Oil, War, & Drastic Global Change

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

The first thing that popped into our minds on Tuesday when WTI oil briefly broached $30 for its first $20 handle in many years, was that this should be triggering a Gawdawful amount of bets, $30 being such an obvious number. Which in turn would of necessity lead to a -brief- rise in prices.

Apparently even that is not so easy to see, since when prices did indeed go up after, some 3% at the ‘top’, ‘analysts’ fell over each other talking up ‘bottom’, ‘rebound’ and even ‘recovery’. We’re really addicted to that recovery idea, aren’t we? Well, sorry, but this is not about recovering, it’s about covering (wagers).

Same thing happened on Thursday after Brent hit that $20 handle, with prices up 2.5% at noon. That too, predictably, shall pass. Covering. On this early Friday morning, both WTI and Brent have resumed their fall, threatening $30 again. And those are just ‘official’ numbers, spot prices.

If as a producer you’re really squeezed by your overproduction and your credit lines and your overflowing storage, you’ll have to settle for less. And you will. Which is going to put downward pressure on oil prices for a while to come. Inventories are more than full all over the world. With oil that was largely purchased, somewhat ironically, because prices were perceived as being low.

Interestingly, people are finally waking up to the reality that this is a development that first started with falling demand. China. Told ya. And only afterwards did it turn into a supply issue as well, when every producer began pumping for their lives because demand was shrinking.

All the talk about Saudi Arabia’s ‘tactics’ being aimed at strangling US frackers never sounded very bright. By November 2014, the notorious OPEC meeting, the Saudi’s, well before most others including ‘analysts’, knew to what extent demand was plunging. They had first-hand knowledge. And they had ideas, too, about where that could lead prices. Alarm bells in the desert.

There are alarm bells ringing in many capitals, there’s not a single oil producer sitting comfy right now. And that’s why ‘official’ prices need to be taken with a bag of salt. Bloomberg puts the real price today at $26:

The Real Price of Oil Is Far Lower Than You Realize

While oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is even deeper. West Texas Intermediate futures, the U.S. benchmark, sank below $30 a barrel on Tuesday for the first time since 2003. Actual barrels of Saudi Arabian crude shipped to Asia are even cheaper, at $26 – the lowest since early 2002 once inflation is factored in and near levels seen before the turn of the millennium. Slumping oil prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said. The nation’s economic expansion faltered last year to the slowest pace in a quarter of a century. “You see a big destruction in the income of the oil and commodity producers,” Turner said. “That is having a major effect on their expenditure across the world.”

Zero Hedge does one better and looks at 1998 dollars:

The ‘Real’ Price Of Oil Is Below $17

“You see a big destruction in the income of the oil and commodity producers,” exclaims an analyst but, as Bloomberg notes, while oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is considerably deeper. Adjusted for inflation, WTI is its lowest since 2002 and worse still Saudi Light Crude is trading at below $17 (in 1998 dollar terms) – the lowest since the 1980s… Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

In fact, while sub-$30 per barrel oil sounds very scary, Saudi prices would be less than $17 a barrel when converted into dollar levels for 1998, the year oil sank to its lowest since the 1980s. Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said.

But this still covers only light sweet crude. Heavier versions are already way below even those levels. Question: what does tar sands oil go for in 1998 dollars? $5 perhaps? A barrel’s worth of it fetched $8.35 in 2016 US dollars on Tuesday. And that does not stop production, because investment (sunk cost) has been spent so there’s no reason to cut, quite the contrary.

Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners

Think oil in the $20s is bad? In Canada they’d be happy to sell it for $10. Canadian oil sands producers are feeling pain as bitumen – the thick, sticky substance at the center of the heated debate over TransCanada’s Keystone XL pipeline – hit a low of $8.35 on Tuesday, down from as much as $80 less than two years ago. Producers are all losing money at current prices, First Energy Capital’s Martin King said Tuesday at a conference in Calgary. Which doesn’t mean they’ll stop. Since most of the spending for bitumen extraction comes upfront, and thus is a sunk cost, production will continue and grow.

Another interesting question is where the price of oil would be right now if the perception of low prices had not made 2015 such a banner year for filling up storage space across the globe, including huge amounts of tankers that are left floating at sea, awaiting a ‘recovery’. But that is so last year:

Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes

If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up ‘cheap’ oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China’s record crude imports have ceased). In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners. China’s crude imports last month was equivalent to 7.85 million barrels a day, 6% higher than the previous record of 7.4 million in April, Bloomberg calculations show.

China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher. But given the crash in tanker rates – and implicitly demand – that “boom” appears to be over.

The consequences of all this will be felt all over the world, and for a long time to come. All of our economic systems run on oil, so many jobs are related to it, so many ‘fields’ in the economy, and no, things won’t get easier when oil is at $20 or $10, it’ll be a disaster of biblical proportions, like a swarm of locusts that leaves precious little behind. Squeeze oil and you squeeze the entire economic system. That’s what all the ‘low oil prices are great for the economy’ analysts missed (many still do).

Entire nations will undergo drastic changes in leadership and prosperity. Norway, Canada, North Dakota, Russia. But more than that, Middle East nations that rely entirely on oil, a dependency that won’t allow for many of their rulers to remain in office. Same goes for all OPEC nations, and many non-OPEC producers.

We can argue that a war of some kind or another can be the black swan that sets prices ‘straight’, but black swans are supposed to be the things you can’t see coming, and Middle East warfare for obvious reasons doesn’t even qualify for that definition.

The world is full of nations and rulers that are fighting for bare survival. And things like that don’t play out on a short term basis. For that reason alone, though there are many others as well, oil prices will remain under pressure for now.

Even a war will be hard put to turn that trend around at this point. Unless production facilities are destroyed on a large scale, war may just lead to even more production as demand keeps falling. The fact that Iran is preparing to ‘come back online’, promising an even steeper glut in world markets, is putting the Saudi’s on edge. Rumors of Libya wanting to return for a piece of the pie won’t exactly soothe emotions either.

And when, in a few years’ time, all the production cuts due to shut wells become our new reality, and eventually they must, then no, there will still not be an oil shortage. Because the economy will be doing so much worse by then that demand will have fallen more than supply.

Barring large scale warfare in the Middle East there is nothing that can solve the low oil price conundrum. But think about it, which Gulf nation can even afford such warfare in present times? For that matter, which nation in the world can?

The US may try and ignite a proxy war with Russia, but that would lead to an(other) endless and unwinnable war theater. Which would carry the threat of dragging in China as well. The US and its -soon even officially- shrinking economy can’t afford that. Which of course by no means guarantees it won’t try.

Comments

[Cloud9.5]

Five year plans and production quotas worked well for Mao and Stalin.  Farmers are optimist by nature and tend to believe next year will always be better.  That’s why they put a seed in the ground. My pop   had the experience of having some pencil neck state twit getting bought by a local oligarch,  and he ordered the burning of our entire nursery.

[Dark Daze]

Well, I hear you, but I am not talkng about five year plans. I am talking about using the technology and bureaucracy and infrastructure we have to 'manage' critical production and take it out of the hands of speculators, again, just like we have had to do so many time before when they fucked up everything.

[falak pema]

The end of Pax Americana corresponds also to the arrival of the "Finite world" meme and the degradation perceived in the  ecosystem of Man's environment, as documented in the Paris conference of Nov. 2015.

So its a DOUBLE whammy...we lose the hyperconsumer model 'cos its a "finite world" for fossil fuel in terms of both short term consumerism's senseless utilization of the Earth's crust and its subsequent pollution fall out in terms of Ocean warming/acidity and Earth's eco destruction.

This civilization change brings into question the socio political model of our global game in the following terms :

1° THe Westphalian construct of Nation-States in the dominant civilization of the West is now deeply put into question. Global climate change, global resource wars, global population problems and the age of "no barriers-no frontiers" interconnected world will create a new perception of how man organises his borderless Internet "civilization".

Will it be more world governance or will it be more nation state retrenchment which entails "nationalist" and "militarist" blowback harkening back to WW1 and WW2 chimes in an age of nuclear Armageddon...?

2° Given the correlation between human needs and availability of economically feasible energy without which Man's civilization regresses, our move to renewables on grid compatibility basis, is NOW the vital challenge we face. The quicker we move to Renewables the quicker we move away from the conundrum of Point #1. This crisis also reveals a huge resource bottleneck : our world environment.

3° Having defined the major problem and the major solution how do we get there in this age of transition and tipping times that our new century looks like becoming; a choice between sterile past plays based on Oil/gas life-line and political alliances which use "massive military hegmonial supremacy" of one nation's money cum clout as the arbitrer of all issues and the definition of new multipolar paradigms.

The means to achieve this aim of a sustainable planet and a new Renewable energy age can only be found if we have political systems, aka the methodology of resource allocation,  that are best adapted to achieve this objective based on hegemonial rule or based on cooperative rule amongst different regions of the globe.

The socio political choice therefore is :

a) Nation States or more Global decision making.

b) Capitalism and rule of 1% Oligarchy or Collaborative commons and rule of 99%. This second option implies moving to more social based economic and political systems where both State and Private Oligarchy work in cohesion on a GLOBAL MARKET/GLOBAL GOVERNANCE scale on the KEY issues ( resource allocation, Military plays and infrastrucutre investments) to obtain the "general good" for Planet Earth.

This perspective will only come into place like all the past "resets" of History : through blood and war and then realisation that a Westphalian peace is necessary when the 30 years of War have decimated one third of the region's population...

21 st Century will be about blood, sweat and tears before its about NEW PARADIgm.

[trader1]

falak - how would Rifkin's zero marginal cost society reconcile one of the possible futures of the Internet?

if you are reading JM Greer, the future looks bleaker for the 99% (or 80% if we stay true to Pareto's principles) than you anticipate:

Radio and television, like most of the other familiar technologies that define life in a modern industrial society, were born and grew to maturity in an expanding economy. The internet, by contrast, was born during the last great blowoff of the petroleum age—the last decades of the twentieth century, during which the world’s industrial nations took the oil reserves that might have cushioned the transition to sustainability, and blew them instead on one last orgy of over-the-top conspicuous consumption—and it’s coming to maturity in the early years of an age of economic contraction and ecological blowback. The rising prices, falling service quality, and relentless monetization of a maturing industry, together with the increasing burden of online crime and the inevitable rebound away from internet culture, will thus be hitting the internet in a time when the global economy no longer has the slack it once did, and the immense costs of running the internet in anything like its present form will have to be drawn from a pool of real wealth that has many other demands on it. What’s more, quite a few of those other demands will be far more urgent than the need to provide consumers with a convenient way to send pictures of kittens to their friends. That stark reality will add to the pressure to monetize internet services, and provide incentives to those who choose to send their kitten pictures by other means.

It’s crucial to remember here, as noted above, that the internet is simply a cheaper and more convenient way of doing things that people were doing long before the first website went live, and a big part of the reason why it’s cheaper and more convenient right now is that internet users are being subsidized by the investors and venture capitalists who are funding the internet industry. That’s not the only subsidy on which the internet depends, though. Along with the rest of industrial society, it’s also subsidized by half a billion years of concentrated solar energy in the form of fossil fuels.  As those deplete, the vast inputs of energy, labor, raw materials, industrial products, and other forms of wealth that sustain the internet will become increasingly expensive to provide, and ways of distributing kitten pictures that don’t require the same inputs will prosper in the resulting competition.

There are also crucial issues of scale. Most pre-internet communications and information technologies scale down extremely well. A community of relatively modest size can have its own public library, its own small press, its own newspaper, and its own radio station running local programming, and could conceivably keep all of these functioning and useful even if the rest of humanity suddenly vanished from the map. Internet technology doesn’t have that advantage. It’s orders of magnitude more complex and expensive than a radio transmitter, not to mention the 14th-century technology of printing presses and card catalogs; what’s more, on the scale of a small community, the benefits of using internet technology instead of simpler equivalents wouldn’t come close to justifying the vast additional cost.

Now of course the world of the future isn’t going to consist of a single community surrounded by desolate wasteland. That’s one of the reasons why the demise of the internet won’t happen all at once. Telecommunications companies serving some of the more impoverished parts of rural America are already letting their networks in those areas degrade, since income from customers doesn’t cover the costs of maintenance.  To my mind, that’s a harbinger of the internet’s future—a future of uneven decline punctuated by local and regional breakdowns, some of which will be fixed for a while.

That said, it’s quite possible that there will still be an internet of some sort fifty years from now. It will connect government agencies, military units, defense contractors, and the handful of universities that survive the approaching implosion of the academic industry here in the US, and it may provide email and a few other services to the very rich, but it will otherwise have a lot more in common with the original DARPAnet than with the 24/7 virtual cosmos imagined by today’s more gullible netheads.

Unless you’re one of the very rich or an employee of one of the institutions just named, furthermore, you won’t have access to the internet of 2065.  You might be able to hack into it, if you have the necessary skills and are willing to risk a long stint in a labor camp, but unless you’re a criminal or a spy working for the insurgencies flaring in the South or the mountain West, there’s not much point to the stunt. If you’re like most Americans in 2065, you live in Third World conditions without regular access to electricity or running water, and you’ve got other ways to buy things, find out what’s going on in the world, find out how to get to the next town and, yes, look at pictures of people with their clothes off. What’s more, in a deindustrializing world, those other ways of doing things will be cheaper, more resilient, and more useful than reliance on the baroque intricacies of a vast computer net.

Exactly when the last vestiges of the internet will sputter to silence is a harder question to answer. Long before that happens, though, it will have lost its current role as one of the poster children of the myth of perpetual progress, and turned back into what it really was all the time: a preposterously complex way to do things most people have always done by much simpler means, which only seemed to make sense during that very brief interval of human history when fossil fuels were abundant and cheap.

http://thearchdruidreport.blogspot.com/2015/04/the-death-of-internet-pre...

[chairman mao]

Hey China just bought 600k barrels of oil from USSA!

[sam site]

Funny that most people believe WW2 spending got us out of the 30s Depression and therefore wars are good for economies.

Few understand that the Bretten Woods Agreement in 1944, that  gave the US Dollar the new global reserve currency status and therefore the opportunity to counterfeit the dollar and export the inflation worldwide. 

A form of hiding the bodies globally after the crime.  Of course that fraud only lasted until 1971 when we started running out of gold for dollar redemptions to pay for all the counterfeited money we spent on Vietnam and Medicare.

This article points out that today hardly any country has the money for war.  The criminal rats controlling America's money since the 1913 Fed Act may be finally cornered and we may finally be free of these criminals

[Herdee]

There will come a point where Saudi Arabia or anybody else shipping oil to China will be forced to trade in 100% Yuan with no American Dollar swap involved. That's happening right now to a lesser degree already but China will copy the petro-dollar model that the U.S. has been using.Why?They'll be forced to strengthen the currency to satisfy the club ( The thieving bloody crooks at The IMF ). It'll be done to weaken The Dollar and be one of Yellen's scapegoats.Russia is already the biggest producer,it's not Saudi Arabia anymore and that's being done with a Ruble-Yuan swap.Buying Gold instead of Treasuries.Take Saudi Arabia out of the equation of U.S. Dollars with its' exports to China,the second largest world economy now.So,it boils down to this; When Russia,China and many others stop trading oil in U.S. Dollars and gradually reduce buying Treasuries,who's big enough to replace that source of debt funding?At the same time China and others are slowly removing Treasury holdings.No panic,but a slow burn is key in order not to raise alarm bells.Can the U.S. get its' debt under control?You be the judge of Washington's corrupt politicians,the answer is NO.

[brushhog]

I opted out of the system 8 years ago by selling my house in an over-priced, over-taxed suburb and bought a small farm in the mountains of a remote area of the northern appalachians. I used about 1/3 the money I got for the house to pay for 80 acres of pasture, hay field, and woods. Place had a small but well-built cabin around 1,000 sq ft. Taxes went from 7k in the suburb to 2,600 for the farm.

I bought a cow, started a large garden, and got a large woodstove to replace the old electric baseboard. Had the cow artificially inseminated for $30. Next year I had 2 cows. Inseminated them both for $60, and this continued. Male calves get banded (fixed) and raised to size then sold for about 1,500 ( market depending). I now have 5 pregnant cows due to calve in spring. I found that one of my biggest expenses was hay in winter, so I bought some old ( but well cared for ) haying equipment for 12k. I started haying my fields and found that I had way more hay than I could use. Last year i sold 2,000 bales for 3.50 each.

So...my freezers are full of organic, home grown veggies, beef, and chicken. The farm pays it's own expenses and a little left over for taxes and utilities. Cabin is easily heated by about 5 cords of wood per year which takes about 3 weeks to cut and stack. We drink good mountain water, some of the freshest and best I've ever had.

I recommend this to anybody who wants to get the fuck out of the shitty work-a-day system that so many of us get stuck in. I had absolutely no experience what-so-ever in farming or outdoor life. I was a salesman, a broker, and then a print shop manager. If you are able bodied and have at least SOME assets, get the fuck out now theres a better life possible. I read ZH and other financial news for fun, not as a nail biting participant. There's going to come a time soon when nobody is going to seel farm land for what you can get for suburban land.

[cwsuisse]

Well done! It seems the Russian art of running a datscha is coming to the US but big style and the visions of author James Howard Kunstler are coming true.

[Youri Carma]

First ever negative crude price!
16 January 2016, by Stacy Herbert (Max Keiser)
http://www.maxkeiser.com/2016/01/first-ever-negative-crude-price/

North Dakota is actually paying people to take their oil! I made this joke earlier today when we watched the oil price fall by nearly 6%, I said, “Max, Saudi Arabia is going to lose this war because they can pump all the oil they want, the US can just print so much money and pay consumers to take their oil.” I was just joking. I didn’t mean for it to ever be real.

Bear in mind that this particular grade of oil is sludgy crap and will cost a lot to refine, but still . . . what has the Fed wrought?

[roadhazard]

Amazing that you can't have a good economy unless gas is $4.00 a gal. I call bullshit.

[UnhingedBecauseLucid]

People have short memories...

The high price signal came because of this:

#1.

http://www.bbc.co.uk/programmes/p01s6pph

#2.

http://www.bbc.co.uk/programmes/p01s6fpv

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That event made us draw the conclusiuon that prices are signaling that low EROEI processes are viable going forward...

... but one thing's for sure is that it shouldn't have been interpreted as if a ceiling in output doesn't exist, nor that the resource is infinite...

The oversupply is still shallow in relative terms. The market mechanisms are inadequate in some circumstances to provide the right price and the right incentive for agents to act with "rational expectations" given the information at hand.

This is such a case...

[cwsuisse]

Thanks to the author! He explains it nicely. If the low price level should remain for longer we are watching a huge black swan that the central banks can not fight because there is nothing left to fight. The only chance for the moment seems to be that something unexpected happens which drives prices up again. That means we are waiting for a miracle. Good Lord, it has come to that!

[22winmag]

Regime change 1-20-2017

[Heroic Couplet]

One family member and I always hypothesized that in the year of a US presidential election, the price of oil rose as a way of paying for the GOP campaign. We've watched over several decades. Now that Trump is GOP Clown Candidate, as a way of forcing the Fox clowns Limbaugh and Murdoch to cover his campaign, the price of oil drops like a rock.