"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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tmosley's picture

Who cares how much energy it takes to get it out?  The primary uses of oil are as a feedstock for energy dense fuel and as a feedstock for plastics.

Barely any is used for energy production (ie fed to a grid).  

As such, the ONLY thing that matters about oil is the price.  If it gets too expensive, people will use less of it.  They will travel less, move closer to their jobs, buy from farms that are closer, etc.  Of course, the price is rapidly increasing due to money printing.  If everyone had savings in and got paid in gold, the current "spike" in price would be meaningless.  But Americans are paid in dollars, which are simply falling in value.  This is a policy decision, and has nothing to do with peak oil.

THe chart proves that.  Sorry the apocalypse won't be permanent :(

DaveyJones's picture

who cares how much energy it takes to get out? - for one, the folks who get it out

then...everyone else downstream

Matt's picture

So why aren't they producing more to profit off of more volume at slightly lower prices? Do they hate making money? Is every single oil producer in the world in a price fixing scheme?

I mean, if I get $110 per barrel, why wouldn't I sell twice as much for $90 per barrel, or three times as much for $75 per barrel?

tmosley's picture

Because you sell at the market price.  Duh.

The market price maximizes your profit.  This isn't an inefficient market with a bunch of stores trying to compete for customers.  ALL of the customers and ALL of the sellers participate in the market, and by doing so, everyone gets the best price.  The market naturally takes dilution of money into account.

BigDuke6's picture

Why arent they producing more?


The House of Saud has been chosen because the 'long game' isn't their strong point. They aint saving it for a rainy day.

i think the answer is - they are.

Prices are being supported by strong demand from China and from former Soviet bloc countries. Although Russia has pushed its oil production to post-Soviet highs, its actual exports have fallen, because of growing domestic oil consumption.

Folks point out that Opec, and particularly Saudi Arabia, could step up production to make up the shortfall. But Saudi Arabia is already pumping oil at the highest rate in nearly 30 years, which means that spare capacity is low.  And thats it really.  Saudi is the key.

G'day DJ mate.


Bringin It's picture

I think your chart only displays what the US and Saudi agreed to in setting up the Petro dollar.  The Saudis don't mind so  much giving their oil away for fiat sciprt, if they are assured they can get a bargain on gold at the same time.  People like the Economic Hitman talk about this.

Supply growth is flat. Demand to settle in fiat is rising.  

toadold's picture

Heres one thing you should remember. I live close enough to a shopping center to walk to it. But because of the increase in  the price of truck fuel the price of groceries, socks, and under wear has gone way up. I'm lucky in that I don't have kids to feed and while it is oft not tasty I have the time to cook my own food. (I'm glad I can't have pets because sometimes I fix stuff a dog wouldn't eat) The down side is I have time to cook because I'm retired. Of course I'm on a fixed income and scrambling to get some money into gold and a cheap AK-47.  There are more and more people going on food stamps  because all they can get is a couple of part time jobs and they have kids. Believe me they are not fans of the Obama administration and they don't buy the idea that there is no inflation. They are resentful that the "fat cats" can buy gold and silver and they can't scrape up enough to do the same. 

Jim in MN's picture

Oh, yeah, hold back that tide Canute


OECD's Gurria says private sector faces worse outcome if refuses Greek PSI (RAN Squawk)


Led Zeppelin for Friday afternoon (jam version with Neil Young)


Cryin' won't help you, prayin' won't do you no good,
Now, cryin' won't help you, prayin' won't do you no good,
When the levee breaks, mama, you got to move

yogibear's picture

China switches from bicycles to autos and the US will switch from autos to bicycles. Chairman Obama's Great Green Revolution plan. As the US heads in a more 3rd world direction. Next we will have to all carry Eco books with Hope and Change on the back of it touting how electricity and machinery are bad. 


mayhem_korner's picture



First Friday in some time where I'm positive what folks will be talkin' about on Monday.

Dre4dwolf's picture

So if we are injecting liquidity into the market and its having no net-positive effect (other than making a handful of individuals filthy rich).


So that means one of two things.

1) Oil Consumption is dropping not because demand is dropping, but simply that people can not afford it /and/or theres less fuel being produced than being consumed.

2) Money creation has lost its benefit (the cons out-way the pros)


3) Deflation is so bad that even printing zillions of dollars doesn't solve any problems.



I think that pretty much means that the markets are broken and no longer reflect meaningful transactions and that the transactions taking place on the market are essentially only surving one purpose.... to draw money in from new investors (young people starting to work) and putting that money into old investors (old people trying to retire).

So that means, essentially that the previous generation got conned out of their retirement through inflation/debasment/theft/fraud/poor investment decisions and bad govt policy.... and that they are trying to steal the prosperity of the next generation (without a 2nd thought about how THAT generation is going to retire / hell even make a living later in life).



So the old got robbed, the old are banding together to rob the young, the young are all poor and unemployed so there is nothing left to steal.... so the old are stealing from eachother + any new investors in the market (re-distributing the scraps/left overs of society).


Well that stinks.


I think its broken.

mayhem_korner's picture



Do you normally list THREE things after announcing that it "means one of two things", or is that just White House protocol?

walküre's picture

I think its broken.

You needed all that analysis to convince yourself that it's broken?

Where have you been? Certainly you haven't been reading ZH for long..

Bankers are con-artists. All of them. No exceptions. Their con is affording them a comfortable life - no matter what - and live off the labour of everyone else. Bankers don't work, they don't lift fingers. The political class is mostly bought and paid for by them and lives off them like parasites because the bankers have the best game in town. Until they're found out and exposed, the con will go on and everyone else will pay and suffer financial oppression. They dictate the price and how much everyone else can afford. Anybody who thinks they're an entrepreneur and can make it big will have to convince the bankers first. The bankers will take whatever they can get away with and own the entrepreneur and the business. Really easy and really cool for them. Not so cool for the rest.

dolph9's picture

I suspect you're right.

Banking surely has to be the greatest scam on the planet.  Bankers put priests to shame.

lakecity55's picture

"Who will rid us of these meddlesome priests?"

navy62802's picture

Past is prologue in this case. The last time we had a major run-up in oil prices, we ended up with a global financial crisis as people started to be unable to pay for their debts. Same will happen again. Just depends on how high fuel prices go. It is perhaps the largest underlying factor which has an immediate impact on whether or not people can pay their monthly bills. Stop paying the monthly bills, and they default. Default then leads to cascading downrange consequences.

Dre4dwolf's picture

In that case, the only plausable solution is to desolve the "creditors" and liquidate the debt to zero.


I think back in 2007~2009 it would of been best if all the banks just crashed and burned and their debtors obligations along with them, we would of went through a few years of deflation and people who had smart investments /hard cash saved up.... would of prospered and grew the economy in a sustainable way.


What we have now is a bunch of meaningless jobs that don't help the economy being produced.


You can't just hand people money and expect them to put it to work, they are going to spend it on crap / their own well being and 90% of society will burn to the ground.


Disolve the banks, limit their size, limit their "lending/money creation".

disolve all outstanding debts every 3 years assuming payments were made and not in default, sorta a "thanks for borrowing money into existance and spreading it around, heres a break".


Maybe a 1 time every 3 years tax return where you just set-off debts @ the IRS and pay slightly higher taxes for a few years proportional to the debt - set - off.


All the money is meaningless anyway at this point.... relieve the system of the strain.


yogibear's picture

Only way to stop Bernanke and the Fed's monetizing. More the Fed is monetizing the tighter around the fed's neck the noose becomes. Krugman where are you when the world needs more of your useless comments?

EmileLargo's picture

Krugman is looking around for fake aliens to revive the economy. 

firstdivision's picture

War with Iran by May?

lizzy36's picture

War with iran = death to world economy.

No coordinated CB rescue, no release from the SPR, nothing will change that fact.

Money 4 Nothing's picture

Before March 23rd is our best guess.

Caviar Emptor's picture

Those betting on big inflation numbers with soaring headline CPI/PPI/PCE numbers and soaring interest rates will be disappointed. So will those expecting a deflatonary, 2008-style collapse after the oil spike. 

Nope. We are trapped in a biflationary world where the worst of all possible combinations will occur simultaneously: inflation for what you need, deflation for what you're worth. Crashing buying power and margin compression is another way to say the same thing. All aggravated by current central bank monetary policy

It's not a red hot/blue cold dichotomy: it's a hazy-grey, rangebound zone. When biflation revs up look for energy and raw material price spikes with plunging economic numbers as we see now (with Europe as the first domino which is already having a big effect on Asia and soon everywhere). When biflation cools, look for short-lived, sharp bounces in economic numbers with moderating raw materials. Wash-rinse-repeat. But each cycle grinds the global economy further down and brings more risk. 

Those of you ZH vets know that I've been saying this since 09. 

daxtonbrown's picture

We are in a Biflationary Depression. Oil and food going up while wages and housing going down. The Bernank is pumping te stock market just so he won't be hung on a lampost. Middle America is still under a biflationary squeeze where credit has dried up, wages are down, oil and food are up and driving a Chevy Volt run on algae won't cut the ticket.


Yen Cross's picture

I'm laughing watching Brian Sullivan and his CNBS perma bull crew fall flat on their faces. Sullivan needs to stick to trading(commentary), and leave the trading to traders.

GCT's picture

The man made a point maybe some of you could help me with in a serious way for a change.  Why does the liquidity flow into oil and not gold?  He has a point gold rising will not hurt the people.

Not to be contrary but I think the government really does not care about the oil prices as they want us all in volts anyways.   Releasing the strategic reserves will not solve anything. 

CrockettAlmanac.com's picture

Mr. Obama plans soon to introduce his energy and environment team, which will include Nobel Prize-winning physicist Steven Chu as energy secretary and former Environmental Protection Agency Administrator Carol Browner as White House energy adviser.

"Somehow we have to figure out how to boost the price of gasoline to the levels in Europe," Mr. Chu, who directs the Lawrence Berkeley National Laboratory in California, said in an interview with The Wall Street Journal in September.

"There's no way we can create a better future without the price of [fossil-fuel-based] energy going up," said Jay Hakes, who headed the Energy Information Administration under President Bill Clinton. "But it's tough for a politician to get up and say 'Your prices are going to have to go up.' "


lakecity55's picture

"Dammit, Bo-rack, we cannot destroy the middle class without a plan!"

"So, George, how about I make some moves and run up the gas price? All those white folks'll go broke."

"What about your black brothers?"

"Hey, watch it! I'm white and semitic. I can't help it if one of my ancestors jumped some hoes during the slave trade."

"OK, good move, my minion. Larry SInclair's in the Limo outside. Let's take a drive before the price goes up!"


mayhem_korner's picture



Tyler - how coincident was today's big jump in crude with the Iran Steps Up Nuclear story (posted 12:38 EST on CNBC)?  Just thinkin' about your little algo mishap yesterday and the fact that Brent an WTI took off just after mid-day...

Moreover...and this is pure conspiracy-conjecture on my part...if TPTB know that cost-push is going to drive oil & commodity prices way up, why not give it some "cover"?  If algos can really hunt & peck keywords like "Iran", "Nuclear", and "Steps Up", it's like a match made in Ponzi heaven.

1835jackson's picture

BOOM! DUM! BOOM! DUM! DOOM! BOOM! BOOM! DOH!....can you hear the war drums?

rubearish10's picture

VIX showing some life. Sell it!

YesWeKahn's picture

you scare shiit out of Bernanke.

VyseLegendaire's picture

I thought central banks were printing in response to a recession/depression caused by peak oil? Not the other way around? Correct me if I'm wrong Mr. "Most Intersting Man in the World."

yogibear's picture

Print Bernake and the fed, print! We will see how much pain you can tollorate. 

Westcoastliberal's picture

$4.09 in Sou Cal and rising.  But this won't have ANY effect on the economy.

Update: now Unleaded Regular $4.29.  $4.25 w/car wash (big whoop)

Jim in MN's picture



So on the scales of Destiny we have


1. Existential threat to Israel, VS.

2. Existential threat to global economy


Hmmm.  How to decide.....

Zero Govt's picture

John Burbank nails it 

It's the most matter-of-fact (sane) description of the "negative feedback loop" (economic vandlalism of Central Banksters) I've listened to in a loooong time


HarryM's picture

Up Next will be to prohibit the exportation of domestically produced and processed oil.



monopoly's picture

Think he would be welcome on the idiot channel? Probaby would decline the invitation. Good to hear this but for us not a lot that is new. Just confirms our thesis.

drivenZ's picture

Oil prices were high in 08, they also spiked last year from Feb-May. I fail to see how this new spike is now somehow directly related to Central Bank easing. Notwithstanding the fact that the precious metals bulls that complain endlessly how the PM markets are manipulated seem to be the same ones convinced that the only reason oil is going up is because of the Bernank 

AnAnonymous's picture

Obesity drug? That is a growth economy.

Best pick of the week, month and year.

Reckoning US citizenism, it means more food to grow so that US citizens can eat even more, as they eat even more, they grow bigger, taking drugs to get slimmer, and in return, having to eat even even more to counteract the action of the drug, more food to grow, more oil to consume etc...

Up to the stars and beyond.

LFMayor's picture

You little chinese bastard, keep smiling.  You won't think it's so funny when we start importing all that opium we secured in Afghanistan.  I mean come on, did you really think we were there to "nation build". Spare me.  

The Big Smoke worked once to shut your asses up, it will work again.

blunderdog's picture

You never really have to worry about the Chinese.  Just build casinos and strip-clubs and they'll all be too busy to uh...what were we talking about again?

MinnesotaMD's picture

Velocity of Calories....sounds like something we could tax endlessly

boiltherich's picture

the painful unintended consequence of all this liquidity is energy costs skyrocketing - and it won't stop until the economy breaks.


Doesn't have far to go, and in fact by the definition of broken economy I use I can say with confidence THAT SHIP ALREADY SAILED.