February 26th, 2015
in Op Ed
by Reverse Engineer, Doomstead Diner
An analysis of why the Oil price crash is driven by Demand Destruction rather than manipulation by Oil producers or Geopolitics.
Greetings Doomfans, and welcome to another edition of the Frostbite Falls Daily Rant, here on the Doomstead Diner.
Quite often I wonder about the CFS of the folks running the economic system. Not just the folks in charge either, the vast number of prop desk traders of various commodities and currencies as well. Since about nobody else these days trades in the markets but large institutional investors, I'm not concerned much with the Cfs of the Individual Investor. The few who are still left out there trying to make money in the Stock market don't matter much as far as its aggregate direction is going.
The primary nonsense ongoing here is the Oil price crash, which generally has been attribted to those nasty Saudi princes refusing to cut their production as the price dropped. Excuse me, but they did not precipitate that price drop, to do that they would have had to INCREASE production before the price collapse happened, not refse to cut production AFTER the price collapse. Did the Saudis increase their production prior to the oil price crash? No of course not, because they are maxed out and have been pumping as much as they can as fast as they can for the last decade at least. If they could have pumped more, a good time to do it would have been when the price was up there around $100/bbl. They could have brought home another small fortune in FRNs this way, and stopped the “Shale Revolution” even before it got started.
Given it is an Epic Fail to try to blame the Saudis for the price crash, the next place the economistas go is to our own Home Grown Frackers, and the idiots on Wall Street and at Da Fed who funded that White Elephant with gobs of cheap credit thrown at Junk Bonds any dimwit with a drilling rig was issuing out. Problem with that idea is that even with drilling rigs being shut in here and production plateauing, the fucking oil price is still dropping and the storage tanks for the stuff are filling up to overflow level. They aren't producing much more of the stuff, they keep dropping the price, nevertheless the storage tanks keep filling up. This is some kind of big fucking MYSTERY to the economistas and prop desk traders.
The obvious answer here is that if there isn't too much supply being dropped on here, then the problem has to be on the DEMAND end. As in, J6P simply is not BUYING the Oil in the same quantity at the same rate he was just 1 year ago. Steady Supply, Price Going Down, Inventory Going Up, you are left with only one variable in this bathtub problem, which is that the fucking DRAIN is STOPPED UP!
Now, why oh why would J6P all of a sudden STOP buying gas, even at the new Low Low prices every day of $2/Gallon. Actually, it's gone even below $2 in quite a few places. According to Da Goobermint, our Economy is recovering, the UE rate is like 7%, so WTF don't these assholes start BUYING MORE GAS?
Maybe it is because they are fucking TAPPED OUT here already? They already SOLD or Junked the car! If the price goes to $1/gallon, they're still not gonna buy the stuff!
Now, I have plenty of friends who tell me the Traffic Problem in their local neighborhood is no different, there are still as many carz on the road from what they can see as there were last year. This may or may not be true in their local neighborhood, the triaging off the Carz economy is not happening at the same rate everywhere. You have to look at this issue in aggregate though, and it's not just the FSoA you have to consider in terms of total Oil being burned as Motor Fuel, you have all of Europe to consider here, All of China, All of Brasil, etc, etc etc.
We KNOW that the FOREX currencies of the Euro and Real have lost between 20-30% of their value over the last year. This means the typical Eurotrash or Brasileiro has lost around 1/4 of purchasing power for Oil, since the Oil is priced in Dollars. It's impossible to know exactly what is going on in China, but I suspect even the 10% of the population that could afford to buy gas for the Hyundai last year is having a whole lot of problems affording it this year.
The way this whole Global Supply-Demand equation for Oil works, it really only takes a 3-5% decline in demand before the supply side starts overfilling the storage tanks. If the producers don't start cutting back and the consumers don't start buying more at whatever the latest lowest price is, then they have to cut the price again JUST to make room in the storage tanks!
Thing here is, even if they wanted to, most folks pumping up Oil can't stop pumping it on a dime, and refineries can't shut down production on a dime either. It is cost and energy intensive to do either a shut down or start up, and about all of them depend on daily revenue to service their debts. The costs for boring a well are already sunk in the ground, so they have to keep pumping no matter what, even if the price is losing money. If they STOP pumping, they go Belly Up.
Because of this, the price pressure on Oil remains toward the downside, consistent with the ETP analysis by the Hills Group, which puts the price down as low as $12/bbl by 2020, at which time about nobody will be producing the stuff because there just is not much to be pulled up left at this price.
This does NOT mean that gas will become unavailable tomorrow at the pump in your neighborhood, or that the traffic problem will become instantly better, it probaby won't. Your neighborhood may still be one of those with access to enough credit for the population at large to still be buying some gas, and if it is then what supply of gas there is will flow in that direction, and away from the neighborhoods more starved of credit. On the Global level, it looks as though the Europeans will be starved of credit before the FSoA, so any gas they used to burn becomes gas that FSoA Happy motorists can burn, so long as they still have some credit left, and a car to burn it with. However, there are fewer of those folks here in the FSoA left all the time.
The problem that none of the numbskulls reporting on this or making policy can figure out is HTF to get Credit to the End Consumer to buy the gas. The way this was done historically was to issue huge credit to Big Bizness like the Ford Motor Company, which then provided a lot of Jobs and issued out the credit fronted to them as Wages for their employees. Alternatively, the Credit was issued out to Goobermints, who hired lots of Teachers, Sanitation Workers, Firefighters, Cops and DMV Clerks, and handed the credit out to them in terms of wages. Always though, whether on the Private Corporate level or Goobermint level, all the Credit was BORROWED into existence.
While energy and resource commodities were in copious supply, it was in the interest of the folks in control of credit creation to issue out credit to buy these things, and create an economy which would consume them. The type of economy it created, one of high technology and numerous creature comforts was of great benefit to the people with access to the credit to make use of all these toys. MANY people got access to things like Carz, Airplane rides (if not ownership of an airplane), Televisions, personal Computers and Iphones. To the people who got all those things for a while, it seemed like it would never end, and moreover this type of living could be extended out to everybody on earth, in an ever growing population.
This of course was complete and utter bullshit, a result of magical thinking and the seduction of the idea that human ingenuity can conquer ANYTHING, even physical limits, but it cannot. The only question ws exactly WHEN we would run up against the limits of a Finite World, and that day has arrived here now.
The Greeks may want more credit to buy energy and fund their society, but it's not going to be forthcoming from the Krauts, who themselves are really out of credit to buy the stuff too. Only by triaging the Greeks off the Industrial Economy can the Krauts continue to access it, utilizing the credit once offered up to the Greeks. For the Krauts, the question is how long their Credit remains good to buy Oil with the construct of the Euro, and that itself does not look long for this world either. After that the Dollar, and really NOBODY's credit will buy any energy when it costs more to dig it up out of the ground then you get back in return for it, but even before that if the population at large does not have credit to buy it, there is no reason to dig it up in the first place!
The collapse in Demand here already evident is not the end of the problems we are going to face here as the Age of Industrialization comes to a close, it is not even the Beginning of the End. It is however, the End of the Beginning.
Thank you, Illuminati Scumbag Winston Churchill.
And that' all the Doom, this time until next time, here on the Doomstead Diner.