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10 Reasons Why A Severe Drop in Oil Prices Is A Problem

Tyler Durden's picture




 

Submitted by Gail Tverberg via Our Finite World blog,

Not long ago, I wrote Ten Reasons Why High Oil Prices are a Problem. If high oil prices can be a problem, how can low oil prices also be a problem? In particular, how can the steep drop in oil prices we have recently been experiencing also be a problem?

Let me explain some of the issues:

Issue 1. If the price of oil is too low, it will simply be left in the ground.

The world badly needs oil for many purposes: to power its cars, to plant it fields, to operate its oil-powered irrigation pumps, and to act as a raw material for making many kinds of products, including medicines and fabrics.

If the price of oil is too low, it will be left in the ground. With low oil prices, production may drop off rapidly. High price encourages more production and more substitutes; low price leads to a whole series of secondary effects (debt defaults resulting from deflation, job loss, collapse of oil exporters, loss of letters of credit needed for exports, bank failures) that indirectly lead to a much quicker decline in oil production.

The view is sometimes expressed that once 50% of oil is extracted, the amount of oil we can extract will gradually begin to decline, for geological reasons. This view is only true if high prices prevail, as we hit limits. If our problem is low oil prices because of debt problems or other issues, then the decline is likely to be far more rapid. With low oil prices, even what we consider to be proved oil reserves today may be left in the ground.

 

Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.

While many claims have been made that US shale drilling can be profitable at low prices, actions speak louder than words. (The problem may be a cash flow problem rather than profitability, but either problem cuts off drilling.) Reuters indicates that new oil and gas well permits tumbled by 40% in November.

Offshore drilling is also being affected. Transocean, the owner of the biggest fleet of deep water drilling rigs, recently took a $2.76 billion charge, among a “drilling rig glut.”

 

3. Shale operations have a huge impact on US employment. 

Zero Hedge posted the following chart of employment growth, in states with and without current drilling from shale formations:

Jobs in States with and without Shale Formations, from Zero Hedge.

Figure 1. Jobs in States with and without Shale Formations, from Zero Hedge.

Clearly, the shale states are doing much better, job-wise. According to the article, since December 2007, shale states have added 1.36 million jobs, while non-shale states have lost 424,000 jobs. The growth in jobs includes all types of employment, including jobs only indirectly related to oil and gas production, such as jobs involved with the construction of a new supermarket to serve the growing population.

It might be noted that even the “Non-Shale” states have benefited to some extent from shale drilling. Some support jobs related to shale extraction, such as extraction of sand used in fracking, college courses to educate new engineers, and manufacturing of parts for drilling equipment, are in states other than those with shale formations. Also, all states benefit from the lower oil imports required.

 

Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade.

With low oil prices, it becomes much more difficult for shale drillers to pay back the loans they have taken out. Cash flow is much lower, and interest rates on new loans are likely much higher. The huge amount of debt that shale drillers have taken on suddenly becomes at-risk. Energy debt currently accounts for 16% of the US junk bond market, so the amount at risk is substantial.

Dropping oil prices affect international debt as well. The value of Venezuelan bonds recently fell to 51 cents on the dollar, because of the high default risk with low oil prices.  Russia’s Rosneft is also reported to be having difficulty with its loans.

There are many ways banks might be adversely affected by defaults, including

  • Directly by defaults on loans held be a bank
  • Indirectly, by defaults on securities the bank owns that relate to loans elsewhere
  • By derivative defaults made more likely by sharp changes in interest rates or in currency levels
  • By liquidity problems, relating to the need to quickly sell or buy securities related to ETFs

After the many bank bailouts in 2008, there has been discussion of changing the system so that there is no longer a need to bail out “too big to fail” banks. One proposal that has been discussed is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports, such an approach has been approved by the G20 at a meeting the weekend of November 16, 2014. If this is true, our bank accounts and pension plans could already be at risk.1

Another bank-related issue if debt defaults become widespread, is the possibility that junk bonds and Letters of Credit2 will become outrageously expensive for companies that have poor credit ratings. Supply chains often include some businesses with poor credit ratings. Thus, even businesses with good credit ratings may find their supply chains broken by companies that can no longer afford high-priced credit. This was one of the issues in the 2008 credit crisis.

 

Issue 5. Low oil prices can lead to collapses of oil exporters, and loss of virtually all of the oil they export.

The collapse of the Former Soviet Union in 1991 seems to be related to a drop in oil prices.

Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Oil prices dropped dramatically in the 1980s after the issues that gave rise to the earlier spike were mitigated. The Soviet Union was dependent on oil for its export revenue. With low oil prices, its ability to invest in new production was impaired, and its export revenue dried up. The Soviet Union collapsed for a number of reasons, some of them financial, in late 1991, after several years of low oil prices had had a chance to affect its economy.

Many oil-exporting countries are at risk of collapse if oil prices stay very low very long. Venezuela is a clear risk, with its big debt problem. Nigeria’s economy is reported to be “tanking.” Russia even has a possibility of collapse, although probably not in the near future.

Even apart from collapse, there is the possibility of increased unrest in the Middle East, as oil-exporting nations find it necessary to cut back on their food and oil subsidies. There is also more possibility of warfare among groups, including new groups such as ISIL. When everyone is prosperous, there is little reason to fight, but when oil-related funds dry up, fighting among neighbors increases, as does unrest among those with lower subsidies.

 

Issue 6. The benefits to consumers of a drop in oil prices are likely to be much smaller than the adverse impact on consumers of an oil price rise. 

When oil prices rose, businesses were quick to add fuel surcharges. They are less quick to offer fuel rebates when oil prices go down. They will try to keep the benefit of the oil price drop for themselves for as long as possible.

Airlines seem to be more interested in adding flights than reducing ticket prices in response to lower oil prices, perhaps because additional planes are already available. Their intent is to increase profits, through an increase in ticket sales, not to give consumers the benefit of lower prices.

In some cases, governments will take advantage of the lower oil prices to increase their revenue. China recently raised its oil products consumption tax, so that the government gets part of the benefit of lower prices. Malaysia is using the low oil prices as a time to reduce oil subsidies.

Most businesses recognize that the oil price drop is at most a temporary situation, since the cost of extraction continues to rise (because we are getting oil from more difficult-to-extract locations). Because the price drop this is only temporary, few business people are saying to themselves, “Wow, oil is cheap again! I am going to invest a huge amount of money in a new road building company [or other business that depends on cheap oil].” Instead, they are cautious, making changes that require little capital investment and that can easily be reversed. While there may be some jobs added, those added will tend to be ones that can easily be dropped if oil prices rise again.

 

Issue 7. Hoped for crude and LNG sales abroad are likely to disappear, with low oil prices.

There has been a great deal of publicity about the desire of US oil and gas producers to sell both crude oil and LNG abroad, so as to be able to take advantage of higher oil and gas prices outside the US. With a big drop in oil prices, these hopes are likely to be dashed. Already, we are seeing the story, Asia stops buying US crude oil. According to this story, “There’s so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the US anymore.” 

LNG prices tend to drop if oil prices drop. (Some LNG prices are linked to oil prices, but even those that are not directly linked are likely to be affected by the lower demand for energy products.) At these lower prices, the financial incentive to export LNG becomes much less. Even fluctuating LNG prices become a problem for those considering investment in infrastructure such as ships to transport LNG.

 

Issue 8. Hoped-for increases in renewables will become more difficult, if oil prices are low.

Many people believe that renewables can eventually take over the role of fossil fuels. (I am not of view that this is possible.) For those with this view, low oil prices are a problem, because they discourage the hoped-for transition to renewables.

Despite all of the statements made about renewables, they don’t really substitute for oil. Biofuels come closest, but they are simply oil-extenders. We add ethanol made from corn to gasoline to extend its quantity. But it still takes oil to operate the farm equipment to grow the corn, and oil to transport the corn to the ethanol plant. If oil isn’t around, the biofuel production system comes to a screeching halt.

 

Issue 9. A major drop in oil prices tends to lead to deflation, and because of this, difficulty in repaying debts.

If oil prices rise, so do food prices, and the price of making most goods. Thus rising oil prices contribute to inflation. The reverse of this is true as well. Falling oil prices tend to lead to a lower price for growing food and a lower price for making most goods. The net result can be deflation. Not all countries are affected equally; some experience this result to a greater extent than others.

Those countries experiencing deflation are likely to eventually have problems with debt defaults, because it will become more difficult for workers to repay loans, if wages are drifting downward. These same countries are likely to experience an outflow of investment funds because investors realize that funds invested these countries will not earn an adequate return. This outflow of funds will tend to push their currencies down, relative to other currencies. This is at least part of what has been happening in recent months.

The value of the dollar has been rising rapidly, relative to many other currencies. Debt repayment is likely to especially be a problem for those countries where substantial debt is denominated in US dollars, but whose local currency has recently fallen in value relative to the US dollar.

Figure 3. US Dollar Index from Intercontinental Exchange

Figure 3. US Dollar Index from Intercontinental Exchange

The big increase in the US dollar index came since June 2014 (Figure 3), which coincides with the drop in oil prices. Those countries with low currency prices, including Japan, Europe, Brazil, Argentina, and South Africa, find it expensive to import goods of all kinds, including those made with oil products. This is part of what reduces demand for oil products.

China’s yuan is relatively closely tied to the dollar. The collapse of other currencies relative to the US dollar makes Chinese exports more expensive, and is part of the reason why the Chinese economy has been doing less well recently. There are no doubt other reasons why China’s growth is lower recently, and thus its growth in debt. China is now trying to lower the level of its currency.

 

Issue 10. The drop in oil prices seems to reflect a basic underlying problem: the world is reaching the limits of its debt expansion.

There is a natural limit to the amount of debt that a government, or business, or individual can borrow. At some point, interest payments become so high, that it becomes difficult to cover other needed expenses. The obvious way around this problem is to lower interest rates to practically zero, through Quantitative Easing (QE) and other techniques.

(Increasing debt is a big part of pumps up “demand” for oil, and because of this, oil prices. If this is confusing, think of buying a car. It is much easier to buy a car with a loan than without one. So adding debt allows goods to be more affordable. Reducing debt levels has the opposite effect.)

QE doesn’t work as a long-term technique, because it tends to create bubbles in asset prices, such as stock market prices and prices of farmland. It also tends to encourage investment in enterprises that have questionable chance of success. Arguably, investment in shale oil and gas operations are in this category.

As it turns out, it looks very much as if the presence or absence of QE may have an impact on oil prices as well (Figure 4), providing the “uplift” needed to keep oil prices high enough to cover production costs.

Figure 4. World "liquids production" (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data.

Figure 4. World “liquids production” (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data.

The sharp drop in price in 2008 was credit-related, and was only solved when the US initiated its program of QE started in late November 2008. Oil prices began to rise in December 2008. The US has had three periods of QE, with the last of these, QE3, finally tapering down and ending in October 2014. Since QE seems to have been part of the solution that stopped the drop in oil prices in 2008, we should not be surprised if discontinuing QE is contributing to the drop in oil prices now.

Part of the problem seems to be differential effect that happens when other countries are continuing to use QE, but the US not. The US dollar tends to rise, relative to other currencies. This situation contributes to the situation shown in Figure 3.

QE allows more borrowing from the future than would be possible if market interest rates really had to be paid. This allows financiers to temporarily disguise a growing problem of un-affordability of oil and other commodities.

The problem we have is that, because we live in a finite world, we reach a point where it becomes more expensive to produce commodities of many kinds: oil (deeper wells, fracking), coal (farther from markets, so more transport costs), metals (poorer ore quality), fresh water (desalination needed), and food (more irrigation needed). Wages don’t rise correspondingly, because more and more labor is needed to provide less and less actual benefit, in terms of the commodities produced and goods made from those commodities. Thus, workers find themselves becoming poorer and poorer, in terms of what they can afford to purchase.

QE allows financiers to disguise growing mismatch between what it costs to produce commodities, and what customers can really afford. Thus, QE allows commodity prices to rise to levels that are unaffordable by customers, unless customers’ lack of income is disguised by a continued growth in debt.

Once commodity prices (including oil prices) fall to levels that are affordable based on the incomes of customers, they fall to levels that cut out a large share of production of these commodities. As commodity production drops to levels that can be produced at affordable prices, so does the world’s ability to make goods and services. Unfortunately, the goods whose production is likely to be cut back if commodity production is cut back are those of every kind, including houses, cars, food, and electrical transmission equipment.

*  *  *

Conclusion

There are really two different problems that a person can be concerned about:

  1. Peak oil: the possibility that oil prices will rise, and because of this production will fall in a rounded curve. Substitutes that are possible because of high prices will perhaps take over.
  2. Debt related collapse: oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil “demand” (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.

In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse - in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently.

The timing of collapse may not be immediate. Low oil prices take a while to work their way through the system. It is also possible that the world’s financiers will put off a major collapse for a while longer, through more QE, or more programs related to QE. For example, actually getting money into the hands of customers would seem to be temporarily helpful.

At some point the debt situation will eventually reach a breaking point. One way this could happen is through an increase in interest rates. If this happens, world economic growth is likely to slow greatly. Oil and commodity prices will fall further. Debt defaults will skyrocket. Not only will oil production drop, but production of many other commodities will drop, including natural gas and coal. In such a scenario, the downslope of all energy use is likely to be quite steep, perhaps similar to what is shown in the following chart.

 

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Related Articles:

Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?

WSJ Gets it Wrong on “Why Peak Oil Predictions Haven’t Come True”

Eight Pieces of Our Oil Price Predicament

 

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Mon, 12/08/2014 - 18:03 | 5530139 kaiserhoff
kaiserhoff's picture

11.  Urban Commies hate low oil prices.

Mon, 12/08/2014 - 18:20 | 5530211 localsavage
localsavage's picture

All I got out of this was that we need to let them fuck us because it is only a little bad......

Mon, 12/08/2014 - 18:38 | 5530276 NoDebt
NoDebt's picture

"Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade."

Stop it, I'm getting all misty.

Mon, 12/08/2014 - 19:05 | 5530374 jbvtme
jbvtme's picture

reason #11.  oil is the life blood of mother earth. she is on life support

Mon, 12/08/2014 - 21:54 | 5530868 MalteseFalcon
MalteseFalcon's picture

Here's a counter reason that blows "Gail" out of the water.  The recovery begins with cheap oil and all subsidized oil businesses folding their tents.  It's time oil speculators got their enormous paper profit margins taken away and the subsidized oil patch loses its subsidies.

No more free FED money to the oil complex.

Game over.

Mon, 12/08/2014 - 20:49 | 5530686 Thom_333
Thom_333's picture

A quick read of this article leaves the reader more confused than not. It would even go so far as to say that it´s deliberately misleading.

It doesn´t answer the important question if the current oil glut is due to

1.Demand destruction - or

2.Increased output.

That question is brushed off with figure 4 that shows the time period 2000 - 2014 , when the current situation is - less than a month old and so you can´t get a read on the questions posed above.

Instead a loose theory on "limits of debt expansion" is floated where the main concern is that total burden of interest is so high that other needs can´t be serviced. Really - how can it be high when there virtually is no rate of interest...?

People who read this stuff may come away with more of the gloom and doom perception that makes them buy reverse ETF´s or keep stacking physical PM´s. And those things seem to be a fire-proof way of slowly being financially wiped out.

What you expect with oil at 65USD/bbl going lower and 0% interest rate is that stocks will eventually just keep going higher based on improved situation  for future multiples expansion.

It starting to look like this is deliberate misdirection. Get people to stay away from productive parts of the economy so that you can suck up shares in good companies for cents on (future) dollars.

Creating a fire-sale are we?

Mon, 12/08/2014 - 22:43 | 5531023 no bones
no bones's picture

Low interest rates increase the burden of debt. Rates have been declining for 30 years, is the debt more or less of a burden? Read Fekete.

Mon, 12/08/2014 - 23:49 | 5531249 DaveyJones
DaveyJones's picture

you're going to have to further define "demand destruction" and "increased output"

not all increased outputs are created equal. you're not suggesting the output cost the same (in energy) today as it did fifty years ago?

this then begs the cause and affect question for "demand destruction"

Gail is far from the first person to pedict the debt collapse preceding the energy exaustion    

Tue, 12/09/2014 - 04:53 | 5531645 Thom_333
Thom_333's picture

Let me rephrase the question then. Is the current oil glut due to the fact that no one really uses it anymore or is it due to the fact that no one can afford to use the stuff?

That should be a simple enough question. Which is it?

 

Mon, 12/08/2014 - 22:32 | 5530984 post turtle saver
post turtle saver's picture

that last chart is fucking retarded... anyone who thinks we'll have a parabolic drop off in energy production across all energy sources in parallel "just because" is smoking some serious loco weed

Tue, 12/09/2014 - 00:21 | 5531327 Apply Force
Apply Force's picture

You underestimate the inter-connectedness of it all.  It's not "just because", it's logic and reason - perhaps thought out a step or two ahead of where you seem to be looking.  Logisitics, redundancies and viable substitutes all portend woe.

Tue, 12/09/2014 - 04:55 | 5531648 Thom_333
Thom_333's picture

And that´s the reason - is it? Because the article sure as hell doesn´t spell that out either. Have we taken complete leave of facts and reason? Or have woe become the new autoerotic stimulant?

Mon, 12/08/2014 - 18:03 | 5530140 LawsofPhysics
LawsofPhysics's picture

Those "estimates" are not rosy enough, get back to work...

Mon, 12/08/2014 - 18:03 | 5530144 mayhem_korner
mayhem_korner's picture

 

 

11.  North Dakota reverts to the desolate tundra that it is, and everyone there goes back to wood-chipping the out of towners.

Mon, 12/08/2014 - 18:11 | 5530169 kaiserhoff
kaiserhoff's picture

They grow a lot of wheat in the Dakotas, but who doesn't.

When I was a kid, my barber took his big annual vacation pheasant hunting up in North Dakota.  You know things are slow when out of state hunting permits are a big deal.

Tue, 12/09/2014 - 04:17 | 5531628 August
August's picture

You got that right.

Mon, 12/08/2014 - 18:09 | 5530157 petkovplamen
petkovplamen's picture

But on the positive side, USA is squeezing Russia's balls so it's ALL worth it and it's ALL good.

Mon, 12/08/2014 - 18:15 | 5530183 kaiserhoff
kaiserhoff's picture

No matter how bored you are,

  don't mess with Sasquatch;)

Mon, 12/08/2014 - 19:28 | 5530453 silverer
silverer's picture

Until all the BRICS countries dump all the trillions in US treasury notes. Russia is dumping SWIFT this coming May. Will maybe have to re-evaluate whose balls are getting squeezed.

Mon, 12/08/2014 - 18:08 | 5530163 Joebloinvestor
Joebloinvestor's picture

Relying on a high price of oil for economic survival makes about as much sense as Atlantic city and gambling.

 

Mon, 12/08/2014 - 19:06 | 5530378 venturen
venturen's picture

much better to give billions to Al Gore and his commies for almost useless renewables producing about 25% of the time. We have a very long way to go on renewables yet we SQUANDER BILLIONS that end up in politicians pockets(lots of GOP guys on the wind and ethanol band wagon). Why not let capitalism work... They produce an electric car for under $30k that can be driven 350 miles at a go with my family and stuff...I will buy one. As for global warming....lets see the raw temperature data...not some Warmest's massaged data. 

Mon, 12/08/2014 - 19:34 | 5530489 kaiserhoff
kaiserhoff's picture

A Libertarian Blog might get on the government's ass for waste, abuse, and regulatory crimes against humanity now and then..., yathink?

Mon, 12/08/2014 - 18:16 | 5530181 falconflight
falconflight's picture

I read a long, and for me a complicated piece arguing that shale producers aren't effected by WTI/Brent because so much of their production is hedged for as long as two years, as opposed to large reservoir production O&G companies.  

 

http://www.marketoracle.co.uk/Article48439.html

Mon, 12/08/2014 - 20:09 | 5530577 williambanzai7
williambanzai7's picture

So the problem shifts to Deutsche Bank and JPM...

Mon, 12/08/2014 - 20:55 | 5530707 malek
malek's picture

... and those are hedged by the Fed. (Yes, DB too.)

Mon, 12/08/2014 - 18:14 | 5530185 iNewsroom
iNewsroom's picture

"@mmckerr: I took @zerohedge seriously and..." http://twitter.com/mmckerr/status/528261506907922432

Mon, 12/08/2014 - 20:51 | 5530696 Thom_333
Thom_333's picture

Yes. And that was what it was all about.

Mon, 12/08/2014 - 18:15 | 5530188 red1chief
red1chief's picture

Reason why the drop in oil prices is good: drop in energy costs for consumers, who can then buy the oil majors fairly cheap for some profit when they rise again.

Mon, 12/08/2014 - 18:16 | 5530194 MarkGoldman
MarkGoldman's picture

And yet, up until 10 years ago the economy survived sub-$40 oil just fine. 

Too little innovation chasing too much fraud, how are they going to stick save this one?

Mon, 12/08/2014 - 19:30 | 5530468 silverer
silverer's picture

A third term for Obama?

Mon, 12/08/2014 - 22:09 | 5530908 The Shape
The Shape's picture

Worked for Putin.

Mon, 12/08/2014 - 18:17 | 5530201 Pareto
Pareto's picture

So what?

 

Seriously.

 

What's the economic problem?  None of that shit delineated above - is a problem.  Its a result.  But, its not a problem.  It just is, what it is - and is what happens when markets - clear.  There are winners and there are losers.  Maybe there was a problem - like when Ben and Janet kept rates too low for too long incentivizing the leveraging up of corporate balance sheets with stock buy backs and copious amounts of over priced fracking equipment chasing prices that were never going to persevere over the long run.

 

But the reckoning?

 

Nope - thats not a problem.

 

 

Mon, 12/08/2014 - 18:23 | 5530220 kaiserhoff
kaiserhoff's picture

Amen.  It should also be noted that lower oil prices lead to lower food, fuel, utility, and transportation costs for everyone.  Most of us can use a break.  Hellstheproblem?

Mon, 12/08/2014 - 18:29 | 5530241 negative rates
negative rates's picture

He burn't the candle at both ends.

Mon, 12/08/2014 - 19:23 | 5530435 Be_Optimistic
Be_Optimistic's picture

Thats deflationary. Apparently things getting cheaper is bad.

Mon, 12/08/2014 - 19:23 | 5530436 silverer
silverer's picture

Oh, just the collapse of the entire western banking system or the next world war. Nothing to get excited about.

Mon, 12/08/2014 - 22:49 | 5531045 Dakota Kid
Dakota Kid's picture

silverer

It's already collapsing and TPTB are hell-bent on starting a war with Putin anyway.  No more excuses are needed.

Mon, 12/08/2014 - 19:36 | 5530500 T-NUTZ
T-NUTZ's picture

the "problem" is the associated MILLIONS of jobs lost and destruction of financing and financial markets.  come on dude get with the program and connect the dots...  

Mon, 12/08/2014 - 19:39 | 5530505 T-NUTZ
T-NUTZ's picture

funny thing!  unemployed people don't buy shit.  they just hang out on blogs and post all day

Mon, 12/08/2014 - 22:51 | 5531052 Dakota Kid
Dakota Kid's picture

You must be one of them.

Mon, 12/08/2014 - 20:50 | 5530691 Pareto
Pareto's picture

Not sure, but, this could be the biggest retarded Keynesian argument made on this site to date!  So by extension, lets fucking bid it all up with negative rates - NEGATIVE RATES, so that we can keep people in jobs producing shit that nobody wants - a real cap. ex dislocation program if ever there was one.  

 

No fucking thanks dude.

 

The funny thing about your program is that it works, until it comes time to pay, and then, like always, it crashes.  Connect the fucking dots.

Mon, 12/08/2014 - 23:07 | 5531116 odatruf
odatruf's picture

Thanks for saving me the time of typing the same thing.

 

Mon, 12/08/2014 - 18:21 | 5530217 ebworthen
ebworthen's picture

That Tverberg chart would necessitate a huge reduction in human population.

Population spiked post WWII because of oil and machinery to produce food.

Mon, 12/08/2014 - 18:43 | 5530306 Jethro
Jethro's picture

Thats precisely what I was thinking.  Greatly reduced energy production with vastly increased human population should correspond nicely with all of the drug resistant virulent microbes gaining a stronghold.

Mon, 12/08/2014 - 23:57 | 5531265 DaveyJones
DaveyJones's picture

it's just the back end of the energy production charts and the dramatic rise in population 

Mon, 12/08/2014 - 18:31 | 5530253 Downtoolong
Downtoolong's picture

Hey OPEC. We totally get you, we understand. No one in our international cartel is willing to cut production either.

At least you guys have a floor on the price of your product, dictated by variable economic cost of marginal production in the long run, and desperate leveraged long hedge funds in the short run.  By comparison, the economic cost of producing our fiat money is zero across the board. That means its floor value is zero too. So, stop whining you lucky bastards.

Yours truly,

The Central Bankers of The G8

Mon, 12/08/2014 - 18:38 | 5530282 Bangin7GramRocks
Bangin7GramRocks's picture

This is written by an oil flack. I'm prepared to call the "if it's not over $90 a barrel, we won't extract it" bluff. If I am wrong, they stop pumping, there is an actual oil shortage and oil goes up again. This time because of actual supply and damand. I'll take that gamble asshole!

Mon, 12/08/2014 - 19:22 | 5530428 silverer
silverer's picture

The problem arises with the cost of extraction, which varies considerably between oil producers. The Saudis can extract with the lowest cost, therefore continue with acceptable margins. Some producers make no profits until they are over $90. a barrel. I remember predictions of $150. a barrel, but it never happened. Nobody would think that can happen now, with the world economy grinding down. So why would you gear up to pull out oil at high cost if there is no profit, or you've got someone to cut you off at the ankles with a lower production cost that can satisfy the new low level of demand without breaking a sweat?

Tue, 12/09/2014 - 12:27 | 5532819 Matt
Matt's picture

For national producers, it is not just about the cost of production, but the oil revenues neccessary to support government programs.

For Russia, something like 50% of their federal government income is oil revenues, so if the price of oil drops from $100 to $60, if the cost is $20 per barrel, the profit portion drops from $80 to $40, and government income drops in half. As a result, they have only 75% of the money they had last year.

Most oil exporting nations are pretty dependant on oil prices that way. 

Mon, 12/08/2014 - 18:52 | 5530329 johnjkiii
johnjkiii's picture

Gail needs to call her proctologist. He found her head. 

Mon, 12/08/2014 - 18:57 | 5530341 TuPhat
TuPhat's picture

Low oil prices means less extraction of money from my wallet at the pump.  Bad for those who expected easy money from oil to last forever, good for me and mine.  A complete collaspe will mean less demand for oil.  The prices we have today are still high by my standards which means less demand.  Less demand means the oil will last longer.  Isn't that what we want?  Figure it out before you write articles Tverberg.  You can't have it both ways unless you can print oil.

Mon, 12/08/2014 - 20:20 | 5530595 ClassicalLib17
ClassicalLib17's picture

Just reminiscing here.  I remember buying gas in Wisconsin in 1971, I think,  during a "gas war" and I paid 20 cents a gallon!  Three years later,  we were stopping wherever we could to buy gas.  I'm just a simple, debt-free individual who relishes life's challenges and appreciates the comments from some of the long time ZH members who have hung around.  Alot of seeming new folks on here now and the relished comment section's quality has taken a turn to the ideological.  I remember a comment thread on an article about the limits to improve current technology being finite.  The thread started off with the commodity traders(I think) and was soon taken over by computer people for about 15 or 20 comments and then it went back to traders.  I don't pretend to understand investing, but ZeroHedge used to have a lot more serious commenters.  I miss the old days. 

 

Mon, 12/08/2014 - 19:00 | 5530353 Debugas
Debugas's picture

money can always be printed

the problem is not that the worker can not afford petroleum (it is solvable by printing presses) the real problem is that 1% decided it is no longer need nor wants to feed the 99%

Mon, 12/08/2014 - 20:05 | 5530564 nmewn
nmewn's picture

I'm not in the 1%.

Feed yourself or fucking starve.

Mon, 12/08/2014 - 19:00 | 5530354 Goldilocks
Goldilocks's picture

Talking Heads - "Road To Nowhere"
http://www.youtube.com/watch?v=AWtCittJyr0 (4:04)

Mon, 12/08/2014 - 19:05 | 5530370 pippi68
pippi68's picture

I think what is neglected in this analysis is the hidden cost of oil. There is an ever increasing hidden cost that is hard to measure in dollars and cents. We are essentially paying for oil also with our collective health and future. I think it's a mistake to discount these hidden costs. If it becomes unprofitable to extract oil (which pollutes the land we live on, the water we drink, and the air we breathe) then this will be good for our collective health and the health of our environment. The economic cost goes up, but the hidden cost goes down. Externalized costs are not reflected in the price at the pumps because we pay for them in cancer treatments, inhalers, decreasing availability of safe food sources, extreme weather, and quality of life. I, too, do not believe that renewables can completely eliminate the use of fossil fuels in the short and medium term, but if there is a limited supply of oil, as we have all been told, and we don't kill off our species with nuclear incidents, war, famine, and disease, then eventually we will only use oil sparingly for the things in which there really are no alternatives. It will be too expensive to do otherwise. I guess I feel like we should reject the easy out of "we're all doomed" and embrace our coming inevitable economic collapse. Within our collective struggle for survival perhaps a better system might arise. Not to work and hope for better would be so.... ZeroHedgy.

Mon, 12/08/2014 - 20:24 | 5530606 ClassicalLib17
ClassicalLib17's picture

MillionDollarBonus is going by pippi68 now.  I love your way with words.  It's your thoughts that disturb me

Mon, 12/08/2014 - 21:33 | 5530809 Thom_333
Thom_333's picture

What hidden cost? You go into a store and buy something for 10 USD and then some magic pixie dust sets you back fifty dollars...? How does that work?

If the supply of oil is so limited and the giant oilfields ar in terminal decline as has been stated for like 10 years or more - where is all this stuff coming from...?

If you are talking about "climate change" and all that I think it´s on a methodologically very shaky foundation. At least it can´t be detectedwith the method proposed by the guys who came up with the concept.

The reasoning her boxes everyone into proving a negative. And that´s really hard...

I dare you to prove me wrong when I am saying that not using all this cheap oil on the market is the going to hurt the economy something awful. Go ahead - prove me wrong!

If you can´t then buying those pieces of paper from Al Gore that has made him a dollar billionaire - yes billion with a b - seems a bit off logic doesn´t it? Not that Big Al is ever going to agree with that. He has a great scam going. But remeber he predicted that all snow and all winter and the polar ice caps would be gone by 2013.

Remember last winter? The news say that you can expect a real polar vortex also this winter. Where does that come from ? Those pesky elfs and pixie dust at it again.

Mon, 12/08/2014 - 19:40 | 5530512 The Nugget
The Nugget's picture
F-R-R-R-R-A-A-A-C-C-K!!!!

(Just in case only most of you got it!)

THATS THE SOUND OF THE OIL FRACKING INDUSTRY IMPLODING!

First the oil price comes down then the stock prices drop but they are still paying those dividends (you think to yourself) so I'll just hang on!! Then they cut their dividends and the share prices really get killed (I've seen this game played before) better sell all those oil assets and buy some real investment/insurance!!!

Unlike the western central banks war on the precious metals, Saudis actually have the physical oil in their war on oil!

HMMMMMMM! Lets see now- demand for gold and silver skyrocketing! Demand for oil dropping like a stone (or so were told)! where do you think we go from here!

“Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves”

--

There are two mistakes one can make along the road to truth - not going all the way, and not starting." ... Buddha

Mon, 12/08/2014 - 19:52 | 5530539 yepyep
yepyep's picture

because fuck you thats why.

the consumer is sick of subsizing the bullshit fraud go fuck yourselves.

Mon, 12/08/2014 - 19:56 | 5530551 wizardofOZ
wizardofOZ's picture

It is quite simple.

human population and oil

http://www.postpeakliving.com/files/siteimages/PopulationAndOil.png

 

And this is documentary from 2009 that explains situation.

Collapse by Michael Ruppert

https://www.youtube.com/watch?v=rdO2Xh51Q-U

 

Mon, 12/08/2014 - 20:43 | 5530653 ebworthen
ebworthen's picture

Thanks for that.  People don't realize that abundant food came about with oil and machinery.  The dearth of food brought about a boom in population.  It is the biggest house of cards humanity has ever built. 

If the oil doesn't flow - to run the irrigation pumps, the tractors, the harvesters, to make the fertilizer, to transport the food, to process the food, to transport it to stores - BILLIONS will starve.

Mon, 12/08/2014 - 20:02 | 5530558 nmewn
nmewn's picture

"High price encourages more production and more substitutes..."

Yeah, we have seen that phase of the manipulation...go fuck yourself in a Fisker.

Mon, 12/08/2014 - 20:06 | 5530572 22winmag
22winmag's picture

I like oil and all that comes with it... like billions of tons of plastics, rubber, petrochemicals, and synthetic materials that make this crazy "modern" life possible.

 

When nuke plants and solar panels start shitting out billions of tons of above commodities, let me know.

Mon, 12/08/2014 - 20:26 | 5530612 himaroid
himaroid's picture

Turn the heat off! We'll show those Russkies who is the toughest!

Mon, 12/08/2014 - 20:29 | 5530622 Rikeska
Rikeska's picture

Stopped reading at "if oil is to cheap they will leave it in the ground" and the horrors of deflation.

Cracka please.

 

 

Mon, 12/08/2014 - 21:28 | 5530801 Duc888
Duc888's picture

 

 

 

Help me out here... wouldn't food become cheaper (cheaper to transport it)  Cheaper to run farm equipment.

Wouldn't air travel become cheaper since the fuel is tha largest cost for airlines, far surpassing the aircraft in cost over the life of the aircraft?

Wouldn't the shipping of any product from point A to point B be cheaper?  Maybe UPS will delete their "fuel surcharge" cost on deliveries.

 

Mon, 12/08/2014 - 22:14 | 5530923 The Shape
The Shape's picture

Oh yeah it will become cheaper for all those industries, but they'll hold onto their "fuel surcharge" for the time being. Then increase it when the oil price goes up again.

Mon, 12/08/2014 - 22:19 | 5530937 Duude
Duude's picture

No, not necessarily. While lower oil prices certainly put some industries in a better fiscal position to lower their prices, it doesn't happen if said industry has become an oligopoly with a relatively wide moat to entry.  Air travel is the best example right now. Airline tickets are still rising. Its an oligopoly due to mergers over the last few years. Eventually, the wider profit margins will attract other lower cost airlines to enter the market but it doesn't happen overnight due to the huge capital outlay to entering the market.   YOu can expect a number of other industries hold back lowering prices till the competition cuts their prices.

You can also add to that the likelihood DC may take this opportunity to add a higher federal gasoline tax. The Federal gas tax is $.18 a gallon. This money is supposed to be used to pay for highways, roads, and bridges, but we all know its often redirected to other pet projects. But with low gasoline prices its almost inevitable they will be tacking on a larger federal gasoline tax in the not too distant future.

Mon, 12/08/2014 - 22:22 | 5530949 luckylogger
luckylogger's picture

Nobody knows what will happen....

Nobody knows what the equlibrium price is for oil....

What the hell.. whay don't we find out?

The world will not end tomorrow...

Sorry to tell ya''ll that but it is true...........

Mon, 12/08/2014 - 22:38 | 5531009 yrbmegr
yrbmegr's picture

Issue #1 is not an issue because when prices rebound, more oil will be produced.  Issue #2 is the same as issue #1.  Issue #3 shows that non-shale states are contributing more to employment growth than shale states, so any impact on employment from shale states will be negligible.  Issue #4 is minor compared to 2007, because it's the domestic oil industry, not the finance industry.  Issue #5 is pure speculation, and probably not true (or only true for Russia?).  Issue #6 is not an argument that a drop in oil prices is harmful.  Issue #7 ignores the likely increase in demand for all petroleum products from lower prices.  Issue #8 is true, but not argued sincerely here.  Issue #9 conflates cost with price, leading to an erroneous conclusion.  Issue #10 is true, but not an argument for higher oil prices.  So, there is still no serious argument that low oil prices are bad for the U.S. (or global) economy.

Mon, 12/08/2014 - 22:43 | 5531026 Amerikan Patriot
Amerikan Patriot's picture

One of the best things about low oil prices is it exposes the commodity economies like Russia who wouldn't have an economy but for oil, natural gas, etc.

Vlad was a pompous strongman and thug when oil was on the rise.  Now that it's falling, he looks a touch beleaguered.  Personally, I hope he doesn't back down or flinch a bit, but only because I'd like him to be completely destroyed by his own ostracism.

The long-suffering Russian people deserve better.  The sooner the tide of public opinion turns on this hooligan and he is sent packing - or worse - the better it will be for them.

Mon, 12/08/2014 - 23:04 | 5531101 AdvancingTime
AdvancingTime's picture

When financial problems occur in the energy sector it is often accompanied by political instability and sometimes her ugly sister war. As a rule the economy loves stability, bottom-line dropping oil prices means more risk for an already shaky world economy. All this is being complicated by the recently strong dollar.  The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy. 

When a strong shift in currencies occurs someone usually gets hurt and this can lead to bankruptcy, default, or contagion. A great deal of the shadow banking world overlaps and falls into the grey world of derivatives.  The total derivatives market has grown to a massive size. It includes hundreds of trillions of dollars in over-the-counter non-reported agreements and private contracts and is estimated to be over 20 times larger than the global economy. Everyone paying attention knows that even a slight problem in a market this size could collapse the whole economic system. The article below delves deeper into the problems caused by falling oil prices. 

http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html

Tue, 12/09/2014 - 10:07 | 5532114 655321
655321's picture

Peak Propaganda

Tue, 12/09/2014 - 11:21 | 5532465 gregga777
gregga777's picture

To summarize, what really counts is the EROEI, the energy return on energy invested, as comprehensively, using scientific and mathematical facts and data, detailed by U. S. Navy Captain t. A. "Ike" Kiefer in:

"21st Century Snake Oil: why The United States Should Reject Biofuels As Part Of A Rational National Security Energy Strategy"

https://www.scribd.com/doc/126243673/21st-Century-Snake-Oil-Why-the-U-S-...

WICI Paper No. 4, dated January 2013. This in-depth report by CAPT T. A. “Ike” Kiefer, from the Department of Strategy at the USAF Air War College. It's especially sobering considering the limitations imposed by the Laws of Thermodynamics.

When a true and complete beginning-to-end EROEI analysis of each renewable is performed, that accounts for ALL fossil fuels inputs required to make it, including all of the prior 'legacy' outputs of fossil fuels, a grim picture emerges. There is NO replacement for fossil fuels, especially so for the easily transported and energy dense liquid, condensate and gaseous forms, which have by far the greatest amount of energy in the most compact volume.

To believe that renewables will replace fossil fuels requires an implicit or explicit assumption that renewables of the scale required to maintain or to build our current civilization could have been developed without fossil fuels, especially the ones used for fueling transportation.

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