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The Decline Of Oil: Head-Fake Or New Normal?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
When production does finally collapse, that will set up the "nobody saw this coming" ramp in the price of oil.
In May 2008 I proposed the Oil "Head-Fake" Scenario in which global recession pushes oil demand down as oil exporters pump their maximum production in a futile attempt to fund their vast welfare states and thus retain their precarious political power.
Oil: One Last Head-Fake? (May 9, 2008)
The terrible irony of the head-fake, of course, is that the exporters' efforts to pump more oil exacerbates the oversupply, further depressing prices. As exporters receive fewer dollars for their production, they attempt to compensate by pumping even more oil. Perniciously, this suppresses prices even more, setting up a positive feedback loop which pushes prices to the point that exporters are no longer able to fund their welfare states and Elites.
Something has to give, and that something is the existing power structure in oil exporting nations.
Another factor deepens the eventual crisis triggered by drastically lower oil revenues. The majority of exporting nations under-invest in their oil production and exploration infrastructures, essentially guaranteeing declining production once the easy oil has been extracted.
This cycle of spending the fruits of current production while starving investment for the future is part of what is known as the resource curse: nations with an abundance of resources rely on the income generated by the sale of their resources which effectively stunts the development of a diverse economy and the institutions which such a diverse economy requires as a foundation.
The net result of the resource curse is national impoverishment as the resources are depleted. Diverting the majority of the oil revenues to support welfare states and Elites dooms the oil exporters to under-investment in future production.
In other words, the decline in the price of oil does not mean oil will remain cheap for years to come; it's a head-fake that fools the unwary into assuming the glut is The New Normal.
Here is a basic chart of the head-fake:
There are additional twists to the head-fake. I first addressed this a year ago in The Oil Head-Fake: The Illusion that Lower Oil Prices Are Positive (September 29, 2014).
There's a number of dynamics in play, but let's focus on three of particular interest:
1. Oil production in the U.S. has soared since 2011. yes, we can debate the financial overhang--i.e. the servicing of debts taken on to expand production--and question the longevity of the production increases.
But right here and now, this expansion of U.S. production is adding to the global supply in sufficient quantities to change the global supply-demand structure.
2. The need to keep pumping in the U.S. to service debt. Many observers reckon a whole slew of U.S. producers will go bankrupt if oil hovers around $40/barrel for long.
Perhaps, but what a lot of people miss is the costs of production are not static. A significant percentage of U.S. oil production is operated by independents--small, nimble firms that can deploy new technologies quickly and squeeze subcontractors.
What cost $100,000 in the bubble, when demand enabled contractors to charge a premium--well, nowadays, that job might only cost $50,000.
The point is that U.S. production could stay stubbornly high for a lot longer than is generally anticipated.
3. The decline in petro-dollars could push the value of the U.S. dollar (USD) higher, further pressuring oil exporters and emerging markets. When oil prices are high, oil exporters have huge surpluses of cash they need to recycle into assets. Since oil is typically traded in USD, the easy trade is to buy USD-denominated assets such as Treasury bonds.
A sharp decline in the amount of USD that needs to be recycled means the global supply of surplus USD is much lower than in eras of high oil prices. As borrowers of USD-based debt buy USD to service their loans, the shrinking supply and rising demand will push the U.S. dollar up vis a vis other currencies. This will exacerbate the declining purchasing power of emerging market currencies and make servicing the estimated $9 trillion in USD-denominated debt more burdensome.
This will further depress demand for oil, which will push prices lower. Attempts by oil exporters to maintain revenues by pumping more oil will increase supply, further increasing the global glut of oil.
Once welfare spending and subsidies of Elites collapses, the social and political stability of oil exporters becomes extremely fragile.
The leadership of oil exporters without a stash of USD to tide them over as oil prices crash would be wise to start building their bug-out island fortresses.
But eventually production will crater. It might be from depletion, or rising domestic demand within exporting nations, or a revolution that disrupts production, or the consequences of under-investment in exploration and production infrastructure.
When production does finally collapse, that will set up the nobody saw this coming ramp in the price of oil.
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Dude, your whole thesis rests on the false assumtion that oil exporters will always be willing to accept US FRNs in exchange for their oil.
Ever thought about what happens when they demand to be paid in another currency/commodity/unit of trade? nope?
Somebodys always willing to trade in dollars, desperate enough they could drive prices down more, yee ha.
Well I agree with you. The US is printing its currency like no tomorrow, so the value of the US denominated reserves are dropping, and because of that the Arabs are pissed. And according some rumors USA stole Arabian gold, so the Arabs are even more pissed.
I wouldn't be surprised if the Arabs will flip the tables on the US.
And do what? Declare war?
Meh...
What are the BOJ & EU doing?
They can also be paid in Euro, Yuan, Aluminium....
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No comment needed...
Will make some ME nations ripe for more ISIS type activity.
Decline of gold and silver? Head-fake or new normal? Or US Fed fucking with the markets?
Its a snake eating its tail...in the doldrums...all 3 are joined at the hip and consuming one another...
>>>Oil >>> Dr. Copper >>> Markets>>>
<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
If new wells can be productive in 30, 60, 90 days that will limit the ramp up of prices.
I'm noticing the volume of ZH comments is drying up more than the volume of the stock markets. What's going on ?? Fatigue has set in. We are all sick of the fraud. Kick the can. Manipulation. Or most have been banned for speaking the truth about The Tribe. Me I am beyond sick to my stomach watching this cesspool. But I'm here until Tyler boots me. I will see if this helps any .....
Fuck The Tribe.
Free Francis Sawyer.
And who is behind the Tribe?
Israel is a British creation. The Balfor Declaration.
http://www.zerohedge.com/news/2015-09-07/bed-despotic-house-saud#comment...
I keep waiting for the "Zion is not a religion, it is a scheme" part...
I am so well trained.
Too many clickbait articles to keep up with. A person can't even finish one article before two more pop up.
Actually, I took two days off. The only thing drying up, Hillarys apology on espionage charges she faces. Even the liberal media is not buying it. MSLSD channel hovering above two dozen viewers.
Hostage video. Morning Joe Rips Hillary Apology: 'Hostage Video, Lie, Ham-Fisted ...
Your comments are welcome...To a point. You can't just say whatever is on your mind. Where do you think you are?
If I turn my head sideways an squint that graph looks like a camel. Coincidence? I think not.
Camel hump half full or half empty? Roll with the punches.
I notice that graph shows crude/condensate/NGL's(natural gas liquids). How about we just show crude? That might show a different picture.
Common core math will remove any critical cognitive thinking intelligence.
What you don't see is pending tender contract agreements. They like the phenomenon of peasants looking at future from rear view mirror.
I just don't like 'cherry picking' data in order to make a superfluous point. Not like Charles to do this.
Does the US employ condensate production in the crude production figures? For some reason, I thought they did not.
It's just like everything else, they can manipulate it until they can't anymore. FUBAR demand, oversupply and eventually decline rates will come into play but right now they have pulled every card they have on collapsing prices and it remains to be seen how long they can keep it up, should be interesting.
He's wrong on this one. There is orders-of-magnitude more natural gas in the shale layers beneath Marcellus/Bakken/Eagle-Ford etc. The Utica formation has several wells already producing more than 50 MMcf/d and they're just getting started. Natural gas prices are going to be low for a very long time.
That is why we should not mix the two together when reporting on production. Two completely different things. NG can not replace crude in many applications. Again, I am surprised Charles wrote this article as he did. It is almost as if he is buying the 'USA will be the biggest producers in the world' unicorn and rainbow story.
Oil is the prime input for modern warfare. The price during wartime is no object, only availability matters. My theory is that oil will be pumped until the last barrel is had, but way ahead of that time there is no or little oil left available for conventional purposes. In fact we will likely burn a lot of the remaining easy oil securing all oil supplies for the military and elites, and for particular industries like the airlines -- who then have the oil and derived fuels at essentialy no cost the same way they have access to money -- and everyone else rides a horse (or camel, or buffalo, or donkey as per your preference). The same societal divide we see now with wealth will then play out regarding oil, and for the simple reason that for the last 300 years all wealth accumulation was always about concentrating the wealth of energy found in fossil fuels.
"we will likely burn a lot of the remaining easy oil securing all oil supplies for the military and elites, and for particular industries"
isn't that what we've been doing for some time now?
Except, I suppose, we need to add the word "attempt"
I still see plenty of cars on the freeway. So no, not yet we are not.
I hope oil stays this low for a long time so i can profit from oas, wll and clr all going to zero.
Ttrtttg
Oil is facing Demand destruction, and Fossil energy is facing demand destruction.
Coal is getting crushed by wind and solar. Coal and Oil and Natural gas are interchangeable for
Energy production. Meanwhile high efficiency cars are destroying Oil demand.