Oil Crash Continues

by Reverse Engineer, Doomstead Diner

Transcript: Greetings Doomfans, and welcome to another edition of the Frostbite Falls Daily Rant, here on the Doomstead Diner.

It’s been a couple of weeks since I recorded my original Oil Crash Rant, and a ton of action has gone down in the interim, so it’s time for an Update!

First off, when I recorded the original rant, Oil had only “crashed” from the $90 range into the $70s. This broke through the Triangle of Doom pattern Steve from Economic Undertow has been tracking since October of 2012, a clear indicator that a breaking point finally was reached on the consumption end of the Oil economy, and consumers globally were no longer able to meet the price needed by the Oil extractors to drill it up.

In the intervening time, Oil has crashed further into the $50 range, and it keeps dropping. The question is How Low Can it Go, and why does it keep dropping so precipitously? Is this the Saudis doing, pruposely selling Oil at low prices to put the local Amerikan Frackers outta Biz? Is this a Master Plan of FSoA State Department Neo-Cons to sink Vlad the Impaler over in Mother Russia? Is it a Plan by the Illuminati pulling the strings at Da Fed to collapse the Global economy by cutting off Quantitative Easing and Cheap Money for Banksters?

Just about all these theories have been floated as explanations by the MSM, along with numerous Bloggers and Russophiles approaching this question from the Geopolitical CONSEQUENCES end of the price collapse. Indeed it is true that the Saudis are trying to capitalize on the price collapse and position themselves best to weather the storm, but by no means do the Saudis WANT to be selling their Oil so relatively cheap compared to recent pricing, like anybody else in the biz of selling something, they want to make the most PROFIT they can from it. Selling at a discount rate doesn’t do that, and you only do it if you are forced into it.

Similarly, while Neo-Cons are gleeful that Vlad the Impaler over in Mother Russia is suffering from these prices and the Ruble is crashing as a result, these are the same folks who promoted the idea of Drill, Baby, Drill for Fracking here in the FSoA and the “energy independence” that would result from that. Or so they said anyhow. Result however of crashing Oil Prices is that the whole “Fracking Revolution” is rapidly unwinding, the Junk Bonds issued out by Wall Street to fund it are rapidly going worthless, and precisely whose balance sheet will blow up first here is about the only major question left in the near term.

So, if none of those Boiler Plate explanations for the crashing price of Oil are correct, what IS the real explanation? It’s reall very simple, you have Demand Destruction for the product ongoing at a Global Scale, in virtually EVERY economy that consumes Oil, which is just about all of them with the exception of a few Bushmen in the Kalahari, a few Amazonian Tribes and a few Inuit still living subsistence lives in Nunavut. If you go back to the beginning of the Industrial Revolution and the Carz Economy, Henry Ford made the fairly obvious observation that he had to pay his employees enough money to be able to afford the Carz they were turning out off the production line. This is the same Henry who also said that if J6P REALLY understood how the monetary system worked, there would be a Revolution overnight.

Fortunately for Henry and the numerous Oligarchs who have succeeded him, this understanding has never been grasped by J6P. In order to BUY Oil, money had to be created and distributed to the population at large. The folks in charge of the TBTF Banks mediate the creation of money, and it ALL comes into existence as DEBT. Somebody somewhere MUST take out a loan in order for you to get a Paycheck. For the most part, the biggest loans are taken out by Goobermints in the name of the people, in the form of Bonds. Next biggest are well connected Oligarchs like Henry Ford himself, who in fact wen Bankrupt several times before finally hooking up with John D. Rockefeller and getting the Ford Motor Company off the ground.

Just about all the money which circulates in modern society stems from enormous debts taken on by Goobermints and Oligarchs to create things such as the Railroads, the Interstate Highway system, the Hoover Dam, numerous Nuke Plants, the telecommunications network, etc. All this debt circulates in the society as money, well at least it did for a while anyhow.

Now it is mostly Hoovered up by a few oligarchs, with most of the debt it represents jacked onto the balance sheet of various and sundry Central Banks around the world, which citizens of those countries are expected to pay off, except of course they can’t, since they in fact do not HAVE the money to pay off said debts, in fact not even the Oligarchs have enough money for that, due to the compounding interest problem. When money gets created as a Debt on one Balance Sheet and a Credit or “Asset” on another one, the money to pay the interest charge on the debt is NOT created along with that. So unless the system keeps expanding, at some point somebody’s interest charge will not be paid here, at the very least.

The further problem is that loans are dished out based on Assets considered as Collateral for the loans, the vast sea of McMansions, Auto Factories, Toy Factories, Steel Plants, Refineries, Nuclear Plants etc etc etc.  Precisely what, however is a Power Plant worth if the people it supplies with electricity can’t afford to buy it?  What is a Steel Plant worth if people can’t afford to drive the cars made by the auto factories the steel plant supplies? What are McMcMansions worth if people can’t afford the mortgages for them?  To say nothing of the heat, utilities,property taxes, insurance . etc, etc etc. All of these assets are of questionable value now, along with the bonds that were floated in order to set them up.

Similarly, all the Bonds floated by various Nation States are also of questionable value if the population can’t afford a tax rate high enough at least to pay the interest on the Bonds, much less pay off the principal.  Here in the FSoA, we’re now in the theoretical hole as a nation to the tune of $18T explicitly, and now apparently also after passage of the latest “Cromnibus” spending bill on the hook for around $303T in derivative exposure the TBTF Banks have as well.

Forgetting the derivatives for a moment, as of right now every man woman and child in Amerika is on the hook for $50,000 or so in federal debt. Obviously children don’t work, and in fact a decent size percentage of the population now is “not in the workforce”, with the reported number of 155M people still working. If you divide out the debt by those people, it comes to around $116K per working person. The median income is around $51K. Sense a problem here?  Obviously, this debt is never going to be paid off, without even starting to contemplate the derivative exposure, which could be up to 16x larger than the nominal national debt.

This of course is just the tip of the iceberg on the total debt situation, individually J6P is also in debt up to his eyeballs and at least so far Da Goobermint isn’t bailing out individuals and buying up all their bad debt. So between the Taxes required to keep servicing the Federal Deficit and keep the Big Ass Military running and J6Ps own college debt, mortgage debt and credit card debt, how much do you think is left over to buy Gas for the Car?  Answer: Not a whole lot and becoming less every day. Bad as that situation is here in the FSoA, it’s an order of magnitude WORSE in Japan and Europe, where, besides ALSO being in debt up to their Eyeballs, their currencies (Yen and Euro) are getting hammered as the FOREX traders generally come to recognize these areas of the world are going down the toilet. In the course of a few months, they’ve lost 20-30% of their purchasing power for Oil, since Oil is priced in dollars. If Oil producers want to keep selling Oil to Japan and Europe, they have to keep lowering the price until they find some bottom where the population will start consuming it again.

The latest Jawboning from the Saudis is they are prepared to let it fall to the $40 range, but it is unclear that even a $40 bbl price will get demand to rebound here in countries now sporting 50% youth unemployment. If they start giving it away FREE, that might get it to rebound, which brings us right back to how this whole system got rolling.

In the beginning, when Oil came Spurting up out of the Ground on Jed Clampett’s farm, it cost close to nothing to extract it. John D. Rockefeller and Standard Oil provided cheap oil to leverage up all the industries that depend on consuming it, the automotive and airline industries primarily. For around 100 years from 1875 to 1975, Oil price was FLATLINED at below $1/bb, and then the first of the Oil Shocks hit with the Embargo from OPEC, and then in the early 2000s the price went parabolic and shot up to over $100, precipitating the crash of 2008.

The price dropped into the $30 range, and then Da Fed began its EZ money policies, providing a stream of ZIRP money for Wall Street to gamble with, which they did in spades, funding the Shale Revolution with a ton of junk bonds, now all set to go worthless. What they forgot to do here was fund the consumption end of the equation, and as a result demand has been dropping steadily, to the point now where there is a glut of oil on the market and the producers have to do a Liquidation Sale at whatever they can get for it, EVERYTHING MUST GO!

For a short time this may seem like a good thing for the Merikan Happy Motorist, but pretty soon the job losses in the Oil Patch will start to hit, many of the companies will go bankrupt, banks with derivative exposure will need and probably get bailouts, etc.

The situation now is a whole lot worse than it was in 2008, and Da Fed is basically out of room to maneuver here and the geopolitical situation has deteriorated markedly. In 2008, we were still buddy-buddy with the Chinese and the Ruskies. In 2008 Europe and Japan were still going concerns.

Will this be the final nail in the coffin of this monetary system? Hard to say for sure, but you can say for sure that in a year or two most, things are going to be markedly worse than they are now, and they are already pretty bad for many people in many places.

And that’s all the Doom, this time until next time, here on the Doomstead Diner.