What Oil War Premium?

Tyler Durden's picture

Central bank's ongoing and so-far-successful efforts to crush short-term volatility and encourage hapless individuals into the world's nominally rising stock markets has had consequences. Inequalities abound (rich vs poor, corporate profits vs capex/jobs, bond yields vs growth hopes) but nowhere else is this more evident - given the ever-increasing crescendo of the drum-beat of war around the world - than in oil price volatility. As the chart below shows... oil price volatility is at its lowest in 21 years. We can't help but be reminded of Taleb's priceless phrase that "there is no freedom without noise - and no stability without volatility."



This constant suppression of short-term volatility can lead to only one thing...

The Black Swan of Cairo

How Suppressing Volatility Makes the World Less Predictable and More Dangerous

Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These arti?cially constrained systems become prone to "Black Swans" -- that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.


Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability or, in some cases, ending up far worse than they were in their initial volatile state. Indeed, the longer it takes for the blowup to occur, the worse the resulting harm in both economic and political systems.


Seeking to restrict variability seems to be good policy (who does not prefer stability to chaos?), so it is with very good intentions that policymakers unwittingly increase the risk of major blowups. And it is the same misperception of the properties of natural systems that led to both the economic crisis of 2007-8 and the current turmoil in the Arab world. The policy implications are identical: to make systems robust, all risks must be visible and out in the open -- fluctuat nec mergitur (it fluctuates but does not sink) goes the Latin saying.




As Jean-Jacques Rousseau put it, "A little bit of agitation gives motivation to the soul, and what really makes the species prosper is not peace so much as freedom." With freedom comes some unpredictable fluctuation. This is one of life's packages: there is no freedom without noise -- and no stability without volatility.

Read more here

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LetThemEatRand's picture

World markets are like the overloaded springs on a '77 International Scout carrying a load of rocks up a mountain.   I owned one.  It is a stout vehicle, but when it starts to wear out, it goes quick.

dryam's picture

Given our debt based money system, the outrageous amount of governmental debt in most countries at all levels, individual debt, corporate debt, and $600+ trilion in derivatives that are very rate sensitive, the Fed has to keep rates near zero.  Otherwise, all of the aforementioned debts and derivatives blow up fairly quickly.  Stop printing today & the system collapses tomorrow.  Keep printing to keep rates at zero and they can milk this thing out a couple of years.  The only time they will stop the printing is when the current financial system breathes it's last breath.

They don't care about inflation, the gap between the rich and poor, stock market bubbles, etc.  They absolutely have to keep those rates near zero because of one thing.....basic eighth grade exponential math (something most Americans know nothing about).  Gold, silver, oil (to a certain extent with other countries help) will be manipulated at all cost.  This is WW3.  Instead of bombs being dropped it's a financial/economic chest match between the West and the East.  Mark my words, there will be some countries defecting from the West.

All of the outrageous propaganda will accelerate and ultimately it will come out that it had to be done for the sake of national security.

hungrydweller's picture

Agreed.  Look for South American countries to go first.  Finally Mexico then Canada.  It's all over then.

Occident Mortal's picture

Oil is less volatile because of globalisation.

It used to be that oil demand followed the US business cycle of boom boom bust. But now that's not the case, more oil goes to China than the US.

Asia, Europe and North America are all on their own economic cycles and this really smooths out the demand side of the world crude oil markets meaning oil is less volatile and the trend is set to continue.

Building iron condors on crude options have been a great way to make money ever since 2008.

zhandax's picture

The western hemisphere has some oil.  Look for China to go first.  They are dependent.  It will be interesting to watch the breadth and depth of this new deal with Russia. 

DaveyJones's picture

well said

did I mention I hate them

new game's picture

ultimately it is my labor/time they are stealing unless the fiat is put to good use.

we know what to do to hedge against zirp theft...

excellent thread! it is all about the oil stupid!

a fascist march to ring fence the supply-cue economic terrorism by the ptb...

east meets west over contol/supply-simple!

kchrisc's picture

"Given our debt based money system..."

Sorry, but it is a theft based system.

sessinpo's picture

dryam        Instead of bombs being dropped it's a financial/economic chest match between the West and the East.


The bombs come later.  Same thing happened before 1929.

SumTing Wong's picture

It's the beach ball being held just below the surface of the water. All is well until someone moves just a little, and then it goes flying...

Soul Glow's picture

Funny, I hauled a load of dirt up a mountain today.

+1 for the analogy

fonzannoon's picture



That chart says a lot. It says they can't clamp down on actual goods like food and energy prices. People are getting crushed, and that's not including heathcare. So instead they clamp down on interest rates and anything like PM's that are an inflationary canary in the coalmine. 

So they will sit back and say "hey listen, if there was real inflation, it would be showing up in the interest rate markets and in things like precious metals, and that's not happening" Then they (financial news networks and the monetary policy dickweeds that come on there) try to make sure they don't burst out in uncontrollable laughter until they go to commercial.

LetThemEatRand's picture

When all of those paper-bugs said "you can't eat gold," what they really meant is "you can't afford to eat."

disabledvet's picture

it's a weird system and more than likely no one understands it.

perhaps not being able to read music at all is the answer

sessinpo's picture

 fonzannoon     That chart says a lot. It says they can't clamp down on actual goods like food and energy prices. People are getting crushed, and that's not including heathcare. So instead they clamp down on interest rates and anything like PM's that are an inflationary canary in the coalmine.


I am trying to understand your dementia praecox (schizophrenic) post.

The chart indicates lower stable oil prices. So how do you claim they can't clamp down on energy prices? Everyone is geting crushed. That is the essence of a high debt society in a deflationary periond. Companies feel it too as well as consumers.

There is confusion and debate regarding interest rates in a deflationary period. For example "real interest rates" did rise from 1930 -1932, but them collapsed. Nominal rates just declined. The 10 year treasury yield was in an almost constant decline from 1920 to 1945 as shown by the link below.


And considering the mass move of PMs, which also occurred before the Great Depression, there is sufficient demand, yet prices have been subdued, as I have suggested. When in the last few decades have we even seen someone or a nation owning a majority of a precious metals?

The answer is pretty simple to me. As long as debts are held by fiat dollars, EVERY asset including PMs would be sold to finance those debts. That means downward pressure on commodities and upward pressure on fiat until that fiat beast is killed.


fonzannoon's picture

Lower stable oil prices? Sure, oil has stabilized at these levels, Lower than that $147 spike 5 years ago that lasted for a few weeks before it broke? Yes. But low? I don't think so man. I think oil prices right here are high enough to be wreaking havoc on whahetever economy we have left. Food prices are absolutely climbing again, and packaging is shrinking to compensate for even higher prices.

So yes, food and energy prices are either rising, or stable at elevated levels.There is no deflation happening there. I also believe that the easiest markets for them to manipulate are interest rates and PM's. They will point to them, as well as the altered government statistics, to contend there is little inflation. So I don't know if that helps your confusion, but I think to say we have "lower stable oil prices" is untrue. Keep pulling that chart back as far as you want with crude and tell me which way it consistently has gone.

 But I agree with you that the consequences of those price rises will end up being deflationary. I think it is, and will continue to, have many people choose food and gasoline over car and mortgage payments going forward. Cutting back spending anywhere possible. I think that is the battle the fed is fighting, and the only way it can fight it is through asset inflation. But that is not helping anyone but the wealthy. Eventually those deflationary forces will overwhelm the fed. It's only a matter of when, and what happens after that.

sessinpo's picture

fonzannoon     I also believe that the easiest markets for them to manipulate are interest rates and PM's.


I do not find prices inflationary except in very specific markets. Gas prices are approaching $4/gallon. We were doing that during the Bush years. Companies are being squeezed in a deflationary environment of lower gains. Thus they are trying to squeeze consumers. This is why you have the perceptionof inflation. A persons salary may not have risen, but neither has the company's. With all that is printed, that money is not circulatiing on main street which would be an inflationary situation. Instead, everyone is fighting for the few dollars out there. But this is also part of competition where I can still shop around. I don't buy $2+ for a loaf of bread. I buy the $1 kroger brand. I don't buy the $1.50 Cambells soup. I buy the under $1 dollar brand.

If anything, it is the Goverment that is squeezing both companies and consumers into this perceived inflation war. and forcing them to cut back. In other words, while we all talk about all the money being printed, the cost of Government exceeds the amount printed.

Finally to address you comment I put in this post. I am not big on the idea of Pm manipulation. These manipulators could just as easily be making that money on the upside without such capital expenditures.

fonzannoon's picture

I never said that the money being printed was hitting the streets. I am not saying we are in a hyperinflationary environment. I am saying that prices are still elevated historically, and people can't keep up with them. I realize they can trade down in quality. I agree they are doing that. That will continue until we are all eating cat food.

Flakmeister's picture

Prices have not declined, volatility has....

fonzannoon's picture

Flak that was the nicest thing you have ever said to me. Thank you.

Flakmeister's picture

I wasn't trying to make your day, but hey, whatever....

thestarl's picture

Food inflation Fonz is one thing the sheeple are finally starting to slowly wake up to,then you point them in the direction of energy some get it. 

GoinFawr's picture

Like boots or hearts LTER, once they start they really fall apart.


+1 for The Tragically Hip reference:

fingers and toes the 40 things we share. 41 if you include the fact that we don't care. Ah, when it starts to fall apart man it really falls apart!

Soul Glow's picture

Line of the day -

Central bank's ongoing and so-far-successful efforts to crush short-term volatility and encourage hapless individuals into the world's nominally rising stock markets has had consequences.


Sutton's picture

So I guess Gartman will be right.

Soul Glow's picture

Fartman can't wipe his own ass.

TammanyBrawl's picture

What's the problem? This just proves the Fed is really good at managing stuff, Keynesian money printing is the way of the future, Mr. Yellen is the 2nd coming of Jesus, and we should all just shut up and go watch Dancing with Stars.


DoChenRollingBearing's picture


Tyler writes: "We can't help but be reminded of Taleb's priceless phrase that "there is no freedom without noise - and no stability without volatility.""

Taleb is a genius, plain and simple.  Oil prices will almost certainly shock us.  It is even possible they may go down.  For awhile.

Soul Glow's picture

I need to read Black Swan again.

CrashisOptimistic's picture

Sometimes a cigar is just a cigar.

A little oil lesson.  Proppant is the stuff that is pumped down into shale wells and out the holes in the horizonal pipes (yes, they have holes) and it fills the fractures that were made when the humongous pressure pump on the surface put pressure into that pipe to fracture the low permeability rock (creating artificial permeability, aka interconnectedness of pores).  When the pressure is then released, the fractures are held open by the proppant.  Oil flows into those holes in the pipe and uppppppp to the surface.

It's all down two miles so there is a lot of pressure trying to squeeze the fractures closed.  The proppant stops that.  It's made of special sand or ceramic particles.

For each individual well in North Dakota or down in Texas at the Eagle Ford, you have to push 3 million (yes, million) pounds of proppant down that hole, flowing with 1 million pounds of water that helps it move along.  All that stuff is trucked to the site.  For each well.  Thousands of truck trips because trucks can't haul 3 million pounds in one trip.  And about 150 of those wells are fracked per month in NoDak.  More in Texas.

This ain't free.  This is big numbers.  Now we all know about the high decline rates of the oil flow.  Primo wells flow about 1200 bpd on day one and are down to 600 at the end of the first month.  The typical well is 600 day one and 400 end of month 1.  The declines are so fast that wells drilled within the last 18 months represent 1/2 (thats' 50%) of the total North Dakota production.  Meaning, the newest (the most recent 18 mos) wells are HALF of output.

If the price falls and wells don't get drilled, output falls INSTANTLY.  It's not the days of old.  You don't get years or decades before you see the effect of no drilling.  Now it happens immediately.

This then defines a very high feedback loop.  A control loop of very high response coefficients. 

The price to pay for all that can't fall or drilling stops and oil flow does too.  FAST. 

Presto, oil can't jump around anymore.

new game's picture

excellent post - boom will go to bust-give it ten years before all this activity declines to nominal returns. my son is on a drilling rig. multi pad top drives. fast and furious is the best description of what is happening. we take for granted its availability and the power of a gallon of gas.

humanity is so vulnerable it has no comparison to anything imaginable. 1900 - one billion humans. 2014 - 7.2 billion humans. 6.2 billion humans in 114 years-how sustainable is that?

not to mention we are trashing the soil that feeds us. potash shortage? water in ogallala aquafir depleted? monsanto nation? days of wrecking(reckon) upon mankind...

chart oil and population-do you feel lucky to be living in the end times of plateau oil?

next war is the positioning of control of the oil and flow. simple reality!

dearth vader's picture

Sounds convincing. So, high oil prices are here to stay - as will be ZIRP, QE, inequality, banker bonuses, PM price rigging, goverment lies, student loans and of course, ZH. I can live with that.

Pemaquid's picture

Informative, for sure. Thanks.

Flakmeister's picture

Moreover when you compute the number of truck trips required to haul the water and proppant and the diesel involved, it becomes a significant fraction of the first years oil output, anywhere from 10-35% depending on location and initial flow rate...

SandiaMan's picture

Gas Prices always go down before elections.

sessinpo's picture

SandiaMan     Gas Prices always go down before elections.


I hope you are saying gas prices are up now so they can decline later. Otherwise I don't understand your post. Nationwide, gas prices have been rising at this current time.

Flakmeister's picture

There is a natural cycle having to do with seasonal demand and summer winter gasoline blends...

But year-over-year, the trend is up...

Atomizer's picture

Israel’s National Orgasm over Ukraine request! It reminds me of the lack of request to show voter ID credentials. Who controls Diebold, what United Nations committee outside of the US monitors votes? The Bank of International Settlements in under minor threat, so is the derivative blowback on synthetic monetary expansion.

--Think Werner Karl Heisenberg




Minor Threat - Stumped

Flakmeister's picture

With the exception of a few months from July 08 to March 09 being short oil has been a losing bet since 1998...

Unlike gold, banks can't sell naked shorts of oil without going tits up...

And currently, there s zero spare production capacity.... 

sessinpo's picture

Flakmeister         And currently, there s zero spare production capacity....




Debunks peak oil.

Flakmeister's picture

This is the guy that confuses depletion rates with decline rates...

And to make matters even worse, tries to tell us that Natural Gas Plant liquids and API > 45 condensate that provide de minimus distallate  production are fungible with oil...

Sorry, some of us are capable of recognizing shills for what they are...

Pity you can't, though....

thestarl's picture

Just the simple fact that we're now into the tar sands and fracking tells this simple fucking mind we're in deep shit.Who said it here our whole civilisation has beeen made possible by cheap and plentiful oil. Now these fuckers can print money all they like but they can't pump 100 mb/d can they? 

Flakmeister's picture

That is basically it in a nutshell...

Cheap credit converted into increased supply so as to reduce prices cannot be realized...

teslaberry's picture

what stupid bullshit is this. article?

in much of the world oil prices are simply fixed by the state. and/ or rationed!. \

i think this article is worrying abou the wrong fixed volatility-----that of interest rates perhaps makes a better subject of discussion, but it does seem played out.

Atomizer's picture

Ok wild ass teslaberry tosser. Now explain to the Zero Hedge community.

Recycling Petrodollars



teslaberry you sound like another Ponzi motherfucker who is trying to save his Hedge Fund depletion exit via paper pencil whipped income statements returns.


My dear little weasel, we will run you out two ways. I prefer you coming forth as first option. The second option is your primary depositors who lost monies, you may have to present a suicide note or you where traveling with the Chinese on MH370 who had a patent. Either way, we have the Blackstone technology to make you disappear .


In the meantime, Telsa sounds like the car company who just got thrown out of NJ for directly selling cars independently to direct buyers.  I won’t mention the car fires or lack of infrastructure to recharge outside your garage. Berry sounds like a government fuck who can’t afford buying his own Z10, Q10 or Z30 Blackberry phone. In conclusion, Tesla - berry.\\