"Oil Won't Stop Until The Economy Breaks"

Tyler Durden's picture

As gold strengthens on the back of the extreme experimentation of the world's (now-sheep-like) central bankers' easing and printing protocols, it does no real harm to the world, but as John Burbank (of Passport Capital) notes, the painful unintended consequence of all this liquidity is energy costs skyrocketing - and it won't stop until the economy breaks. The negative feedback loop, that we pointed to yesterday as potentially the only thing to stall a magnanimously academic response to the insolvency we see around the world (and the need for deleveraging at this end of the debt super-cycle), of oil prices into the real economy will be devastating not just for US but for EM economies, though as the bearded-Burbank reminds us - Saudi benefits greatly (and suggests ways to trade this perspective). Flat consumer incomes while costs are rising is never a good thing and while we make new highs in oil in terms of EURs and GBPs, he warns we may soon in USDs also. Summing up, his perspective is rising tensions in the Middle East combined with central bank liquidity provision are a huge concern: "We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good. It's hard to know where things are going to go. The point is, just because they're putting liquidity in the market doesn't mean the economy is improving."

 

Edited Transcript below:

On the price of oil and his Saudi investments:

"[Oil] is up 16%, more than any of the indices. It's a big problem for the rest of the world - central bank easing and liquidity providing presents a lot of problems for the average consumer here but also for emerging markets around the world.”

“The one market it really helps is the Saudi market. We have 15% of our capital in the Saudi market - only about 1% is held by foreigners. It should be opening up this year. So we think unfortunately QE3, which is now being pursued in Europe and Japan, essentially in the U.S. with other programs, has negative feedback loops. And oil we think is the one. Gold goes up 10%, 20%, 50%, it doesn't cause any problems with people the way banking is done these days, but oil does… I don't think oil is going to stop until the economy breaks which is a real risk."

"The average consumer isn’t doing well. Their income has been flat for almost ten years, but their costs keep rising. They had a benefit with natural gas being cheaper this year, but the oil price is now breaking out and it's breaking out because of all the liquidity in the world. The oil price is making new highs in euros and pounds and it may soon in dollars. That's a big problem."

On investing in Saudi: 

"Right now, we have to use swaps. We've been in the market for about three years. Foreigners couldn't actually own Saudi stocks until August 2008. So we've spent quite a lot of time doing our research and understanding the market.”

"[Saudi Arabia] is very sincere in opening up the market to foreigners. It reminds me of India in the 2003, 2004 time period before you could buy Indian stocks directly.  Saudi, which is 70% of the G.C.C, and by far the most important, the most liquid market, is something that foreigners are going to want to own.”

"Right now, you can't buy an ETF, you can't buy Saudi stock. It's obviously very difficult to buy a security directly. We have done that. We know that foreigners now are looking at the market. The market is about 11 times earnings with almost a 5% dividend yield in 2012, and that's on an unlevered basis. The Saudis have about $600 billion of reserves and corporates have very little debt. To me, there's a lot of systemic risk in the Western world…[but] in the Saudi market, they've been very restrictive. Banks have not wanted to make it easy to borrow money and buy stocks after the bubble that happened in 2005, 2006."

On tensions in the Middle East:

"If tensions with Iran means oil goes up, then that's good for the Saudi economy but not good for the rest of the world. Fundamentally, if there's a problem with Iran, it's a problem for the whole world…The biggest risk for Saudi is really a risk that the whole world bears, but actually Saudi benefits. Oil goes to $150, $200, it means the economy is going to grow even faster because the government has more money it can deploy in the economy."

"Saudi is not like an overbuilt economy. It's just opening up now. Building is going on. The Saudis are so conservative that they don't lend against land. "

On the European Central Bank issuing more money:

"A lot of the risk has been taken out of the market, on a near-term basis. We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good.”

"I don't believe in a global rally right now. It's a bounce back from oversold conditions last year. But I think the confidence in central banking is far overdone. It's hard to fight the Fed when prices are going in the other direction."

"It's hard to know where things are going to go. The point is, just because they're putting liquidity in the market doesn't mean the economy is improving."

On Passport's strategy:

"We’re stock pickers. In fact, this is a great year to be long and short individual securities.  In 2008, everything went down. In 2009, everything went up. In 2010, everything moved together and eventually ended up. Last year, things started separating. Our strategy is to be picking individual securities, companies that are not depending on economic growth.”

“Biotech and healthcare is one of those sectors. There hasn't been an obesity drug approved in over 30 years and we thought Qnexa would have a good chance of being approved…We were one of I think four big holders in the stock. We think it can double again because we think a large pharma would probably like to own the company at some point."

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Matt's picture

So you think there will be no coal, oil or gas at all? You think it's all going to suddenly disappear and there will be no energy at all?

I used potatoes because YOU used potatoes. Rice is much better; Asians have been living on it with somewhere between 6 and 12 people per acre fed for thousands of years. Obviously we are not going to only eat potatoes.

An ox is a bull with his testicles removed to make him grow bigger. There are Amish and Mennonites and Hutterites and Hesidic Jews etc etc all over the place that have all kinds of old breeds of animals and old tools.

Railroads are going to be the way of the future if energy levels decline anywhere inbetween flat to mad max levels. People all over the world haul stuff on dirt roads, and they've been doing it for thousands of years. Most farm roads in North America were only recently paved, if at all.

Really, it all depends on what kind of collapse you are expecting; it seems you think no one will ever use money ever again, and all the hydrocarbons are going to vanish, leaving only local barter economies = Mad Max.

 

UP Forester's picture

This summer, my Massey-Harris is getting one of these:

http://www.youtube.com/watch?v=AksUuOckWpI

UP Forester's picture

Worked all over Europe during WWII, should work better now.

Hulk's picture

I'm going into the starter business!!!

Green Leader's picture

I come here to read and learn finances and geopolitics.

I abstain from commenting what I do not know nor understsand very well. Look and learn, as I was taught in the Coast Guard.

As a group, almost everybody here is unqualified to speak about agriculture/natural resources development & management. What we get are 'theoretical experts' like the Spaghnum Moss. Enjoy this video of actual oxen bred with short legs to successfully plow in steep slopes. An acre of bananas will provide as many calories as an acre of intensively farmed potatoes. Nature balances out.

http://www.youtube.com/watch?v=YYnDXXA4icw

 

Flakmeister's picture

Actaully there are a few here that know their shit vis a vis agri-production from first hand experience... Sean7k and LawsofPhysics come to mind.... (apologies to any regulars that I overlooked)

Yes, one should always assume that someone knows more than you on a given subject and one should stick to what one can reasonably converse in....

DaveyJones's picture

"As a group, almost everybody here is unqualified to speak about agriculture/natural resources development & management"

that's because the questions and solutions are both broader and intensely more local than that description. The answers going forward are more about "gardening" than "farming," more about an intimate knowledge of local systems and plants than massive production management, more about imitating nature than spending endless energy attempting (unsuccessfully) to convert a local ecological system into something it is not and while doing so, making permanent destruction on water supplies, soil, and soil organisms. At least, that's what "the experts" are saying. Ironically, with that description, my neighbor, and her tomato plants, become a vital resource.   

Green Leader's picture

Since I consider you a good contributor to this forum I will have King Solomon enlighten you:

Where there are no oxen, the manger is empty,
but from the strength of an ox come abundant harvests.

 (Proverbs 14:4)

This is about farming indeed--and all it required peripheral skills: tool sharpening, body mechanics, astronomy, basic carpentry/metalworking, animal husbandry, compost making, seed preservation, etc.

Gardening is a first step and even so, most people want to learn all about it in one hour or less. Our small green group is about education and people do NOT want to learn, no they don't. What they want is to somehow calm their consciences. Like the "buy local meme" someone posted earlier in this thread. It's the same meme..."If I go to a one hour workshop I'm green and doing what I should do."

Most will starve, passing out while sitting on their chairs and sofas.

 

DaveyJones's picture

my favorite Solomon line goes something like:

If you see oppression of the poor, and justice and righteousness trampled in a country, do not be astounded

I hear you. It's probably true that my definition of gardening is more about scale than detail and complexity just like my plugs about permaculture. As I said somewhere above and many times, I'm with you, I don't expect everyone to catch on. They'll catch plenty of other things but not this. Those who do must learn fast and share with those who will learn. 

chindit13's picture

Why you've just described the world outside my hut!  55 million on land the size of Texas, ox carts carrying the produce on dirt roads from farms plowed by oxen pulling a wood and metal contraption, (dodging cobras and Russell's vipers and Banded Kraits the whole time) most all grown without pesticides and petroleum based fertilizers (can't afford them)...and everything ending up in twice-daily sidewalk markets crowded with shoppers many of whom lack power much less refrigerators.  Meat's got a lot of flies on it, but that's why we cook it....well.  Truth be told, the meat section of the markets stink like hell come closing time.  Lots of mouth breathing required, and a dab of perfume under the nose spares one the worst of it.  Sometimes they walk the animals to market, and slaughter on the spot.  That's fresh, thought not for the squeamish.

Three growing seasons per year and lots of rain no doubt help, but Mad Max is nowhere in sight.

boiltherich's picture

An acre of bananas will also leave you dead from constipation.  :)

Bringin It's picture

LFMayor - you make all good points, except the first one about agreeing w/ CIO.  Yes, the urban/suburban-ites are in a pickle, but nuking sombody, like {crazy} CIO advocates, is no solution ... is it?

tmosley's picture

"It is impossible to develop any other system of agriculture than the one we have now, or the one we had before now."

So sayth the prophets of the cult of Death.

Mr Lennon Hendrix's picture

What the hell does the NWO have to do with Peak Oil? 

GeneMarchbanks's picture

'That means pre-emptive use of military force against the major population centers of China.'

Wow! That's a new one. One place at a time Captain America.

Not all 7 billion consume oil you are aware?

CrashisOptimistic's picture

You'll be very hard pressed to find people on Earth who do not eat food transported to them.

China is the right place to start.

The US consumes 23% of annual total global oil consumption with 4% of global population.  You either want that 4% to endure the devastation of taking that 23% down to 4%, or you are an American and want to have a lifestyle superior to the rest of the world.  

There is only one way to do that.

GeneMarchbanks's picture

You, sir, are a retarded person.

 

 

 

                     [junk]

Piranhanoia's picture

The one percent speaks in tongues through the fellow with the microcephalic knob on his neck.    Ladies and gentlemen. You thought it was a monkey, you thought it might be the wild bearded boy found in the jungle, but no, our circus just has "crash" the pscyopath lusting for the end of civilzation anywhere it isn't.   Crash knows no connection exists to the rest of humanity for it.   Free Tickets and come if you dare!    Remember, it wants to kill 25% of you!

mayhem_korner's picture

microcephalic knob on his neck.  

 

LOL.  I'm going to hang that on my fridge.

CrashisOptimistic's picture

25% won't be enough.  Mankind went from 1 billion in 1900 to 7 billion today -- because of oil.

 

Dr. Kananga's picture

Oil? I thought it was K-Y, but hey...

Crash, I get your line of reasoning, but have you considered that--like Col. Kurtz--your methods may be "unsound?"

LFMayor's picture

yeah doc, unsound :)   But you're not hungry yet. 

Walter E Kurtz's picture

Colonel Kurtz says that the US won't have to attack China to depopulate the planet.  The coming economic collapse/WWIII will do that for you.  Beans, bullets, and band-aids my friends...

walküre's picture

Mankind went from 1 billion in 1900 to 7 billion today -- because of oil.

2 major wars and a few smaller wars, not to mention several genocides in there as well.

Does that seem feasible to you? An increase in the size of a herd seven times over during a period of only 100 years?

They fucked and had kids before 1900 too, you know. Lots of kids.

Clue: The 7 billion number is probably NWO propaganda garbage to keep the ponzi going.

LFMayor's picture

i had a Jehovah's witness tell me once that there were only 4 million people in the whole world.  Nutrition, pre natal care and pharma keep keep more kids alive these days. 

Darwin has been twarted for so long it's now dangerous to stop twarting him.  From everthing from warning labels on plastic bags for the sub 80 IQ's to entire countries that cannot feed themselves.

Pbn2Au's picture

Crash could present his case better and with more sensitivity.

However, be open to concepts that intially seem harsh, wrong or unsettling.

Learning should happen anywhere and everywhere.

There are many unfortunate choices and realities on the horizon - that from an über optimist.

tmosley's picture

Yes, let's all be open to mass murder.  

You nominating yourself to be the first victim?

Because God knows there is no way Americans will follow the laws of economics and reduce their consumption as things become more and more expensive.

CrashisOptimistic's picture

If there was a price on air, would you reduce your consumption?

tmosley's picture

If ifs and buts were beer and nuts, you wouldn't want to destroy the world.

Oil is analogous to food, not air.  But you don't want to accept that, because then there might be an argument against murdering the world.

Matt's picture

Contrary to popular myth, it's not like Americans eat 10 times as much as everyone else. Everyone needs 1500 to 3000 calories per day, unless you're Michael Phelps and you are consuming 10,000+ calories per day in order to train constantly to be the best swimmer in the world, at the cost of accelerated aging.

Yes, North Americans eat more meat and more imported fresh food from tropical regions than other people, and sure that will likely change. However, from a calorie perspective, in an uber-expensive oil world, more people will need more calories to live and perform manual labour, not less.

CrashisOptimistic's picture

This is ZH.  This is not CNBC.  I seek no advertising revenue or clients by telling them rainbow and unicorn stories and phrasing things gently.  ZH is where you find bullshit, and stupidity, but you can also find information here.

I don't care if people listen or agree.  And it doesn't matter if the listen or agree, and it also doesn't matter if I care about them doing so.

Geology doesn't care about anything.  That is all that matters.

tmosley's picture

Normalcy bias unto death.

Because oil is the only source of energy in the universe.

Mr Lennon Hendrix's picture

America needs to rebuild itself from a suburban country to one that is more agrarian.  And by needs I mean that it must do it before it is forced to, because if America waits until it has to change there will be a lot of turmoil.

Things that go bump's picture

There is going to be a lot of turmoil.

Ned Zeppelin's picture

you got that right.  If the choices are to either preemptively "wise up," or risk complete disaster, we choose Door No. 2 every time, all day long. 

Handguns, lots of ammo, rice, beans, water source, god knows what else. . .

Matt's picture

So you want to take existing, productive farmland and redistribute it into smaller, less efficient farms ran by former suburbanites? Or build large housing tenements next to existing farms, so the former suburbanites can be used as labour on the farms? Or make all the workers owners of new farm collectives?

Personally, I'd rather apply feebates on fuel so that farmers and transporters get steep discounts, while non-essential users pay a higher rate for fuel, and luxury users - airlines, cruise ships, etc - pay hefty premiums. let the 2 percent that already grow all the food just keep doing what their already doing.

Numbers are a bit old, but at 400 gallons of oil equivelent per year per person for food production, at 400 million people, it would take 4 million barrels per day of oil to just keep producing food using existing methods. This includes nat gas use for making ammonia fertilizer, transportation, etc. renewable or nuclear could be used to make the ammonia, saving nearly a third of that.

EDIT: oops, that is not right, its 4 million gallons per day, forgot to divide for barrels; more like 100,000 bpd needed to feed all of America using existing methods with no change at all.

REEDIT: man i can't  do math today. 400 gallons is ~10 barrels per person. 400 million people makes it 4 billion barrels per year, divided by 365 days is around 10 million barrels per day. Man I hope that 400 gallons number is way too high ...

bluebare's picture

Keep in mind, a food portion eaten today is typically transported 1,500 miles from producer to consumer.  Plastic packaging also contributes significantly to food-related oil use.  These factors help explain the oil-intensive nature of the current food system portrayed by your numbers.  Excise taxes on luxury users of oil come nowhere near to covering your proposed feebates for agricultural users.  If the economy breaks, developing small. local, self-sufficent agricultural systems will be the only way to create food security for most people.  I don't desire a transition to an antiquated agrarian society,  but we may be in the process of being forced to go there whether we like it or not.

tmosley's picture

Typical death worship by a peak oiler.

Get those obsidian daggers ready, we're going to make the sun rise, 10,000 still beating hearts at a time.

GeneMarchbanks's picture

Bloodlust, pure and simple.

Mr Lennon Hendrix's picture

You and utopians are the death worshippers because if we do not confront peak oil head on then there will be problems.  If you were in charge you would be saying everything is fine and then if something bad did happen what then?  You would be unprepared.  You are the death worshipper.

POTUSes like Clinton, Bush, and Obama have stayed silent on Peak Oil, because they run your death cult.  You are as much a part of Scull and Bones as they are.  You embody the cult of death.

tmosley's picture

You are saying you want to perpetrate a massacre of the kind not seen since the days of Ghengis Khan rather than do a little fucking research.

You worship death.  Get the fuck over it.

Oil in real terms is simply not going up.  Oil is only going up because of money printing: http://www.tfmetalsreport.com/sites/default/files/users/u1246/oilpricing...

But you want to murder a few billion people, just to be safe.

Matt's picture

How much is the cost of extracting oil now, versus in 2000? How much of the price rise thru 2008 was speculation, and how much was inflation? Has labour and equipment costs increased 400 percent in three years for oil producers?

What if gold was undervalued before, thru the 2000s, so it was buying far less oil than it should have, and it is less undervalued now, so the price of oil in gold has gone down, but not entirely due to inflation?

Bringin It's picture

tm - I just watched Jeff Rubin say that for every American that decides to get off the road, 10 more in the developing world get on.  My own observations support this statement.  In the past, rising price always brought on more production until we reached about 86mb/d.  Now, as supply gets tight, prices are bid up until one or more economy throws a rod.  Their demand collapses, supply frees up, prices come back down somewhat.  This is what bouncing along the Peak [cheap] Oil plateau looks like.  Sure the market is gamed, as are all markets now, but there are fundimentals having to do with no supply growth and growing EM demand.

Oil is only going up because of money

Now what's this about 'mass murder'??  Do you mean the CIO preemptive mass murder?  Yes, that is insane, but has nothing to do with Peak Oil.

Money 4 Nothing's picture

Yes, the globalists feel safer that way.

DaveyJones's picture

peak oilers vs utopians - Was that a Survivor episode?