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The Connection Between Oil Prices, Debt Levels, And Interest Rates

Tyler Durden's picture




 

Submitted by Gail Tverberg of Our Finite World blog,

If oil is “just another commodity,” then there shouldn’t be any connection between oil prices, debt levels, interest rates, and total rates of return. But there clearly is a connection.

On one hand, spikes in oil prices are connected with recessions. According to economist James Hamilton, ten out of eleven post-World War II recessions have been associated with spikes in oil prices. There also is a logical reason for oil prices spikes to be associated with recession: oil is used in making and transporting food, and in commuting to work. These are necessities for most people. If these costs rise, there is a need to cut back on non-essential goods, leading to layoffs in discretionary sectors, and thus recession.

On the other hand, the manipulation of interest rates and the addition of governmental debt (by spending more than is collected in tax dollars) are the primary ways of “fixing” recession. According to Keynesian economics, output is strongly influenced by aggregate demand–in other words, total spending in the economy. Any approach that can increase total spending–either more debt, or more affordable debt will increase economic output.

What is the Direct Connection Between Increased Debt and Oil Prices?

The economy doesn’t just grow by itself (contrary to the belief of many economists). It grows because affordable energy products allow raw materials to be transformed into finished products. Increased debt helps energy products become more affordable.

Figure 1.

Figure 1.

Without debt, not a very large share of the total population could afford a car or a new home. In fact, most businesses could not afford new factories, without debt. The price of commodities of all sorts would drop off dramatically without the availability of debt, because there would be less demand for the commodities that are used go make goods.

With commodities, such as oil or copper, there is a two way pull:

  1. The amount it costs to extract the oil or copper (including taxes, shipping costs, and other indirect costs), and
  2. The selling price for the commodity. The selling price reflects the customers’ ability to pay for the product, based on wages and debt availability. It also reflects other issues, such as the availability of cheaper substitutes.

The availability of increased cheap debt tends to pull oil (and copper and other commodity) prices high enough that businesses find it profitable to extract these commodities. This is why Keynesian economics tends to work–at least historically. When oil prices dropped to the low $30s barrel in 2008, the issue was very much a “decrease in debt outstanding” problem–taking place even before the Lehman bankruptcy–as I will show in later charts.

Figure 2. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

Figure 2. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

The peak in oil prices took place in July 2008. When we look at US mortgage amounts outstanding, we find that home mortgage debt hit a peak on March 31, 2008, and very slightly declined by June 30, 2008. The bankruptcy of Lehman Brothers did not take place until September 15, 2008. A further decline in the amount of home mortgages outstanding occurred from that point on, partly because of declining sales prices and partly because commercial organizations bought homes to rent them out.

Figure 3. US home mortgage debt, based on Federal Reserve Z.1 data

Figure 3. US home mortgage debt, based on Federal Reserve Z.1 data

When we look at consumer credit outstanding, we find that consumer credit outstanding hit a maximum on July 31, 2008, and began declining by August 31, 2008. (Consumer credit is available monthly, while mortgage debt is available only quarterly. Some definitional change regarding consumer credit must have taken place as of December 31, 2010, to cause the jump in amounts in the graph.)

FIgure 4. Consumer Credit Outstanding based on Federal Reserve Data. Student Loan data was available only for 12/31/2008 and subsequent. Prior amounts were estimated.

FIgure 4. Consumer Credit Outstanding based on Federal Reserve Data. Student Loan data was available only for 12/31/2008 and subsequent. Prior amounts were estimated.

When student loans are excluded, consumer credit outstanding (including such items as credit card debt and auto loans) is still not back up to the July 31, 2008 level today (Figure 4).

I have not shown commercial and financial debt, but they decreased as well, with somewhat later peak dates, coinciding more with the Leyman collapse. In my view, the spending of individual citizens is primary. When their spending falls, it quickly ripples through to business and government accounts. We see this affect slightly later.

The Federal Government quickly stepped in with more spending (funded by debt), as shown in Figure 5, below.

Figure 5. U S publicly held federal government debt, based on Federal Reserve data.

Figure 5. U S publicly held federal government debt, based on Federal Reserve data.

If we combine all United States debt (Figure 6, below), including both government and non-government, it becomes clear that the rate of increase in debt slowed markedly in 2008 and subsequent years.

Figure 6. US debt, excluding  debt which is owed to governmental agencies such as the Social Security Administration. Amounts based on Federal Reserve Z.1 data.

Figure 6. US debt, excluding debt which is owed to governmental agencies such as the Social Security Administration. Amounts based on Federal Reserve Z.1 data.

Without this increasing debt, oil prices dropped to less than one-fourth of their maximum values (Figure 2). Prices of other energy products–even uranium–dropped as well. Somehow the high prices of oil that occurred in early 2008 had turned off the “pump” of ever-increasing debt that had previously held up commodity prices.

Oil Prices and Interest Rates–the Two Big Factors Affecting Discretionary Income

If oil prices spike, clearly discretionary income falls, for reasons described above. If interest rates spike, suddenly goods that are bought with credit (such as automobiles, homes, and new factories) become more expensive. Thus, a spike in interest rates will tend to adversely affect discretionary income as well. If the Federal Reserve wants to counter high oil prices (which continue to affect discretionary income adversely for the long term), it needs to keep interest rates low. Hence, the attempts to keep interest rates low for the long term.

The primary approach to keeping interest rates low has been Quantitative Easing (QE).US QE was begun in late 2008 and has been kept in place since. Other major countries are also using QE to keep interest rates down. The hope is that with very low interest rates the economies can somehow recover.

QE Doesn’t Really Work, Because it Doesn’t Fix Wages, Which are the Underlying Problem

When oil prices are high, wages tend to stagnate (Figure 7, below).

Figure 7. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

Figure 7. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

The reason why wages tend to stagnate when oil prices are high has to do with the adverse impact high oil prices have on the economy. Consumers cut back on discretionary spending. This leads to a loss of jobs in discretionary sectors. Also, labor is one of the biggest costs most businesses have. If profits are squeezed by high oil prices, the logical response if to try to reduce wages in response. One way is to outsource production to a lower-wage country. Another is to mechanize the process more, thereby slightly increasing fuel usage but significantly decreasing wage costs.

Instead of going to individuals as wages, the money from QE seems to go to speculators, who use it to bid up stock prices and land prices. The money from QE also tends to hold home prices up, because some homes are purchase by speculators. The money from QE also helps encourage investment in marginal enterprises, such as in shale gas drilling. As a recent Bloomberg, described the situation, Shale Drillers Feast on Junk Debt to Stay on Treadmill.

What Really Pumps Up the Economy is a Rising Supply of Cheap Oil

One piece of evidence supporting the view that a rising supply of cheap oil pumps up the economy is the rising average wages seen in Figure 7 (above) during periods when oil prices are low. Another piece of evidence that this is the case is the close correlation between oil consumption (and energy consumption in general) and inflation-adjusted GDP (Figure 8, below).

Figure 8. Growth in world GDP, compared to growth in world of oil consumption and energy consumption, based on 3 year averages. Data from BP 2013 Statistical Review of World Energy and USDA compilation of World Real GDP.

Figure 8. Growth in world GDP, compared to growth in world of oil consumption and energy consumption, based on 3 year averages. Data from BP 2013 Statistical Review of World Energy and USDA compilation of World Real GDP.

When there is an inadequate supply of oil, it affects GDP growth. This happens because there is no inexpensive, quick way of switching away from oil. We need oil for very many uses, including transport, agriculture, and construction. In the late 70s and early 80s, we tried to switch away from oil as much as possible. Now the low-hanging fruit for making such a switch are mostly gone.

The spike in oil prices signaled that something had changed dramatically. We could no longer count on a rising supply of cheap oil to pump up the economy. People’s job opportunities were dropping. They found it necessary to cut back on debt. Either that, or creditors cut off credit availability. One way or another, citizens started using less debt.

World Oil Supply

World oil supply is growing only very slowly, as illustrated in Figure 9. While we hear much about the growth in oil from shale formations in the US, this is mostly acting to offset falling production elsewhere.

7. Growth in world oil supply, with fitted trend lines, based on BP 2013 Statistical Review of World Energy.

Figure 9. Growth in world oil supply, with fitted trend lines, based on BP 2013 Statistical Review of World Energy.

It is this lack of growth in oil supply together with the high price of oil that is holding back world economic growth. As stated previously, very low interest rates are needed to even maintain the level of economic growth we have now.

The Difference Between and Growing and Shrinking World Economy for Repaying Debt

In a growing economy, it is possible to repay debt with interest. But once an economy flattens, it is much harder to repay debt.

Figure 10. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 10. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

It is likely that it is this problem that underlies the difficulty economies have in increasing their indebtedness. Very low interest rates can help, but ultimately, if the economy is not expanding, debt doesn’t work well. Wages are not growing in inflation-adjusted terms, and because of this, it is not possible for citizens to take on much more debt. Increased student debt gets in the way of buying homes using mortgages later.

The Unfortunate Oil Price Problem We Have Now

The problem we have now is that a rising supply of cheap oil is no longer possible. Most of the cheap-to-extract oil is already gone.

Instead, the cost of extraction keeps rising, but wages are not going up enough for people to afford the high cost of extracting oil (even with super-low interest rates). The unfortunate outcome is that oil prices are now too low for many producers. I described this in my post, Beginning of the End? Oil Companies Cut Back on Spending.

Because oil prices are too low for companies doing the extraction, we really need higher oil prices. But if oil prices are higher, they will put the country (and the world) back into recession. Interest rates are already very low–it is not possible to lower them further to offset higher oil costs. We are reaching the edge of how much central banks can do to hold economies together.

The Effect of Rising Interest Rates on the Economy

If it takes very low interest rates to offset the impact of high oil prices, it should be clear that rising interest rates, if they ever should occur, will have a disastrous effect on the economy. If interest rates should rise, they could be expected to have a number of adverse effects, pretty much simultaneously.

  • They make the monthly payments for a new home or new car higher, reducing the sales of both
  • They reduce the sales price of existing bonds (carried on the books of banks, pension funds, and insurance companies)
  • They likely will reduce stock market prices, because bonds will look like they will yield better in comparison.
  • Also, the country will be shifted into recession, and lower stock prices will result based on the apparently worse prospects of most companies.
  • The resale value of homes will likely drop, because fewer people will be in the market for  a move-up home.
  • The US government will need to pay higher interest on its debt, necessitating a rise in taxes, further pushing the country toward recession.
  • With higher taxes and more layoffs, there will be more defaults on debts of all kinds. Banks, insurance companies, and pension plans will be especially affected. Many will need to be bailed out, but it will be increasingly difficult to do so.

The Federal Reserve has said that it is in the process of scaling back the amount of debt it buys under QE. The expected effect of scaling back QE is that interest rates will rise, especially at with respect to longer-term debt. For a while, US interest rates did rise, and home sales dropped off.  But more recently in 2014 year to date, interest rates seem to be falling rather than rising. This is strange, since this is the period when the scaling back of QE is supposedly actually taking place, rather than just planned. It is possible that overseas transactions are distorting what is really happening.

Getting Out of this Mess

The substitution of debt for additional salary isn’t necessarily a very good one, even with very low interest rates. For example, the maximum length of new car loans has increased from five years to six years to seven years, allowing people to afford more expensive cars. The catch is that loans are “underwater” longer, and it becomes harder to buy a replacement car. So ultimately, buyers tend to keep their cars longer, reducing the demand for new cars. The problem isn’t entirely solved; to some extent it is just delayed.

It is hard to see a way out of our current predicament. The ability of consumers to pay higher prices for goods and services under normal circumstances requires higher wages. But if higher wages are not available, higher debt plus very low interest rates can “sort of” substitute. This cannot be a permanent solution, because there are too many things that will disturb this equilibrium.

As we have seen, rising interest rates will bring an end to our current equilibrium, by raising costs in many ways, without raising salaries. It will also reduce equity values and bond prices. A rise in the cost of extraction of oil, if it isn’t accompanied by high oil prices, will also put an end to our equilibrium, because oil producers will stop drilling the number of wells needed to keep production up.  If oil prices rise (regardless of reason), this will tend to put the economy into recession, leading to job loss and debt defaults.

The only way to keep things going a bit longer might be negative interest rates. But even this seems “iffy.” We truly live in interesting times.

 

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Thu, 05/22/2014 - 20:57 | 4787057 Theta_Burn
Theta_Burn's picture

And they say Japan is a lost cause...

I demand to see the manager

46+2

.

Fri, 05/23/2014 - 07:22 | 4787837 economics9698
economics9698's picture

Gold standard.  Full reserve banking.

Fri, 05/23/2014 - 08:39 | 4788029 litemine
litemine's picture

Oh ya...and + $50,000. per Toz

Ready to retire on your 20 oz's?

Thu, 05/22/2014 - 21:00 | 4787062 Al Huxley
Al Huxley's picture

That's a pretty long way of stating the obvious: too many people + not enough cheap oil = trouble

Thu, 05/22/2014 - 21:05 | 4787068 El Vaquero
El Vaquero's picture

Actually, it's more than that.  It's a way of saying there is cause to believe that oil production could possibly drop much faster than the Hubbert curve predicts - i.e. when the oil companies cannot take out another loan that they need to pump more oil, they'll either sell off some of their equipment and run into the same problem in the near future, or they'll quit pumping oil.  She's saying that the dynamics behind pumping oil and finance could very well change rapidly and violently when finance meets physics.

Thu, 05/22/2014 - 21:10 | 4787085 Al Huxley
Al Huxley's picture

...which is kind of another long way of saying: too many people + not enough cheap oil = trouble ;)

 

 

 

Thu, 05/22/2014 - 21:17 | 4787101 bunzbunzbunz
bunzbunzbunz's picture

Dont't get smart with me young man.

Fri, 05/23/2014 - 00:06 | 4787433 dryam
dryam's picture

What this is saying is that a debt based money system must always be expanding or otherwise it goes into a dramatic downward spiral. The problem is that the real economy of the world is now in perpetual contraction mode now that we have past peak cheap oil. One graph is going up exponentially and one is decreasing exponentially into virtual perpetuity. Math says something has to give. Thus, the man made system (current money/credit money system) has to ultimately break. Additionally, our current society & living standard can not be supported by smoke & mirrors indefinitely and will be falling off at an exponential pace.

It's not called Zerohedge for nothing.

Fri, 05/23/2014 - 09:55 | 4788292 PeakOil
PeakOil's picture

Yup. Smoke and mirrors only takes you so far.

In other words, the hydrocarbon fuelled modern industrial economy is running on vapours.

Fri, 05/23/2014 - 10:54 | 4788484 saveandsound
saveandsound's picture

Peak oil is not going to end the world. There are other sources of energy.

However, mobility is going to suffer and life is going to change for most of us. Interesting times, indeed.

Thu, 05/22/2014 - 21:57 | 4787189 El Vaquero
El Vaquero's picture

 

...which is kind of another long way of saying: too many people + not enough cheap oil = trouble, and sooner than we might expect. ;)

Thu, 05/22/2014 - 22:17 | 4787227 centerline
centerline's picture

Damn, I hate to quote this shit right now considering what is going on.  But, it is a good quote regardless of origin.  And very applicable to our times.

 

“There are decades where nothing happens; and there are weeks where decades happen.”

? Vladimir Lenin

 

The "can kicking" we are seeing... making it seem like nothing is happening... is resistance to fate, and therefore the means of accelerating change once change is set in motion by some unforeseen future event.

Thu, 05/22/2014 - 22:02 | 4787197 centerline
centerline's picture

Precisely EV.  That is why EROEI is the critical metric.  The counterbalance is demand destruction - but, it's affects are delayed.  After all, it is a "consumer" economy that requires perpetual growth.  Temporary "patching" can kick the proverbial can a little... but, the bigger trend is not significantly affected.  The stuff we see now for the most part is just short term noise.

Thu, 05/22/2014 - 22:39 | 4787274 El Vaquero
El Vaquero's picture

EROEI numbers are all over the map, and without seeing the methodology used and whatnot, I tend to be a bit skeptical of them.  Not of the concept of EROEI, just the claims and measurements.  In a sense, dollar costs are proxies for EROEI.  Very low EROEI wells are likely to have a very high dollar cost.  

Thu, 05/22/2014 - 23:06 | 4787327 CrashisOptimistic
CrashisOptimistic's picture

"In a sense, dollar costs are proxies for EROEI.  Very low EROEI wells are likely to have a very high dollar cost.  "

 

Probably a legit broad perspective, EV.

But QE makes measurement impossible.  All we can say is broad things.

Another issue with the conclusion is IP -- initial production.  You might see 10+ thousands of barrels/day from an offshore well that costs a lot.  A Bakken well has an IP of under 1000 bpd, and costs about $8 million to drill/frack.  All oil wells don't flow the same rate on day 1.

Thu, 05/22/2014 - 23:17 | 4787349 El Vaquero
El Vaquero's picture

Absolutely.  I think you'd have to do it on a well-by-well basis, and use relative dollar costs between the wells to really start getting a picture, and then understand because of QE and fractional reserve banking in general, you're trying to hit a moving target.  You might also want to throw in the portion of the nation's resources that go towards extraction.  IMO, the percentage of the nation's GDP that goes towards oil production is more important than the GDP itself.  And again, with the government's penchant for changing definitions and being all round manipulative sonsabitches, you're trying to hit a moving target.  Even so, I think if you're willing to wade through the BS and lies, you can get a decent picture of what is going on.

Fri, 05/23/2014 - 09:35 | 4788230 sessinpo
sessinpo's picture

Al Huxley     That's a pretty long way of stating the obvious: too many people + not enough cheap oil = trouble

---

El Vaquero     Actually, it's more than that.  It's a way of saying there is cause to believe that oil production could possibly drop much faster than the Hubbert curve predicts - i.e. when the oil companies cannot take out another loan that they need to pump more oil, they'll either sell off some of their equipment and run into the same problem in the near future, or they'll quit pumping oil.  She's saying that the dynamics behind pumping oil and finance could very well change rapidly and violently when finance meets physics.

----

Okay to play devils advocate, what is a commodity? Are grains or cattle? What about coffee?

Here is my point. I can either of your statements and replace it with whatever. For example:

Al Huxley      That's a pretty long way of stating the obvious: too many people + not enough cheap grains = trouble

Al Huxley      That's a pretty long way of stating the obvious: too many people + not enough cheap coffee = trouble

Or maybe this example:

    Actually, it's more than that.  It's a way of saying there is cause to believe that cattle production could possibly drop much faster than the Hubbert curve predicts - i.e. when the cattle companies cannot take out another loan that they need to produce more cattle, they'll either sell off some of their equipment and run into the same problem in the near future, or they'll quit producing cattle.  She's saying that the dynamics behind producing cattle and finance could very well change rapidly and violently when finance meets physics.

 

What's worse is the authors premise that interest rates wouldn't effect a commodity, thus since interest rates effect oil, oil can't be a commodity? Complete BS. Interest rates can effect any market. Interest rates a way of measuring risk on money loaned. It doesn't matter what market you are in or what product you have (even commodities), if you have to borrow, then interest rates effect you. And yes, that also applies to rate of return.

Fri, 05/23/2014 - 10:13 | 4788346 PeakOil
PeakOil's picture

Oil happens to be a very special. It underpins the modern global industrial economy & the world reserve currency, you know, the petrodollar. Beef or coffee too expensive? No worries. Substitute or go without. Wheels keep turning...

What's the substitute for Oil genius?

Fri, 05/23/2014 - 11:59 | 4788796 marathonman
marathonman's picture

Manpower and Amish lifestyles?

Thu, 05/22/2014 - 21:06 | 4787077 Citxmech
Citxmech's picture

The second to last chart with the trendlines is pretty sobering.  Not much headroom left there.  Love to see that with a "cost per barrel produced" line overlaid.

Thu, 05/22/2014 - 21:39 | 4787150 Kirk2NCC1701
Kirk2NCC1701's picture

Or... Lack of DO* and lack of DI**, means you better have one or the other.  Else, it's time to Do or Die.

 

* DO = Disposable Oil  = cheap + available energy

** DI = Disposable Income =lots of income relative to basic needs

Thu, 05/22/2014 - 21:13 | 4787098 Kreditanstalt
Kreditanstalt's picture

"Without debt, not a very large share of the total population could afford a car or a new home. In fact, most businesses could not afford new factories, without debt. The price of commodities of all sorts would drop off dramatically without the availability of debt, because there would be less demand for the commodities that are used go make goods."

Yes, but without debt-based money, the PURCHASING POWER of the dollar would SOAR, too.

Thu, 05/22/2014 - 21:18 | 4787107 bunzbunzbunz
bunzbunzbunz's picture

Unless it didn't.

Thu, 05/22/2014 - 21:34 | 4787139 Spastica Rex
Spastica Rex's picture

I'm looking for the right economic theory/party/leader to get us back to business as usual.

Thu, 05/22/2014 - 22:49 | 4787293 aVileRat
aVileRat's picture

Unless you have a system where everything is instantly purchased (and payable cycles are zero), you will always have a need for working capital; aka. credit lines, corporate cash floats or liquidity pools: Debt/loaned cash.

Sadly, one world currency would cause every wingnut to scream "NWO is here" and that magical SDR would splinter at a rate variant to the weeks to crack the code. Look at how "stable" bitcoin was before it splintered, or the gold standard (every time it's been tried). Systems tend to return to entropy and reset. Facts of life for a cyclic species.

Not all upstream corporates take a responsible level of debt on to their sheets. The 2008 story of Oilexco (and the dangers in non-producing resource lending) is a serious issue. However most lending is done with specific rules and guidelines, often backed by producing assets. Forest Oil was one most recent example of someone who crashed a 100 year old iconic brand due to chasing the "whales' as they say. Rice is an outlier, but so is any company with greater than 2.8x D/x. The other oil heads that lurk in ZH can explain that in another conversation. On the whole, since 1Q14 is nearly over, the sector is carrying way way waaaay less debt than normal. With most at the supermajor level well aware they are either in play by NOC's (or soon to be), or will need to continue to grow leaner in much the same way the early 1980's microtransistor revolution forced "old tech" to retool for a new innovation cycle, latter dubbed "moores curve".

Shales and their "tight" reserviors is only the start; what is next will be really big shit, which is why some of those corporates trade at very high multiples for their sector group; but compared to other "moonshot" industries at very cheap valuations on cash flows. The next generation of petro-tech sadly requires technology which is about 20 years out for Russia and China at this stage, and likely will be something that is not going to be made available to them now. The best Putina can hope for is to make an old timey style "trade cartel" with China and pray that a Weakened Russia is better for him than a obsolete Russia, which means a dead Putina. At the very best, Russia has condemned itself to be the "Canada" to China for a long time now. Don't think China will ever give Putin enough cash flow to return Russia to USSR level power. As he becomes more fustrated, expect Russian Xenophobia and extortion to accelerate, and the gross brutality against Russian minorities (and common enemies like Urgurs and Tartars) to accelerate.

Watching India and the MENA's responses to Russian and Chinese brutality, or how much their own peoples are willing to put up with is going to be the catalyst I suspect, or it damn well should be.

On an alternate note an often overlooked piece of the "shale" story is that while the wells come on a high levels, the blowdown can be managed. Depending on rock conditions and the reservior engineer, one can easily run a well deep into the 10 year mark that would outpace all but the most largest fields in the world; that is pre-enhanced recovery methods such as pressure drives, restimulating the formation or solvent sweeps. Certain formations also have the natural ability to "refrac" themselves.Again, not something many know about, because that is the bleeding edge of the industry; in much the same way one does not see the newest toys Boeing plays with on TopGear.com.  (sorry Mr.Clarkson) but not for lack of Area 51 junkies snapping cloud shadows every day.

On debt, resource booking and NOC's: Russia also has a notorious problem, up there with PEMEX in regards to overstating the long term performance of their fields gross productive capacities, esp. Gazprom. which becomes very testy when one asks about the nature of their reserve booking, corporate decline rates and cash/field management policies. 

Getting back on track:

Yes oil is the ultimate giffen good, more important than oil due to the hidden requirements that go into our lifestyle. Everything from the red in your wife's Loubouton shoes to the Iphone case to the KY jelly, to the films that coat your Solar arrays, its an additive or lube, or something in between. Which is why nobody really can replace it, since synthetic crudes that are so necessary for long-chain petrochemical engineering are stupidly prohibitive to create from fleshy plants or biomass reactors.

Cheap energy was the reason discretionary income was possible, started with coal from Scotland to London; rolled down to Saudi/Romanian fields post-WWII. Without the highway tax on the cheap US fuel, overbuilt post-war, the "peace dividend" of the 1960's would have been way less effective on US retail innovation.

It's not perfect, but unless someone wants to rewrite the laws of physics, it's going to be with us for a while. Well, until self-repairing nano-machines are used as lubes & plastic replacements --- goodluck with that one.

 

Thu, 05/22/2014 - 23:50 | 4787421 Spastica Rex
Spastica Rex's picture

Wow - that was really well thought out and written response.

That my snarky, vapid one-liner inspired it is pretty remarkable.

+1

Fri, 05/23/2014 - 13:51 | 4789208 Zerozen
Zerozen's picture

At the very best, Russia has condemned itself to be the "Canada" to China

Nonsense. Russia does plenty of business outside of China, mostly in Europe. The tilt towards Asia is a diversification of business partners, not an economic joining-at-the-hip with China. A more appropriate analogy for China's version of Canada would be Australia.

Don't think China will ever give Putin enough cash flow to return Russia to USSR level power

If it's in their interests to do a lot of business, they'll do a lot of business with each other, and both will get rich. This is infantile thinking...it's like saying 30 years ago that America will never give those commie pinko Chinese enough cash flow to become a powerful, wealthy nation. The U.S. did, and it happened, and that's how markets work.

As he becomes more fustrated, expect Russian Xenophobia

"As the West goes bankrupt, expect Anglo-Saxon Russophobia to accelerate." Fixed it for ya.

and the gross brutality against Russian minorities (and common enemies like Urgurs and Tartars) to accelerate.

Oh joy. It's about time a white country went counter-trend on the fad of endless hordes of third-world immigrants flooding into white countries.

Watching India and the MENA's responses to Russian and Chinese brutality, or how much their own peoples are willing to put up with is going to be the catalyst I suspect, or it damn well should be.

There aren't any Indian minorities in either China or Russia. Seriously, at this point, you're just mentally jerking off over some fantasy future prediction of yours. You sound like you know something about the oil business but please, stay away from the armchair geopoliticking.

 

Thu, 05/22/2014 - 21:18 | 4787105 km4
km4's picture

Tyler you can have a field day follow up post with this

China calls the US a "Mincing Rascal." China is so right http://pando.com/2014/05/22/china-calls-the-us-a-mincing-rascal-china-is... via @pandodaily

 

Chinese state media is slagging the U.S. as a “mincing rascal” and “high-level hooligan” in response to federal hacking charges filed against five members of the People’s Liberation Army’s Unit 61398.

As is the usually the case when you interpolate between the Sino-Tibetan and the Indo-European language families, something has obviously been lost in translation. But, as with North Korea’s bellicose tirades — they recently called South Korea’s president a “crafty prostitute” and President Obama her “powerful pimp” — weird interpretations are 99% of the fun.

Despite the trans-Pacific linguistic hiccups, however, the Chinese government’s gist — that Americans are playing cute with their hypocrisy, deploying lawyerly distinctions without a difference in a lamely transparent attempt to validate its own NSA’s electronic eavesdropping against China — is clear. Not to mention hard to deny.

There was once a time when Americans were like John Wayne: Straight shooters, who did what they had to do. We weren’t stylish like the French or smart like the Brits or terrifyingly accurate with firearms like the Afghans. But you could always count on Americans to keep their word. I say “word” because, being people of few words, we preferred singular to plural.

When General MacArthur said “I shall return,” everyone knew exactly what it meant (never mind that he actually returned somewhere else.)

continues....

Thu, 05/22/2014 - 21:34 | 4787142 Spastica Rex
Spastica Rex's picture

At least they didn't call us the Nelliest Nellie in Nellie-Town.

Fri, 05/23/2014 - 07:12 | 4787807 tonyw
tonyw's picture

"...There was once a time when Americans were like John Wayne: Straight shooters, who did what they had to do....."

when was this legendary time?

i suppose the Straight shooters did what they had to do when  "dealing" with those pesky natives, annexing Texas, invading and overthrowing more governments than any other country...

 

Thu, 05/22/2014 - 21:25 | 4787119 disabledvet
disabledvet's picture

ummmm..."oil prices go through the roof and it's GREAT!"

sound about right?
that is all this "recovery" has been hasn't it? Why would they care about finished product...let alone food. (We'll skip the whole shelter thing for now.)

"That of, by and for the higher energy price shall not perish from this earth!"

If you're a debt holder...you're the bag holder. We'll see if they nuked the treasury market successfully or not. I'm waiting for the 40% "with inflation adjustment" dow correction first, although the dollar at parity with the yen will do.

Thu, 05/22/2014 - 22:10 | 4787208 centerline
centerline's picture

Not sure about that debt holder = bag holder thing.  Seems to me that is a gamble too.  Moral hazard be damned, the rule of law is toast.  The free-for-all is on.  Actual tangible, off the grid assets are about the only real bet left soon.  That and getting out of Dodge, assuming the next place isn't Dodge as well.  The trouble is timing...

Pesky governments are dying.  Made too many promises.  They are going to take from everyone they can to keep things from falling apart.  Society is going to pull itself apart in the process.  Having anything that ties you to the system will be a mechanism for extorsion.  A house.  A car.  A kid in school.  A job.  Medical needs.  A bank account.  You name it.  Hard to say what the next best move is... but debt might figure into this differently than one might think.  Still noodling through this... thoughts appreciated!

Thu, 05/22/2014 - 22:47 | 4787289 El Vaquero
El Vaquero's picture

If I could time the implosion, I would take out as much debt as possible and purchase all sorts of shit that might be helpful.  Tools.  Storage for a few hundred gallons of gasoline.  An AR-10 with a snazzy Nightforce mounted on it and a metric shitton of ammo.  If you work under the impression that the banks are going to go under and not be able to enforce contracts, then you should get what you can when you can if you can time it right.  Fuck the bankers.  They didn't create the dollars that they loaned you.  They entered a few numbers on a ledger and said that you were indebted to them.

 

But I don't have faith in my ability to time it that well, and I don't want to go through yet another lawsuit with a bank.  So I'm learning to make due with what I do have, under the assumption that the benefits of heavy industry may go away entirely, or become much less reliable.

Thu, 05/22/2014 - 21:32 | 4787134 bubblemania
bubblemania's picture

Yes, Oil - Up Equities - Up Real Estate - UP Food - UP All things that are purchased in US Dollars. If dollars are worth less all of the above costs more. It's all relative! Bullish!

Thu, 05/22/2014 - 23:18 | 4787350 kurt
kurt's picture

Don't be floating your negative interest bubble fuckface, not here!

Fri, 05/23/2014 - 00:22 | 4787475 Joe A
Joe A's picture

All coming to an end in the coming decades. It is the ecoLogy, stupid!

Economy is a submit of ecology, not the other way around. There are not enough raw materials and energy around to make finished products. At least, not in their current shape. Matter is congealed energy, but lots of it.

Fri, 05/23/2014 - 01:28 | 4787531 Mediocritas
Mediocritas's picture

High quality, cheap-to-produce oil has already peaked, leaving us with expensive-to-produce non-conventional oil.

No easy credit, no "shale revolution" (let that sink in for a while). If ZIRP is dropped and rates rise, then a whole lot of marginal production gets shelved and with it goes the economy. ZH is already onto the bullshit of shale so I don't need to explain further.

Anyone in doubt that we're already in the end game, here are some canaries:

http://www.euanmearns.com/wp-content/uploads/2013/10/UK_primary_20121.png

http://oilprice.com/uploads/AC9027.png

http://www.euanmearns.com/wp-content/uploads/2014/01/europe_primary_ener...

Draghi can't print Joules.

Fri, 05/23/2014 - 02:29 | 4787574 Debugas
Debugas's picture

oil is energy

energy is driver of all activity among other things economic activity

Fri, 05/23/2014 - 09:40 | 4788242 sessinpo
sessinpo's picture

Debugas       oil is energy

energy is driver of all activity among other things economic activity

---

Man can live without oil. No one wants to, but it has been done before. Man cannot live without food.

Fri, 05/23/2014 - 13:37 | 4789168 Zerozen
Zerozen's picture

The reason no one wants to is because it means 80%-90% of the world's population will have to die off.

Fri, 05/23/2014 - 03:14 | 4787608 nixy
nixy's picture

But....ffs..... there are two types of debt.

1. The debt we are morally obliged to repay, 'cos some one's worked to earn it.

2. And then there's the stuff we're (they're) NOT morally obliged to repay...... AKA thin air banker credit.

Fri, 05/23/2014 - 06:55 | 4787775 The wheels on t...
The wheels on the bus are going to fall off's picture

You have exponential currency supply, that requires exponential growth from an exponential increase in population but with finite energy (at economical price) = Unsustainable growth model and total collapse

 

Either the model above has to be infinite as a whole, or finite as a whole. 

Fri, 05/23/2014 - 07:58 | 4787919 samsara
samsara's picture

Thanks Tylers for another GailTheActuary article.

Next how about a Nicole 'Stoneleigh' Foss article

Fri, 05/23/2014 - 08:15 | 4787954 SmallerGovNow2
SmallerGovNow2's picture

Great analysis Gail...

Fri, 05/23/2014 - 09:09 | 4788137 Spungo
Spungo's picture

The problem is not enough humans. Everyone should have as many kids as possible. Full quiver, bitches.

Fri, 05/23/2014 - 09:42 | 4788251 sessinpo
sessinpo's picture

More BS for those that actually think it through.

Fri, 05/23/2014 - 11:21 | 4788616 Der Wille Zur Macht
Der Wille Zur Macht's picture

This guy shares a LOT with the Keynesian mindset. 

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