believe in the distorted facts.

 

Bringing back factuality is useless and vain; in this US driven world, it does not bring money.

 

The US citizens nature is eternal.

Libertarians for Prosperity's picture

The author of this article has zero understanding of how speculators affect oil prices. ZERO. ZILCH. NADA. When oil went cuckoo for cocoa puffs in 2008, the amount of speculative money in the commodity complex was over $250B, an increase of over 20X from 2003-2008. Furthermore, if margin requirements are typically less than 10%, that means speculators could take multiple trillion dollars worth of commodity positions if they wanted to. One million oil contracts are traded on the NYMEX daily. If the size of an oil contract is 1,000 barrels, this means the amount of "paper oil" traded each day is over 12 times daily world oil consumption.

http://www.marketwatch.com/story/ice-brent-futures-volume-set-new-record...

And all of that means.....   nothing?  

Brandon Smith is just another bugged-out doomer goon with 50 canned hams under his porch. He should stick to writing articles like, The Art of the Bug-Out Bag and Final Survival Preperations.

http://www.alt-market.com/articles/121-the-art-of-the-bug-out-bag


JeffB's picture

On the other hand, there is some pretty solid evidence that "speculators" were not the driving force in the big runup in oil prices leading up to and including the 2008 spike:

http://www.aspousa.org/index.php/2009/05/peak-oil-not-speculation/

"...After many years of solid growth, oil production plateaued in October 2004. Regardless of the price level, the oil supply simply stopped responding, and from then on, the world had to make do with broadly flat supplies. Ordinarily, the expansion of the world’s economy would be accompanied by increased energy consumption and an inelastic oil supply might have been expected to hinder economic development.  It didn’t. In the four years to mid-2008, the world economy expanded by 18%. The global economy boomed, even without new oil.

However, this came at a price. In the absence of oil supply growth, demand accommodation was required. This was achieved by secular prices rises averaging 25% per annum from 2003 to the end of 2007. In other words, the price of oil went up, and this constrained consumption by causing the marginal consumer to drop out of the market. This proved a workable solution for a time, but the global economy could not sustain 25% annual price increases indefinitely, and by second half 2007, the situation was becoming critical. Consumption was being maintained by continuing draws on inventories averaging 1.4 million b/d, and virtually every producer, with the possible exception of the Saudis, was running flat out. By early 2008, even the Saudis were throwing the kitchen sink at the market - all to no avail. On paper, it looked like a peak oil nightmare.

Of course, consumers were responding. From 2005, the EU and Japan began to shed consumption and, from late 2007, US consumption also began to decline as the US consumer sought to escape high oil prices. Notwithstanding, developed economy consumers were not abandoning the market as fast as Chinese consumers were entering it, and prices continued to rise. In early 2008, prices took off and some argue that speculation took over. Still, as inventories continued to fall until May 2008 and all the oil producers were running at full output, the case for market manipulation at that time is hard to make. Indeed, the market was in backwardation most of this time. In backwardation, futures prices are lower than spot prices, the equivalent of the market saying, “Well, prices are high now, but they’ll be lower later.” The market - those very speculators - believed that oil was over-priced but was continually surprised as demand kept pushing up prices.

Prices did ultimately fall, but not because the supply situation eased, nor because speculators fled the market, and not because inventories were released. Prices fell because the global economy collapsed. ..."

Blano's picture

My new favorite avatar.

Byronio's picture

If they had an uprate feature I would give you one for your avatar.

Smokey1's picture

"Whether they are correct or not about the eventuality of peak oil remains to be seen."

It only remains to be seen by blind fools like you. Peak oil is screamingly obvious to anyone with half a brain.

Greeny's picture

"Peak oil is screamingly obvious" What time frame you are talking about 1-2 weeks? then maybe you right. I see OIL at 140$/b again as soon as QE3 hits the street. Hey By the way, Brent now going up and pushing $109/b already. We gonna see $140 before $80, how about that?

Smokey1's picture

Do you even know what peak oil is?

Greeny's picture

Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.

Silver Dreamer's picture

There's also a large confusion over production and supply.  We may have plenty of supply, but we definitely have a production issue.

Flakmeister's picture

You might want to complete that thought... as it stands, it makes no sense.

Sambo's picture

No, it is not obvious. Peak cheap oil maybe but that is not the only thing left behind on the earth by dinosaurs & ...what they would have eaten but did not eat.

Flakmeister's picture

Not obvious if you rely on MSM. Obvious to anyone that actually follows what goes on in the oil patch...try following the technical discussion at theoildrum.com

Urban Redneck's picture

The technical discussion at theoildrum.com tends to be focused on where management tells the little geologists in the silo of thought that they may look for and extract oil.  There are bigger strategic issues that materially impact supply and are too often neglected in the conversation.

treemagnet's picture

Apparently not enough folks have had enough bad experiences to take this shit seriously.  My father-in-law being a perfect example.  By the time enough folks are awake, the vise will have them pinched.   And since they're fucked like a drowning victim, we're all fucked cause they're gonna cling and panic and drown the rest of us.

Turd Ferguson's picture

Well done, Brandon.

JW n FL's picture

the sheep dont care. they are not even watching of feeling this shit.. just another day in the sheeps life.

 

ignorance abounds!

JW n FL's picture

http://www.milidroid.com/2011/news/wsj-talks-about-upcoming-smartphone-tests-usual-ignorance-abounds/

WSJ Talks about upcoming Smartphone Tests. Usual Ignorance Abounds.

******************************************************************

You have to LOVE big brother! give yourselves over...

Sathington Willougby's picture

See the funny thing about that is, we noticed.

It's just hard to shout above all the bleating.

Land of the fleeced, home of the slave.