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The Fed & The Price Of Oil
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Given the potential for financial losses triggered by oil's price collapse to cascade into the financial sector at large, the Fed may well be forced to intervene either directly or indirectly.
An email dialog with correspondent Mark G. last month alerted me to the key role the Federal Reserve plays in the price of oil-- either helping to maintain the current low prices (by enabling financing of new production) or pushing down supply and production (by making financing of new production more difficult).
Capital--cash or credit--is as important as the actual hydrocarbons in producing fuels and natural gas.Without fresh capital or financing, the oil/gas will remain in the ground.
The Fed flooded the global economy with credit borrowed in U.S. dollars during its quantitative easing programs. Need to borrow billions of dollars to finance new oil production? No problem when the Fed was emitting trillions of dollars into the global financial system.
Now that the Fed has ended its QE money-printing program, the dollars have dried up. The other source of dollars--U.S. trade deficit--has also contracted as the trade deficit has declined.
This decline in the availability of U.S. dollars has placed global borrowers with dollar-denominated debt in a vice as the scarcity of dollars meets the pressing need to refinance debt that's coming due and needs to be rolled over.
Strong demand and reduced supply lead to much higher prices for dollars--which is exactly what the world is seeing.
Domestic oil producers have a source for financing: the Fed. As I have speculated before, the Fed may not be a passive observer of the domestic oil patch's financial travails. Given the potential for financial losses triggered by oil's price collapse to cascade into the financial sector at large, the Fed may well be forced to intervene either indirectly through proxies or directly.
As I explained in Will the Fed Intervene in the Oil Market? (December 23, 2014), the Fed has a variety of intervention options, from buying oil futures contracts to buying at-risk oil-based bonds to enabling proxies to roll over oil-based debt.
Compare the staggering cost to oil exporters in lost income to the modest cost of the Fed financing domestic oil-based debt. If the domestic oil industry needs $100 billion in debt to be buried in a balance sheet somewhere or rolled over, the Fed can arrange this size of financing without raising an eyebrow. Compared to a balance sheet of $4+ trillion and the Fed's essentially unlimited credit spigot, what's $100 billion more in aid to the domestic oil/gas industry?
The oil exporters who are losing tens of billions of dollars in cumulative revenue do not have any equivalent Sugar Daddy. Their declines in income will have to be matched by declines in spending, declines that will cascade through the oil exporters' economies with devastating impact.
If you want to deploy the oil weapon, make sure you have a central bank that can intervene at will, in whatever size is necessary, to reduce the impact on your own economy, while maximizing the financial pain inflicted on the targets of the oil weapon.
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oil 20
Saudi Arabia is wielding its oil weapon by keeping production high and prices low – all the better to punish some rivals and consolidate market share – but the gambit may come back to bite the House of Saud,...
Behind the Saudi Oil-Price Gambit :
http://tersee.com/#!q=oil+arabia&t=text
latest on OIL:
http://tersee.com/#!q=oil&t=text
can they atleast eat those doughnuts they keep around their heads?
Saudi Arabia swings their production out of line *just* in time for banks to cut off all credit and for the shale industry to go under...
Then GS / House of Saud / <insert evil empire here> comes in buys them all up for 10 cents on the dollar gets the wages of the workers down right before oil goes to $200 and we invade Iran..
Darth Vader will study these tactics one day...
Carnage makes my head hurt.
LOL, this is HILARIOUS folks! Let's wage another economic war on the world after we have reemed then in the arse for decades exporting U.S. Inflation.
Approaching Full Retard Event Horizon...
We'll have Putin crawling on his knees begging Barry for forgiveness any day now ....
Release the bailout!
Hey, the Fed already gets insider "volume" discounts for manipulating...errr, participating in the CME "markets".
Release the Frakken
all of that may very well be so, but even with oil 'down', gasoline is $2+ per gallon here. i remember in the '90s it was $1 for awhile. then i think back... in the '90s the pay was way higher. so, it's like getting paid a fraction of what people were getting paid in the '90s, with gas 'down' to double what it was then. certainly, other people have done better, but for working for a company, the '90s were where it was at. you could show up drunk to the interview, then get a job paying $20-$30 per hour, and download mp3 and cheesecake all day. now it's more like you'd better be sharp all the time, and you're gonna get paid ~$10 to dig ditches somewhere. lol. someone call me a whaaaambulance. i'm just sayin'... in context, gas isn't really 'down' for at least some of us.
The banksters are counting on short memories. Ask gold what it's done since then.
Mother GOLD @ $3000, When Fed Steps Aside...
3000 what? US fiatbux? Euro fiats? Swiss fiat franx?
Perfect idea. THe Fuck FED can buy more assets with free money.
I can't even sell my soul to the devil. The FED already owns it.
And rehypothecated it then some.
Everybody keeps trying to predict the unpredictable but it doesn't work. The FED's been trying to suppress the chaotic actions of the market and it has kind of worked...for awhile. the problem with suppressing the variables is no matter what, they'll eventually escape your control and the longer they are suppressed the worse it will be in the end.
The question in my mind is how many more times they will destroy and rebuild Zion before Neo defies the Architect.
ergo, vis a vis!!
Fuck your money printing price of oil :-)
Bye !
Extremest!!! LOL.
Oil is money. Gas is money. Hydrocarbons are money. Gold is money. Platinum is money. Silver is money.
Paper is a Pretender to the throne. And we know what happens to all pretenders eventually: They get exposed and removed for the fraud they are.
And although 'Diamonds are forever' and are precious, they're not "money" as such -- given the oligopoly on it by its closed club of diamond merchants, and the fact that industrial diamonds can be and are man-made ('Made is Russia' first, as I recall). Not to digress, and I don't know enough about them, but I suspect that Investment Grade diamonds hold their value -- if bought at a fair price. Even then I'm not so sure, given the huge margins and spread that its traders demand. So, unless I can buy them for 30-50% of retail (from a divorcee), I like to avoid them as a "Store of value".
All money does is give us a more flexible form of barter but it must hold a definite value. Every paper currency that has ever been tried has suffered from a runaway printing press and with the digital age it has become geometrically worse. We're going back to 40 acres and a mule...quickly.
Anything that will lead to or support productive work can be used as "money".
FYI, there is no monetary or fiscal solution to scarity.
Take it from me, change is the only constant.
Innovate or die motherfucker.
"low oil prices will be a boost for the economy" stupid mutherfuckers said this. lol
If you like your fake financialized economy you can keep it. I like the real economy which benefits from lower commodity prices, especially oil.
Good luck explaining to J6P why oil was "too cheap" and the Fed is supporting a higher price (and J6P goes back to paying $4 at the pump). Just might piss off a few folks.
Low oil prices would help the economy, if we actually had an economy...
Very well put....our 'virtual' economy might appear to benefit from lower oil prices but the real economy is losing a significant portion in the oil field and all those industries supporting it, and which pay far better wages than our service industries.
They could always buy oil for the SR....fill it up like China is doing right now...
That only makes sense if you're thinking strategically and not for your corporate overlords, who tell you to buy on the way up.
but they said cheap oil was good for the economy!
ZIRP is a funny thing when it forces money into risk assets. not in a million years did we see this coming!
Once again, before considering the "price" of anything be sure that there actually is true price discovery in the market and also consider the soundness of the currency the item is being "priced" in.
That is all.
THey want it so the dollars in your wallet are so volital, they vibrate and give you one hell of a butt rub.
I can't wait for the gas price changing as you pump. "cheaper, pump, higher, stop,!"
Not to be contrarian or argumentative, but (as a qualifier to your argument), "true price discovery" is itself a shifty and fickle creature -- given that such "discovery" is subject to market swings and manipulations. As we've discovered even with gold and other assets.
Which brings me back to the classic line of "Change is the only constant". Also... I know I can rely on the Laws of Nature, and laws of human nature. Statistically speaking.
But I agree with you otherwise. And to facilitate stable commerce, I'd like to see hydrocarbon fuels (oil, gas) priced in Gold (and other PMs priced relative to Au), rather than in any fiat. That way, legitimate market shifts or trends are likely to be at work -- rather than those "shady, shifty parasites of questionable heritage and No Added Value".
Correct. See things and the opportunity for what it is.
FED meddling creates higher amplitude market moves. With enough meddling, shortages will appear, just like the USSR proved.
Nice idea but no indication the Fed is doing this. However, the players are drilling in the good places still. I have been working on a roadway use agreement finalizing today that allows roads on one of our sections to be pivot points for development to the south, west and north. We get paid every year for the use of our roads, two different oil companies want these agreements, one has already met our terms. Drill on dudes, shale oil is going to keep coming up as long as there are cars, buses and trucks on the road.
And if their are no jobs, who do you intend on buying your oil? States that did not feel the effect of the housing crisis will feel this one. I think the Sauds and China men will be buying shale properties by year end for pennies on the dollar if there is still a world.
You have no idea what you are talking about. If you did, you wouldn't be reduced to exaggerating to attempt to make a point.
Thank you. You make a great point. Go ahead and copy/paste, then print my comment. Place it beside your computer. I want you to remember. You may think you are some big dick with a huge bank account on zerohedge but I promise one thing, you are not the only heavy hitter in these woods. There is plenty of wolves roaming.
talk is cheap, dreams are free
It'll be the Chinese, ultimately. The Saudi's are busy with destructive pursuits.
picking winners again?
But I thought "energy prices" are excluded from CPI etc.
But clearly, what is good for consumers, is NOT good for bankers and their 1%-er clients.
Ah, freedom, and kleptocracy!
FEDs going to take over a market. Tell me it ain't so.
they took over mine the health insurance and 4 million agents looking for low quality sales jobs unbelievable
What's the proof they are not doing it already?
Hint: WTI>Brent
What if this oil price decline is inspite of their efforts?
Right, what makes anyone believe the Fed is successful at everything they chose to sick their beak in? Oil is far more complex than just some paper bond swaps between cooperating banks.
Everything the Fed touches turns to shit. 1913 to today is all the data needed.
Right!
From Petrodollar to Petro vs. Dollar
Millions dead thru 2 banker financed world wars and banker financed Communism.
So... all according to plan?
Someone is getting nervous.
http://www.washingtontimes.com/news/2015/jan/14/saudi-arabia-building-gr...
Or wait until the oil price is at critical mass low then the banks step in and buy the assets of the bankrupt oil producers at pennies....then drive the price back up to $100
Everybody I know here in TX that had even a remote connection to the oil patch was making beaucoup money
Once the banks have soaked the producers for the usury then they can go after the profits themselves
This is the New Aggressive Push on Carbon Taxes.......
The Snake (government) swallowing it's Tail. Start with Audit the Fed......Then Government Officials (bribes) (Insider Info) And the Government's Crazy Scheme, paid Minions and all those that are In positions of Trust, That Abused that Trust should Be Charged, and JAILED for their Crimes.
Result of linear thinking. Lots of cracks appearing in the dike(s)
"Compared to a balance sheet of $4+ trillion and the Fed's essentially unlimited credit spigot, what's $100 billion more in aid to the domestic oil/gas industry?"
Sorry, Charles
ain't going to happen (FR buying energy debt) ... outside of "full faith & credit of US taxpayer" ... straying away would require Congress to approve (at least tacitly)
energy debt is better than mortgage debt and the fed buys that
not on the approved list ... here is the Federal Reserve Act Article 14
http://www.federalreserve.gov/aboutthefed/section14.htm
not saying they won't (eventually) but Congress WOULD HAVE TO AGREE (at least tacitly)
What difference does it make whether it's on the list or not?
How the hell will anyone know unless we AUDIT the bastards?
Charles always manages to reveal the fact that he doesn't know much in every article he writes.
Charles is weak here
has done much better
The Fed can 'hide' their oil futures purchases right next to their S&P futures purchases.
Didn't Congress just 'approve' shit-canning of the Volcker rule until 2017...? If this situation begins to take on the look of a 'cascade' event, Congress will do whatever need be done, same as the $debt ceiling. Public sentiment is priority #1. It will not be allowed to turn negative on this 'recovery'.
Fed lends money to TBTF at no interest -- TBTF buys oil futures -- Fed promises to let TBTF front run the buy -- Fed promises to make good any TBTF losses..... Problem solved.... All legal.... Just shows as a Fed-to-bank loan on the Fed books....
Bank forecloses first, then gets bailout. That's how things are done.
You can be sure at $2.00 a gallon the Fed is doing eveything they can to keep the price from going lower. To step in and actually admit intervention in the way of supporting the price of a commodity that is critical to consumers is absolutly astounding. They'll try to sell the go green, peak oil, consumer will do bad thing like buy V8 engines and it's best for them meme. Very similar to pissing down you back and telling you it's good for you. Insanity at work here.
besides, Largarde just said low oil good for economy ... haha
It's good for MY economy. That's all I care about, thank you.
Hey good luck Fed, go buy your futures and try to intimidate select few people with your free money, there are other entities in play here now not just your usual lapdog Wall St banksters.
My buddy lives in Houston and works in related O&G and said they are expecting a very painful time. If their health care sector can cushion the blow good for them. I'm not sure what other states will do.
cheap credit past few years (courtesy of federal reserve) led to malinvestment **cough** shale ** cough ... ramping up production when demand declining
Bravo!
Bankers didn't count of house of Saud themselves saying fuck the fed and produce like crazy for market share. The elephants are dancing, time for us ants to sit back and watch.
The Fed does not have control of the oil markets. I question their ability to have a marked and sustainable impact on prices.
Oil futs is a thin market. The fed can control damn near anything in the states. They can't control russkies or Iran, at least yet. IT is the whole play here.
If they can't inflict enuff pain they will inflict war. Already done, already happening. Same old shit, different day. Enjoy the cheap gas, because someone is going to pay for it.
The Fed cannot control the oil market any more than they HAVE controlled the gold market.... If it is financial and you have a printing press and no one is auditing you, then you have the power.
Marginal producers, especially in Canada, are being forced to keep producing in order to pay off high debt and also forced to cut costs, and layoff workers. This will work in short term but if energy prices remain low, a major shake out will occur with hedge funds and bondholders taking a major hit. Fed knows this and will look to buy risky debt and Wash. will beg SA to cut production. Checkmate-- Putin wins again. Only other option is to cut off oil supply by sureptitious means---engineered military action in a major producing nation in order to control valves or destroy production Think Nigeria, Libya, Irag again. Venezuala.
Maybe, the MSM starts promoting war with SA after all the years (even before 9/11) of covering for them. I can just hear Andrea M. (rhymes with bitch from hell) now, telling us how the evil Saudi's are crushing us with cheap oil! More likely, DC sends reinforcements to their ISIS puppets to overthrow the Saudi's which would explain this story.
http://hotair.com/archives/2015/01/15/saudi-arabia-building-massive-wall...
no, yeah, no. i can think of a couple of reasons why that might be a bad idea. a few minor pitfalls.
The Fed can't bail out everyone. Sure, stick yer thumb in the hole in the US dike, while the Mexican and Canadian oil dike is hemhorraging.
CHS seems to be of one mind lately... the wrong one.
Sure, the Fed can control the oil market, but why didn't they do so when WTI hit $75, $60, $50?
This article - like yesterday's bogus "national nervous breakdown" reeks of click bait.
This is the only weapon the US has against Russia. All the other "sanctions" were nonsense. There's no way to do it without self-injury, like a mad-man letting off a grenade and getting hit as his only way to ensure his enemy can also be hurt.
The Fed will go along with this and has been complicit the entire time. This is also the Fed's only real weapon to attack Russia and the Fed is the real government.