Guest Post: Why Oil Prices Are Killing the Economy

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Mon, 12/19/2011 - 23:39 | 1996479 TruthInSunshine
TruthInSunshine's picture

The Bernank logic governs this realm.

Using gasoline/diesel/heating oil as just one example, if The Bernank can get their prices to double over the next 4 years, even while consumption of these products decreases by 15% due to an economy so bad that people are forced to choose between eating and turning the thermostat up past 50 degrees, he is #winning.

You see, The Bernank, if given enough time, can duplicate this effect on just about every consumable item, and even the prices of services if he's allowed to rape and pillage long enough, and he can thereby report that expenditures are growing (even while consumption is falling) during an awful real economic contractionary period, and all will be well as reported in splashy headlines and graphics across the front page of USA Today.

The kicker is that the more that prices rise, the more that real consumption falls, and a self-reinforcing demand destruction loop is then born, in which case The Bernank has to rely more and more on rising prices to deceive as many as he can into thinking the economy is actually growing (or at least not contracting).

Bernankincidal Economics 101.

Mon, 12/19/2011 - 23:41 | 1996491 r00t61
r00t61's picture

Who cares if the supply of oil runs out?

I mean, I've heard many economists say that we can simply print and inflate our way to prosperity, so it must be true.

Mon, 12/19/2011 - 23:50 | 1996502 TruthInSunshine
TruthInSunshine's picture

Yes.

The Paul Krugman economic revival plan, which would entail a) printing an additional amount of federal reserve notes that now matches the existing U.S. debt, to use to pay off said debt, and b) printing approximately 15 trillion additional federal reserve notes on top of the amount mentioned in order to prepare elaborate defenses for purposes of warding off a hostile invasion of Martians -

- would offset the economic destruction brought about by diminishing oil production.

 

*If The Bernankio can succeed in getting a standard crap loaf of bread to $6 or $8 in the next couple of years, we're really going to be firing on all cylinders. Bernankincide Economics 101 FTW.

Tue, 12/20/2011 - 00:29 | 1996627 Oh regional Indian
Oh regional Indian's picture

Actually TIS, a centralized transactiion system can keep SNAP cards and food on the tabel for a while yet if needed. In effect, the cost to the government is really zero when they "print". 

The only cost is a political cost, which they seem willing to pay at this point.

When your card says you can get a bread every other day...it's price ceases to matter. All you have to practice is breathing and staying alive, which seems to be the goal for most anyways.

ori

/re-capitulation-collaboration/

Tue, 12/20/2011 - 00:35 | 1996643 trav7777
trav7777's picture

can't print oil, bitchez....and there are no alternatives to transition to that will be cheaper.  Except unicorn piss

Tue, 12/20/2011 - 08:22 | 1997090 Bicycle Repairman
Bicycle Repairman's picture

In the graph I note that oil prices move in lock step with the stock market.  But of course this is a coincidence and neither "market" is manipulated.  Further any "analysis" that does not account for the USA military's use of oil and for the interference with oil from Iraq, Iran, Libya and who knows where else is woefully incomplete.  Fail.

Tue, 12/20/2011 - 13:09 | 1997900 rwe2late
rwe2late's picture

Bicycle Repairman

Agreed. The global oil cartel or "oily"-gopoly manipulates prices. The global Pentagon/NATO is the world's biggest user and polluter of Petroleum products (as well as chemical, biological, nuclear, etc.).

There is also a potential and literal black swan effect of an even worse BP disaster occuring given the planned and ongoing activities in the North American Arctic, as well as the known environmentally ruinous activities in Africa, Russia, and elsewhere.

 

 

 

 

 

Tue, 12/20/2011 - 12:45 | 1997803 Jumbotron
Jumbotron's picture

Yummmm.....Hot Spiced Unicorn Piss Toddies for all...just in time for the holidays !!!

And by the way...you are correct sir !

Tue, 12/20/2011 - 04:26 | 1996938 Sudden Debt
Sudden Debt's picture

Your right!

And why doesn't GM build cars tha run on Plutionium pellets? I bet we'll get better mileage anyway!

 

Tue, 12/20/2011 - 08:06 | 1997064 zhandax
zhandax's picture

Wrong concept; GM is green now.  Depleted uranium pellets.  Cheap, plentiful, and now that Iraq is 'supposedly' over, in surplus (never mind that dozen or so troops that got shifted to the 'other' border).

Mon, 12/19/2011 - 23:57 | 1996534 Caviar Emptor
Caviar Emptor's picture

@ Truth: I call it Biflation as you know. Thanks for re-enumerating. 

At the root it's all really about Bubble Economics: or What happens when you short-circuit the laws of supply-demand in a supposedly free-market economy? 

This is what happens under the law of unintended consequences: misallocations, price misalignments, inefficiencies and ultimately anti-competitive business models. 

Bernank inherited bubble economics from his predecessors, but he is also one of the high-priests. So in his zeal to reflate the burst bubble of 07-08 (which is also a 30-year bubble) he has created biflation as a side effect. And the global economy is suffering because of it. 

Tue, 12/20/2011 - 00:01 | 1996545 TruthInSunshine
TruthInSunshine's picture

Indeed.

There is absolutely no way price discovery or any proper correlation on the supply/demand curve, etc. can occur in the markets that Ben S. Bernanke completely broke.

Tue, 12/20/2011 - 00:06 | 1996558 Caviar Emptor
Caviar Emptor's picture

Totally agree

Tue, 12/20/2011 - 00:15 | 1996581 CrashisOptimistic
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Economics are trumped and rendered irrelevant by insufficient oil flow.

That's just the way it is and there's nothing anyone can do about it.

Tue, 12/20/2011 - 01:44 | 1996827 Freddie
Freddie's picture

The muslim paying back his patrons is Saudi Arabia.  No exploration.

Tue, 12/20/2011 - 09:36 | 1997215 Flakmeister
Flakmeister's picture

Now you have gone from being hateful to just plain ignorant....

Pray tell, who is not "exploring"?  For full marks, show your work.

Tue, 12/20/2011 - 14:20 | 1998198 Iwanttoknow
Iwanttoknow's picture

Nah,I'm afraid that Freddie's ignorance is congenital.

Tue, 12/20/2011 - 08:34 | 1997100 WhiteNight123129
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Agreed, this is how idiots confuse dimentionless demand supply imbalance which is an increase in demand given constant supply, or a decrease in supply assuming constant demand etc... Obviously there is a bit of demand price elasticity, but overall it is becoming less and less elastic, or people will need a donkey for transportation.

Now prices are not dimentionless measure of price increase, price is a ratio. Oil divided by dollar, yens,Gold etc...

So instead of measuring anything going on with supply demand it just measures what is going on with the denominator.

If Silver availability goes down faster than oil, Oil will go down if denominated in Silver. In that case no need to buy Oil,just buy Silver as you will be able to buy more oil with your Silver down the road.

Ah... about supply constraints on the dollar... Raise donkeys they might become a useful commodity!

Mon, 12/19/2011 - 23:39 | 1996484 homersimpson
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I guess the algos didn't read this article. Futures on DJI now +50 this late at night.

Mon, 12/19/2011 - 23:48 | 1996506 heremynkitty
heremynkitty's picture

Good, I need another entry point for TZA.  Do I hear +200?

Mon, 12/19/2011 - 23:41 | 1996492 Stuck on Zero
Stuck on Zero's picture

Anyone remeber the panic and confusion when oil went from $2.50 a barrel to $10.00 a barrel in 1973? 

Tue, 12/20/2011 - 00:04 | 1996551 Caviar Emptor
Caviar Emptor's picture

Yup. And oil imports were only 30% of consumption. Now it's doubled

Tue, 12/20/2011 - 07:39 | 1997037 Ghordius
Ghordius's picture

In Europe the highways were closed on Sundays, and the debate raged around what to do with the already high gasoline taxes...

Yup. Those were good times for bicycle sellers.

Mon, 12/19/2011 - 23:43 | 1996493 jonjon831983
jonjon831983's picture

Just wanted to point out something from the past.

 

When oil hit $110 airline pilots were claiming that airlines, in order to save on costs, were demanding that planes be minimally fueled 

Pilots claim airliners forced to fly with low fuel

4/16/2008

http://www.msnbc.msn.com/id/24034468/ns/travel-news/t/pilots-claim-airliners-forced-fly-low-fuel/

 

High prices will encourage... creative answers.

 

Take from one place and give to another...

Mon, 12/19/2011 - 23:43 | 1996495 I am a Man I am...
I am a Man I am Forty's picture

i'm too stupid to understand the quote at the beginning

Tue, 12/20/2011 - 00:23 | 1996606 Schmuck Raker
Schmuck Raker's picture

It's in British.

Tue, 12/20/2011 - 01:19 | 1996775 prains
prains's picture

It's the orange jump suit,jambs brain signals to the ass

Tue, 12/20/2011 - 00:03 | 1996501 Kitler
Kitler's picture

Persistently high oil prices in the face of collapsing demand?

Perhaps just Bernanke and his boys doing more of Gods work.

http://seekingalpha.com/article/172797-the-global-oil-scam-50-times-bigg...

 

Goldman Sachs (GS), Morgan Stanley (MS), BP (BP), Total (TOT), Shell (RDS.A), Deutsche Bank (DB) and Societe Generale (SCGLY.PK) founded the Intercontinental Exchange (ICE) in 2000. ICE is an online commodities and futures marketplace. It is outside the US and operates free from the constraints of US laws. The exchange was set up to facilitate "dark pool" trading in the commodities markets. Billions of dollars are being placed on oil futures contracts at the ICE and the beauty of this scam is that they NEVER take delivery, per se. They just ratchet up the price with leveraged speculation using your TARP money. This year alone they ratcheted up the global cost of oil from $40 to $80 per barrel.

 

"Traders of the the ICE core membership (GS, MS, BP, DB, RDS.A, GLE & TOT) wouldn’t really have to put much money at risk by their standards in order to move or support the global market price via the BFOE market. Indeed the evolution of the Brent market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and “squeezing” those who had sold oil they did not have. The fewer cargoes produced, the easier the underlying market is to manipulate." - Chris Cook, Former Director of the International Petroleum Exchange, which was bought by ICE.

 

Then again what would the former DIRECTOR of the Petroleum Exchange know.

Tue, 12/20/2011 - 00:08 | 1996552 CrashisOptimistic
CrashisOptimistic's picture

Persistently high oil prices in an environment of collapsing demand SAYS WHAT VIA OCCAM'S RAZOR?

It says supply is diminishing.  This is not rocket science.  The flow rate of oil out of the ground (which should NOT be called "production", no one produced anything, it was already there) is NOT SUFFICIENT.

Period.  Full stop.

Oil flow rate out of the ground is NOT SUFFICIENT.  Prices are rising.

When you see insane articles like that in USA Today (today) try VERY HARD to read it carefully. They intersperse crude and petroleum products all over the place and confuse even themselves.

The US imports about 2.5 barrels of oil for each barrel it "produces".  The rest is utter bullshit.

Tue, 12/20/2011 - 00:15 | 1996570 Kitler
Kitler's picture

Tell that to the FORMER DIRECTOR of the exchange.

 

http://www.theoildrum.com/node/5606

 

A Partnership made in Heaven?

There are probably few more influential people than Peter Sutherland. An Irishman with a high level legal and political background, he became a non-executive director of BP as early as 1990, and after a brief but successful period to 1995 as head of the World Trade Organisation he has been on the BP board ever since, from 1997 as chairman. He has also chaired Goldman Sachs International since 1995.

Lord Browne of Madingley was a career BP man who ascended to the top in 1995 and eventually fell from grace in May 2007 shortly before he was due to retire. He was on the Board of Goldman Sachs from May 1999 until May 2007.

BP have always been natural traders. Unlike Exxon, who are vertically integrated and produce & refine oil and distribute products, BP sell the oil they produce on the market, and buy the oil they refine. In the years since 1995, BP has made phenomenal profits by trading oil, and oil derivatives.

So have Goldman Sachs. You don't rise to the top in Goldman Sachs unless you are responsible for making a great deal of money: and their energy trading operations have made immense amounts.

The key player in Goldman Sachs is the current CEO Lloyd Blankfein, who rose to the top through Goldman's commodity trading arm J Aron, and indeed he started his career at J Aron before Goldman Sachs bought J Aron over 25 years ago. With his colleague Gary Cohn, Blankfein oversaw the key energy trading portfolio.

It appears clear that BP and Goldman Sachs have been working collaboratively – at least at a strategic level - for maybe 15 years now. Their trading strategy has evolved over time as the global market has developed and become ever more financialised. Moreover, they have been well placed to steer the development of the key global energy market trading platform, and the legal and regulatory framework within which it operates.

Tue, 12/20/2011 - 00:21 | 1996599 CrashisOptimistic
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None of that has anything to do with geology.  Geology is the dominant force in the matter.  The rest is hand waving.

Tue, 12/20/2011 - 00:26 | 1996619 Kitler
Kitler's picture

GLOBAL PRODUCTION CAPACITY IS STILL INCREASING NUMBNUTS!!!

http://www.google.ca/imgres?q=global+annual+oil+production+2010&hl=en&gb...

Tue, 12/20/2011 - 00:35 | 1996648 dolph9
dolph9's picture

Oil production is, for the most part, flat since 2005.  A brief spurt upwards does not prove a trend.

If anything, oil production is going to start to fall, they'll call it "demand destruction" but in reality the supply is not there, so that demand ultimately won't be, either.

Tue, 12/20/2011 - 01:40 | 1996743 ZerOhead
ZerOhead's picture

90 million barrels per day is more than the estimated 84 million barrels currently being consumed. Looks like a concerte effort to force the price down. I wonder where it's all going?

 

http://omrpublic.iea.org/

Global oil supply rose by 0.9 mb/d to 90.0 mb/d in November from October, driven by lower non-OPEC supply outages. A yearly comparison shows similar growth, with OPEC supplies standing well above year-ago levels. Non-OPEC supply growth averages 0.1 mb/d for 2011 but rebounds to 1.0 mb/d in 2012, with strong gains expected from the Americas.

Tue, 12/20/2011 - 00:37 | 1996653 trav7777
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uh, NO, it isn't.

If there were oil out there in abundance, producers would PRODUCE INTO THE HIGH PRICES.  They would SELL INTO IT.  Do you freaking GET that?

Tue, 12/20/2011 - 00:45 | 1996682 TruthInSunshine
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I used to disagree with Trav on the oil issue, we'd get pissy (especially him), but after I took a genuine leap into the oil production issue, I discovered he was right.

We weren't in alignment on the core and important issue, at any rate. He was speaking of oil that was economically feasable to extract/recover, while I was focused on total amount of oil in terms of provable reserves. Further, total global oil production peaked around 1976 and has declined since then, regardless as to consumption patterns.

Aside from the fact that I do believe oil prices are significantly manipulated by games played at terminals and games played by central banksters, and that this typically leads to a significant premium on prices paid for oil IF IT WAS LIKE ANY OTHER RENEWABLE COMMODITY, I'd sure as hell rather keep my oil in the ground and wait rather than take Bernanke or Trichet's toilet paper for it, if given the choice.

Tue, 12/20/2011 - 00:46 | 1996688 DaveyJones
DaveyJones's picture

...then you'd be a terrorist

Tue, 12/20/2011 - 01:31 | 1996732 TruthInSunshine
TruthInSunshine's picture

I know.

They'd probably make me an offer I couldn't refuse.

Tue, 12/20/2011 - 05:21 | 1996973 richard in norway
richard in norway's picture

no good long term financial sence, why sell something today for $100 when tomorrow you can get 200

Tue, 12/20/2011 - 01:01 | 1996730 ZerOhead
ZerOhead's picture

TIS  (Looks like you can't handle the truth! :)


http://omrpublic.iea.org/

The supply function is being manipulated by OPEC. Do not cofuse yourself with production vs. production capacity.  

Latest production numbers are now at 90MM b/d. Production capacity is 6-7 MM b/d higher.

 

Global oil supply rose by 0.9 mb/d to 90.0 mb/d in November from October, driven by lower non-OPEC supply outages. A yearly comparison shows similar growth, with OPEC supplies standing well above year-ago levels. Non-OPEC supply growth averages 0.1 mb/d for 2011 but rebounds to 1.0 mb/d in 2012, with strong gains expected from the Americas.

 

Tue, 12/20/2011 - 01:12 | 1996761 TruthInSunshine
TruthInSunshine's picture

When I went back and forth on that issue (the true rate of production vs reported rate and the reported rate that's possible if everyone was pumping), and went through a ton of sources trying to find credible information, I found sources claiming production and production capacity (current) is underestimated and that it's overestimated.

I'm not a geologist, and I don't have access to what OPEC and non-OPEC oil producing sources know about their fields.

I think what I'm speaking to more than what is the current rate of production, which would allow for the admission that oil may very well be overpriced if it were renewable and/or their were expectations that oil consumption would decline over the long term (rather than increase), is that there's an area that exists between what are proven reserves of oil & reserves of oil that can be efficiently extracted at what could be profitable prices given today's prices.

That area is where the price premium will ultimately really come into play, even if over the intermediate or longer term.

Tue, 12/20/2011 - 01:34 | 1996784 Kitler
Kitler's picture

"Peak oil" is very much dependent on price and time response to that price. And technological advancement.

Therefore peak oil is about as solid a concept as peak wheat or peak corn. You can always extract more if the price is higher but at some point the price creates it's own demand destruction.

If the globe could handle say $200/bbl oil production could be increased to perhaps 150-200MM barrels per day for decades.

 

http://www.assembly.ab.ca/lao/library/egovdocs/2007/aleri/162450.pdf

8-9 TRILLION barrels of non-conventional crude exist in the world. 1.6T are in the Canadian oilsands alone.

 

1,600,000,000,000 divided by 100MM barrels per day (assuming you had enough water etc.) would get you 42 years of 100MM barrel/day supply.

Technically impossible right now but give it time and higher prices and anything is possible but it's not going to happen overnight to be sure.

Tue, 12/20/2011 - 01:38 | 1996814 DaveyJones
DaveyJones's picture

Coping, planning and adapting to peak oil is subject to peak understanding 

Tue, 12/20/2011 - 01:42 | 1996822 ZerOhead
ZerOhead's picture

Right now it looks more like peak gouging if you ask me.

Tue, 12/20/2011 - 13:18 | 1997926 TruthInSunshine
TruthInSunshine's picture

I really should have qualified my statement above to say "I think Trav is right," rather than "Trav is right."

Honestly, does anyone really know how to balance what any rational and observant person can agree is manipulation of the exchanges and inventories against the actual, hard, irrefutable fact of how much oil that can be extracted at economically feasible levels remains (given the technologies of any time period)?

IBM's Watson just made its 5 Big Predictions for the next 5 years, and one of them wsa that energy will become free as humans learn how to coordinate, pool and store their own kinetic movement (or something to that effect - and no, I am not putting much weight into this, but I'm no physicist, either).

Tue, 12/20/2011 - 13:11 | 1997913 ian807
ian807's picture

The flaw in your argument is "anything is possible." That's not true. For some things there are no solutions that are easy enough and inexpensive enough to matter. The trillions of barrels under the earth's surface are there, but will do us no more good than the hydrocarbons on the moons of Jupiter. It's neither energetically nor economically profitable to try and use them. There's also no way a teacup of oil in a 10 cubic yards of rock at 50 thousand feet will ever be worth getting compared to other solutions. Not now. Not ever in our lifetime.

Restricting your view to proven reserves (1.4 trillion barrels or thereabouts), real extraction rates (45% is pretty average) and a little extra thrown in for unconventional really doesn't take us far past the next 30 years.

So quantity of affordable oil is one problem. The other two are:

1) A near total dependence of the transportation sector on cheap oil

2) At some point, supply chains (including those that supply the oil and coal sectors themselves) start to break down.

That's our achilles heel as an economy, and a civilization. A more diverse transportation technology based on multiple fuels like electricity for trains and natural gas and biodiesel for automobiles would let us transition gracefully. Given the current slavish devotion to letting the markets handle it, I doubt this will happen. Markets don't think ahead very well. You need governments for that. Currently our own is too involved in partisan politics to bother with practical future problems. Europe is little better. China could manage it, but it's own economic downturn will probably cause the government there to lose focus.

Interesting times.

Tue, 12/20/2011 - 00:45 | 1996673 DaveyJones
DaveyJones's picture

even assuming you are right, how"s the eroei on that? under 10 barrels. And what was it when the whole game started?  

Tue, 12/20/2011 - 09:41 | 1997232 Flakmeister
Flakmeister's picture

Kitler... you are another person fooled by "All Liquids"... The net energy content of what is called oil is at best flat and the world net exports are down ~10% since 2005 (i.e. exporters are consuming more of their production domesitically)....

You understand the difference between NGL, refinery gains and bio-fuels? Do you?

Go back and hit the hopium pipe again... 

Tue, 12/20/2011 - 13:02 | 1997831 Jumbotron
Jumbotron's picture

Kitler said.....GLOBAL PRODUCTION CAPACITY IS STILL INCREASING NUMBNUTS!!!

 

AT WHAT COST DIPSHIT ????!!!!!!!

Tar sands = Very labor intensive to dig out of the ground and more costly to refine.

Shale = Very labor intensive to frak with all that extra water needed to be drilled for as well not to mention disposed of ....oh yeah.....more expensive to refine than its light sweet crude cousin.

Deep Water in Gulf of Meixco....BP....nuff sed

Deep Water in Artic.....BP again, eventually....but colder.   Oh yeah....once again more expensive to refine since this oil is cooked due to it being closer to the mantle and/or compressed more and heated from friction alone.

The very fact alone that we are inventing new technologies to scrape the sides of the toilet bowl much less drill down to the bottom of the septic system is all the proof anyone needs that Peak (CHEAP) Oil is real and here to stay in order to fuck up infinite growth.....well....for infinity.

Add higher input costs of energy into the entire manufacturing chain from acquisition, to production to distribution to the consumer driving their fat ass to Wal Mart and Safeway....add that to a self destructing world debt ponzi scheme.....well......I think you can guess the rest.

Tue, 12/20/2011 - 01:54 | 1996842 Freddie
Freddie's picture

Lord "Browne" is a member of the tribe like Blankfien.  The Roth lackeys.

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