Bernard L. Madoff

Got Oil

54 posts in this topic

I'm still inclined to think that it will break to the downside. But it may still take months of sideways action before we find out...

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Yes Cobran,

The Petrodollar trade is still a core factor of US foreign policy.

As more countries consider transacting their oil in other currencies, I think you are going to see a lot more of these pricing wars.

USA depends on the petrodollar exchange to shore up its addiction to debt.

Not only that, but all those US military bases in the Middle East cost billions to maintain!!

They need the Saudi cheaper oil to have the lion's share of the market.

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Yes Cobran,

The Petrodollar trade is still a core factor of US foreign policy.

As more countries consider transacting their oil in other currencies, I think you are going to see a lot more of these pricing wars.

USA depends on the petrodollar exchange to shore up its addiction to debt.

Not only that, but all those US military bases in the Middle East cost billions to maintain!!

They need the Saudi cheaper oil to have the lion's share of the market.

 

I was thinking more along the lines of Saudi Arabia (known as a US ally) and the US are conspiring to bring the Soviets down (let's face it, Putin wants a return of the USSR). A low oil price also helps to support/strengthen the oil dependent economies of the west.

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I was thinking more along the lines of Saudi Arabia (known as a US ally) and the US are conspiring to bring the Soviets down (let's face it, Putin wants a return of the USSR). A low oil price also helps to support/strengthen the oil dependent economies of the west.

 

Stakes are high as US plays the oil card against Iran and Russia

 

 

... This time, according to Middle East specialists, the Saudis want to put pressure on Iran and to force Moscow to weaken its support for the Assad regime in Syria..

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The WTI oil price is at US$66 per barrel!  :o

 

Warning! Personal wild speculation below!

 

What is going on, and what will be the implications? In my view: continued US asset inflation, prolonged EU property bubble, Australian hangover, and 'peak terrorism'

 

One driving factor to the low oil prices could be that the Saudis want to kill off the shale oil competition. This is a risky move since the US may see shale oil production as a geopolitically important asset that will weaken the power of Russia and the ME oil producers (who cares about Venezuela?) If this strategic importance for the USA is backed by financial support behind the scenes then we may see low oil prices for quite a while.

 

In parallel, China is probably shifting from an economy dominated by spending on infrastructure, manufacturing, and building ghost cities. In a more modern economy they will transition towards a greater share of services in their economic activity. This means that the rate of increase in energy consumption may taper off together with their imports of commodities. As a whole, the China story is long term bearish for all commodities, including gold, coal, iron ore - and oil.

 

We have an interesting constellation of geopolitical power blocs at present. We have the old hegemony superpower USA having increasing economic activity based on capital productivity (and statism!) at the expense of labour utilisation and individual freedom. The US corporations are awash with cash and have found little investment opportunities globally than re-purchasing their own company stocks. Increased domestic oil production plays into the hands of US strength. With falling stock markets in the Middle East, stagnant markets in Europe and Asia - the US market is the least dirty shirt of asset classes.

 

Russia is heavily reliant on oil revenue, and it is rumored that the low oil prices of the 80s triggered the fall of the Soviet Union. Has Russia learned from this lesson and prepared counter-measures against another such scenario? I don't think this is the case, since the whole world has been caught up in the 'peak oil' meme for the last couple of decades. Sanctions against Russia may be an inconvenience for them, but low oil prices will definitely hurt them. Sure, Russia will survive, but will Putin survive a long domestic economic winter?

 

The Chinese have always seen themselves as the center of the world (the "Middle Kingdom"). There is no doubt that they have the ambition to re-establish themselves as the most powerful and advanced economy in the world. By sheer numbers they may get there sooner than generally expected. Even though China and Russia seem to collaborate on many issues, does China actually want Russia to be a neighbour superpower? It would not be surprising if the Chinese actually don't mind Russia suffering a bit, while China keeps growing in strength away from the spotlight of global media coverage. The growth in Chinese defense industry capability will be a thing to watch.

 

Prolonged low oil prices will reduce the available discretionary spending in the Middle East. War efforts are highly expensive, and if we classify international terrorism as covert war, then less funding for such activities may hopefully lead to 'peak terrorism'. Still, disenfranchised people groups in the ME will probably remain a breeding ground for volatility, but will take the form of more domestic instability. The war in Syria may be an example of this. Due to the sanctions against Iran, they probably have diversified their economy to one that is less reliant on oil. Conversely, since the current main ME power, Saudi Arabia, is so reliant on oil revenue, low oil prices may lead to a power may shift from Saudi Arabia to Iran. We will therefore see Iran having an increased international presence.

 

The EU economies will benefit from lower energy costs, which will also have deflationary effects. Fuel is very expensive here and has lead to massive efforts to make economies and households fuel efficient. The reduced energy cost will increase consumer discretionary finance - but I think we have already seen 'peak materialism'. Granted, the world is also increasingly efficient in producing cheap materialism - but we are also living more virtual lives than tangible ones. This leads to more money being spent on experience goods, of which a home is one such category. Eating out and travel are other experience goods that will drive associated business growth.

 

The lower commodity prices will hurt the Australian economy more than the lower energy prices will help it. House prices here are also already among the highest in the world when considering key ratios such as price/household income and price of housing stock / GDP, etc. It is therefore likely that house prices here will at best generally only grow at the rate of GDP growth per capita. Instead, the challenges here will be to structurally change the economy to one that is less reliant on commodities (familiar story?). This will take some pain and effort. Our elite financial institutions have been willfully asleep at the switch. The RBA bought the economic theory of Ricardian comparative advantage lock, stock, and barrel. The problem with a one-trick pony economy (or all the eggs in the commodities basket) is the greater vulnerability to market changes. Sure, if beauticians can instantly become miners, and then conversely miners can instantly become beauticians and brain surgeons, then it is fine for a country to rely on the one dominant industry in a rapidly changing global economy. But this is of course patently absurd - except to our RBA and Treasury economists. Our commodities hangover is only just beginning - more political infighting and blame-storming coming up as painful structural changes are forced upon us.

 

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AK had an interesting graph about the different break even points for oil per country. The current price could conjure all sorts of conspiracy theories. Is there any single power capable of manipulating the market? Seems like most producers lose at the moment. Too much supply and lower demand?

 

oil-break-even-prices.jpg?itok=ATkVFdvJ

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Direct Injection Carbon Engine (DICE) uses finely ground coal in a slurry as liquid fuel:

http://www.globalccsinstitute.com/insights/authors/martinoettinger/2012/08/01/mrc-–-dice-–-ccs-–-game-changer-electricity

 

Here is a report about it:

http://www.abc.net.au/news/2014-04-29/direct-injection-carbon-engine-uses-brown-coal/5417962

 

Oil prices may stay low for a looong time.

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The Chinese have always seen themselves as the center of the world (the "Middle Kingdom"). There is no doubt that they have the ambition to re-establish themselves as the most powerful and advanced economy in the world. By sheer numbers they may get there sooner than generally expected.

...

 

That was quick!

 

China just recently became the world's largest economy, measured in "purchasing power parity":

http://www.marketwatch.com/story/its-official-america-is-now-no-2-2014-12-04

 

It’s official: America is now No. 2
By Brett Arends
Published: Dec 4, 2014 6:01 a.m. ET
 
Chinese economy overtakes the U.S. to become the largest
 
 
Hang on to your hats, America.
 
And throw away that big, fat styrofoam finger while you’re about it.
 
There’s no easy way to say this, so I’ll, l just say it. We’re no longer No. 1. Today we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world. For the first time since Ulysses S. Grant was president, America is no longer the leading economic power on the planet.
 
It just happened — and almost nobody noticed.
 
The International Monetary Fund recently released the latest numbers for the world economy. And when you measure national economic output in “real” terms of goods and services, China will this year produce $17.6 trillion — compared to $17.4 trillion for the U.S.A.
 
As recently as 2000, we produced nearly three times as much as the Chinese.
 
To put the numbers slightly differently, China now accounts for 16.5% of the global economy when measured in real purchasing power terms, compared to 16.3% for the U.S.

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I'm still inclined to think that it will break to the downside. But it may still take months of sideways action before we find out...

 

Time to revisit the 2008 low!

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AK had an interesting graph about the different break even points for oil per country. The current price could conjure all sorts of conspiracy theories. Is there any single power capable of manipulating the market? Seems like most producers lose at the moment. Too much supply and lower demand?

 

oil-break-even-prices.jpg?itok=ATkVFdvJ

 

Turns out that two countries can indeed manipulate the market... The conspiracy is between the US and the Saudis. The end game is to teach a belligerent Russia to not f*ck with the US (and the Saudis apparently) Seems the US can simply adopt the same strategy as they adopted to outspend the USSR via the star wars programme under Reagan! The Saudis benefit from the death of US shale oil production presumably. The US benefit from Saudi cheap oil. Russia learn a salient lesson in power and come to heel. Or not.

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... Seems the US can simply adopt the same strategy as they adopted to outspend the USSR via the star wars programme under Reagan.

 

That always annoys me as it was only in retrospect that they realised the spending might have been the successful strategy. At the time the US guys were arguing about how much the USSR was spending and they were all out by magnitudes.

 

They spent up big on military because that is their ideology. Not because they thought it would win the war without fighting. The idea it was a conscious strategy at the time doesn't make sense logically given the players and smells completely post hoc rationalisation and self aggrandising.

 

Using that kind of thinking for strategy means you are only ever fighting the last war. You might get lucky if the enemy hasn't changed or learned.

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That always annoys me as it was only in retrospect that they realised the spending might have been the successful strategy. At the time the US guys were arguing about how much the USSR was spending and they were all out by magnitudes.

 

They spent up big on military because that is their ideology. Not because they thought it would win the war without fighting. The idea it was a conscious strategy at the time doesn't make sense logically given the players and smells completely post hoc rationalisation and self aggrandising.

 

Using that kind of thinking for strategy means you are only ever fighting the last war. You might get lucky if the enemy hasn't changed or learned.

 

Something tells me that you really like Americans. :)

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Well in this case I was thinking specifically of the "Hawks" in the American military / political system that now claim credit for outspending the USSR.

 

And I must admit that McCains recent speech about torture gives me hope that even they are not all as bad as they seem from the outside.

Edited by tor

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That always annoys me as it was only in retrospect that they realised the spending might have been the successful strategy. At the time the US guys were arguing about how much the USSR was spending and they were all out by magnitudes.

 

They spent up big on military because that is their ideology. Not because they thought it would win the war without fighting. The idea it was a conscious strategy at the time doesn't make sense logically given the players and smells completely post hoc rationalisation and self aggrandising.

 

Using that kind of thinking for strategy means you are only ever fighting the last war. You might get lucky if the enemy hasn't changed or learned.

 

Yeah fair enough. I take your point on revisionism. The US might be making a deliberate attempt to punish Russia this round with malice aforethought however it doesn't mean it will work. I doubt it will. Putin will dig in. He has plenty of political capital at the moment.

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