The Next Catastrophic Crunch Will Be Oil: Set to hit the USA just like In 2008

Wednesday, Aug 31 2011 by
17
The Next Catastrophic Crunch Will Be Oil Set to hit the USA just like In 2008

Everyone was waiting with baited breath for the news about QE-3. But perhaps the number to watch was Q-3 nominal GDP, coming soon!! The important message Ben Bernanke had in Jackson Hole was that the Federal Reserve cannot, on its own, create economic growth in America (or jobs), simply by making it more or less attractive for banks to lend; and thus for Americans and foreigners to borrow. Or by printing money to buy over-priced toxic assets so the ATMs still work, or to help the Treasury improve the structure of their debt, by buying long bonds real cheap from Bill Gross…Hey Bill, that was a patriotic thing to do!

But Mr. Helicopter wasn’t very specific about whose job that was, although one would have thought that in a free-market democracy that would be the job of either the “free-market”, or the elected representatives, or a combination of both? Either way, both of those have been conspicuously MIA (Missing-in-Action) for quite some time, like since the time Gerald Ford was in charge; Alan Greenspan correctly characterized him as the only “decent and sane” American President he had any dealings with; “the man who vetoed everything stupid that Congress put out” (I paraphrase).   

Meanwhile America mutates into a quasi-fascist state where the population must serve at the pleasures of a small minority of super-rich. Who enjoy the luxuries of the protection of their wealth that is provided by the Law (particularly the one about three-strikes-and you are out), plus the huge investment in military power. Make no mistake; America spends half of what the whole world spends on defense to keep the wealth of 1% of the population “safe”, not to keep ordinary Americans, the ones who serve the rich…”safe” (guess who’s side I’m on).

Meanwhile in Belgium there was a conference to discuss whether or not the gyrations in the price of oil over the past few years were due to (a) speculation or (b) something else. 

There are three schools of thought:

1: There is a (fairly recent) idea that when the amount of money the world pays for oil (in nominal dollars) gets above 3.3% of world GDP (also in nominal dollars), the extra input cost slows world GDP, but when it is less than that, it has no effect; i.e. high oil prices slow GDP growth but low prices don’t particularly speed it up. I was intrigued by the number 3.3% because that is exactly the same number that I came up with by two (other) separate approaches to try and figure out what is the fundamental price of oil, i.e. the price of “equilibrium” on the demand side of the equation. Like an Err…SNAP moment!! Although me I call that process “Parasite Economics” and the fundamental “market equilibrium” I’m interested in is just how much milk you can suck out of Daisy before she keels over with a nasty dose of mastitis.

That red line, which I call the valuation estimate of the “fundamental”, is defined by the equation which one day I suspect may eventually replace E=MC2 and the General Theory of Economics (as proposed by Keynes), and can be expressed:

FOOT = 3.3 x TOAD/OIK

Where:

FOOT = Fundamental Of the price of Oil Today

TOAD = TOtal Of All De (the) nominal GDP in the world

OIK     = Total of all the OIl Konsumed.

2: Another school of thought has it that there are now constraints in production of oil, and prospects of further constraints as oil is currently getting discovered and developed, slower than the rate at which it is being used. Another way of saying that is that the replacement cost, i.e. the cost of finding new oil and bringing it to market, is what determines the correct (i.e. fundamental) price. I would like to emphasize that “replacement cost” is not the cost of pumping oil that has already been found out the ground, it is the cost of finding an equal quantity of oil that hasn’t been found yet, and pumping that to the market.

And thus the gyrations of the market reflect a flip-flop between pricing the current value of replacement cost, which is hard to know…the head of Exxon says it is $75, the BP disaster suggests it might be more; and what the buyers can afford before they start to suffer from mastitis. The essential instability to finding equilibrium there is the conflict between the luxury of governments subsidizing imports of oil, which is something that both USA and China do, and the un-sustainability, long term of financing current expenditure on the luxury of cheap gasoline, by borrowing, rather than by investing in infrastructure to lower costs in the future.

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That’s a simple chart – it’s not a big secret, you can look the numbers up on Wikipedia if you don’t believe me, USA and China need over twice as much oil to generate a unit of GDP that countries that have policies to increase the return on investment on every barrel they burn. The main policy there is taxation:

Source OPEC: http://www.opec.org/opec_web/en/data_graphs/333.htm

I remember years ago asking someone how the population put up with Franco. He told me “It’s simple, cigarettes and alcohol are cheap”… in USA it’s the same deal, except over there the fascists use gasoline prices to keep the masses happy. If USA had the same tax on oil as Europe, that would generate another $500 billion a year, which is, if you think about it, enough to run a decent sized war, even these days.

3: A third school of thought has it that speculators are manipulating the market, which is what the Saudis have been saying all along (they said it was a Zionist Plot). You have to give credit to the Saudi’s role of “fairy-godmother of last resort” in this whole scenario, when there is a bubble they pump, and the reason they give is that if they don’t the world economy will stall.  They could be right:

Put this one on your iPhone and weep:

So you say the financial collapse was caused by Lehman? Oh yeah…but something happened before that, nominal GDP growth in USA was half-way to the bottom before Lehman hit. The red line there by the way is a rough & ready estimate of the “fundamental” as defined by FOOT = 3.3% x TOAD/OIK, assuming that over that period the supply was pretty much constant (i.e. the line is defined by nominal GDP).

What that all says to me is that (a) on one hand as argued in my previous article the fundamental is driven by the line of nominal GDP when supply is more or less constant (b) but equally nominal GDP (or growth of that) is driven to some extent by the degree of departure of the price from the fundamental, so there is a feedback-loop working there, and as we all know from Engineering-101, when you have feedback loop you get oscillations, and sometimes those can shake your contraption to bits…like now. Oh yeah, you thought I was asleep, nope…I know about the spread between WTI and Brent, but that only started recently, and what America pays to import oil is dictated more by Brent and the OPEC basket which more or less tracks that.

How about this one:

Looks suspiciously like when USA starts to have to borrow over $125 billion a quarter from foreigners so they can pay for their “habit”; the train goes off the rails. I haven’t updated that chart, but the excess over “fundamental” paid by America in the current oil bubble, is more than they paid out (borrowed) in the last one. So how about this one:

Looks suspiciously like the departure of oil prices over the fundamental correlates pretty well with a drop in nominal GDP growth in America. Make no mistake, it’s not “real-GDP” that matters in a time of deflation, it’s nominal, how much of the nominal is inflation is something to worry about later. 


Filed Under: Oil, Usa,

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26 Comments on this Article show/hide all

Andrew Butter 31st Aug '11 7 of 26
6

In reply to emptyend, post #6

I disagree - but I'm pleased to have the opportunity to debate.

You need to differentiate between how much America spends to defend her oil supplies AND keep Israel safe, regardless of what they do (and they didn't sign Protocol One or sign up to the ICC either), and what the Saudis spend, mainly to protect their own situation.

Keeping Israel "safe" must also be differentiated from the cost of keeping the oil flowing (as if anyone wants to stop it flowing). For example from the threat of WMD in Iraq which if they existed, threatened Israel not oil supplies and the "threat" of Iran, ditto.

The "neutralization" of the WMD threat was a trillion dollar or more "aid-package" to Israel, the idea that the WMD program, if ever it existed (so far no proof has been found that it did), threatened America or UK is laughable.

Imagine if that money had been spent in USA building bridges, or whatever?

Don't forget the one condition Tariq Azziz had when he was negotiating the withdrawal of troops from Kuwait, was that sensible balanced negotiations be put in place to resolve the Israeli/Palestine issue - that was non-negotiable by USA, and that was the reason George Bush #1 pressed the button.

Saudi Arabia spends a huge amount of money on defense, that;'s good for America because that's where she buys most of her equipment, so the more insecure the Saudis feel, the better that is for America.

That expenditure these days is mainly against the supposed threat of Iran, which is not a threat, Iran is absolutely uninterested in Saudi Arabia. And sure, the Shia living in the Eastern Province where all the oil is, would in a democracy, have more rights. But Iran is not interested in that either.

I'm sure, as an ardent student of the Middle East, you will remember that the reason Iran refused to stop the Iran/Iraq war, once they were winning, in spite of the gas supplied from Germany and Portugal - all of course supplied in line with the Geneva Convention, particularly the stuff used on civilians...helps if you have an inside track into the ICC.

The reason they refused the initiatives by the USA and the Saudis was they wanted TWO things:

1: Saddam Hussein had to go.
2: Democratic elections (which the Shia would win).

The response of USA to that idea then was to shoot down an Iranian passenger plane (with one of my friends in it), when it was flying in Iranian airspace - so the Iranians sensibly decided to climb down. No one can fight America head on.

But now, one or two trillion dollars of American taxpayer money later:

1: Saddam Hussein is gone
2: They had democratic elections (which the Shia won).

I'm surprised the Iranians didn't send America, and her taxpayers, a thank-you-note.

As far as the Saudi promises to spend more - well OK - I'll believe that when I see it.

Regarding your second point - the reason anyone could make all those stupid loans which drove up house proces, was that via securitization you could get some moron to buy the mortgages.

Re the Rich asking for more taxes - sure - they realize the value of having their wealth protected, I have (elsewhere) suggested a 3% a year wealth tax on anyone with a net-worth of more than $5 million, in USA and Europe.

And anyone who doesn't want to pay, can piss off and go and live in Mogadishu, or Dubai which is the most boring place in the world unless you like $1,000 hookers (I said it was well governed, boring is something else).

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tournesol 31st Aug '11 8 of 26
8

Andrew

You say that you are proud of your family members who fought and in some cases died fighting fascism. I too had family members who took up arms to oppose fascist aggression in the Spanish Civil War and again in the Second World War. Some of them died, some were terribly injured, some endured long years of captivity in conditions which make Guantanamo look like a holiday camp.

You say that you consider the US to be a fascist state. Does that mean you would join those engaged in armed struggle against the US? I'd guess not. So why not?

Frankly I regard your favourable comparison of Saudi Arabia with the US as utterly bizarre. You call the US fascist, but the US government is subject to democratic process. Presidents can be challenged and impeached. There is separation of powers. The courts are independent. The constitution is inviolate. Ordinary people have recourse to legal remedies. There is freedom of information. Each citizen is equal in the eyes of the law and the state. Of course public welfare provision is deficient by European standards but the US is a relatively young state, so it might need more time.

Contrast that with Saudi Arabia. There is no democracy. The King is neither elected nor subject to democratic control. Women are denied basic human rights. The lives of women are regulated by the State to the extent that they cannot drive, wear clothes of their own choosing, gain custody of their children, exercise rights equal to their husbands. Their rights can be compared with slaves in the US 200 years ago. Imagine your daughter wished to marry a Saudi man and go to live there. Would you be concerned? Of course you would. A member of my family had to flee from a state similar to Saudi and broke the law by smuggling out her children because she would have no rights to access following an impending divorce.

In saudi there is no freedom of conscience or of religion. The penal system is mediaeval and incorporates mutilation and torture. The right to a fair trial does not exist. A saudi prince or some other multi-millionaire is effectively above the law.

You complain that in the US wealth is concentrated into the hands of a few rich people. In Saudi wealth is concentrated into the hands of the extended royal family and a clique of wealthy people. Difference is that in Saudi the wealth of the state accrues to the benefit of the ruling oligarchy. In the US state assets are separated from privately owned wealth. And this is the system you offer as a favourable comparison to the US? I submit to you that by any normal measure Saudi is much closer to a fascist state than is the US.

Of course the US has often followed foreign policies which have been misguided and unethical. But those aberrations have been offset by great courage and generosity. Can you say the same about Saudi?

I'm afraid that I generally fail to understand the arguments advanced in your articles - they seem to incorporate too much rhetoric, numerology and anecdote for my simple brain. But I can understand your argument against the US and I find it entirely unconvincing. I think you are playing to the crowd by repeating the same old anti-American rhetoric that pervades Europe whenever we don't need the US to bail us out of trouble. I find that a complete turn off as far as the rest of your arguments go.

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Andrew Butter 31st Aug '11 9 of 26
5

In reply to tournesol, post #8

First of all, what my articles are about is putting numbers on what is going to happen to prove that my models work.

That's it, the rest is noise.

I said, for example:

1: The S7P 500 would bottom at6 675
2: Then it would go to 1,200
3: Then it would reverse by 15% to0 20%
4: Them it would hit 1,30o by Christmas.
5: Then it would meander
6: Then it would go down to 1,150
7: Then it would go back up.

That's numbers, you can argue philosophy all day, but numbers are numbers.

Everything else is just an explanation of how I got to where I got to. So you think America is not quasi-fascist, OK but in my opinion the absence of having the right to vote "None-of-the-above" is as undemocratic as the system that prevails in Saudi Arabia, and in practice, with legalized lobbying (kickbacks) in USA, I fail to see the difference from the way it works in Saudi.

Three years ago I hired a top-ranking US architect to design and manage the construction of a $500 million building, they were more corrupt than any architect I ever met in the Middle East they had kickbacks scams out of their ears.

You think America is less corrupt than Saudi, dream on sweetheart, I lived in America I lived in Saudi, I paid kickbacks, I know what goes on.

Philosophy apart, what I write about is what's going to happen, and why.

The reason USA is in a hole is that it is hopelessly corrupt.

Do I care?

Not one bit.

By the way, I mostly agree with what you are saying, and I acknowledge that what antagonizes you is an issue about basic humanity, which I have no contest with, I agree with your sentiments, just I like to put things into perspective.

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emptyend 31st Aug '11 10 of 26
4

I thought that Saudi was supposed to be a dry country........  ;-)

I'm afraid that I don't have the "motivation" needed for this sort of debate....

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Andrew Butter 31st Aug '11 11 of 26
1

In reply to emptyend, post #10

Saudi Arabia is "dry" in principal, in reality about the only thing to do as a visitor is to get drunk.

My main objection to going to Saudi is I drink too much.

As you correctly pointed out - what that's got to do with my article, is hard to figure out.

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tournesol 1st Sep '11 12 of 26
7

Andrew

Just one last comment on this side show then I'll move on

I think that you are doing what politicians and other slippery characters do. You threw out what I regard as a slanderous statement that the US is fascist. I challenged that. You did not respond head on but switched the focus to how great Saudi is. I challenged you on that too. You have not responded but have switched focus agan to corruption. This suggests that  you do not enjoy being challenged. In which case the best thing to do is to stop making comments that invite challenge.

You claim that there is more corruption in the US than in Saudi. To support that contention you offer an anecdote about your personal experience with a corrupt architect in the US and contrast that with your experience in Saudi.

Human beings as a species suffer from many imperfections. One of them is the way that our personal experience - which is inevitably based on a small sample of the world - skews our perceptions. There is a fancy name for this - salience error? or some such. In truth a single example of personal experience is not reliable evidence for a sweeping claim such as those you are making.

Transparency International rank the US 22nd and Saudi 50th in their table of corruption perceptions - those rankings are out of 178 states. By comparison the UK ranks 20th. The table is derived from a survey with a large sample size so that indicates that most people disagree with you on the specific point you are making.

I myself have worked in around 25 countries in Europe, Africa and the Far East. I worked for a US oil major and was specifically concerned with identifying bad practice including corruption and dishonesty. In my experience there is a fundamental difference between cultures/countries. In the US and the UK there may well be corrupt individuals but corruption as it is usually conceived of is not endemic. In Africa and parts of the Far East corruption is endemic. It is so well entrenched that it is entirely unremarkable. That is simply not the case wrt the US.

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tournesol 1st Sep '11 13 of 26
8

Andrew

going back to your opening comment

You include a chart introduced with the phrase..."Put this one on your iPhone and weep:"

That chart shows the price of crude overlaid on the variation in US GDP . The lines intersect at the crucial date where Lehman collapsed.

The clear inference is that some significant causal relationship is indicated by the convergence/intersection.

I may be being stupid here but it seems to me that the intersection is an artefact of your choice of axes/scales. There is actually no good reason at all for you to use the scales you have chosen - one in $/bbl the other in % change in GDP is zeroed in so that it co-incides with $80/bbl.

It follows that the intersection is the result of your choice of scales rather than being some fundamental mathematical truth.

If that is correct it implies that you have worked backwards from your conclsuion to determine how to best present the data to give the appearance of being supportive. Is that right? Or am I misunderstanding things here?

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extrader 1st Sep '11 14 of 26
4

Hi rg,

Well said !

I was working in Pakistan (for a bank that had lots of legacy business in Nigeria), when Transparency International's update came out, moving Pakistan from 'most corrupt' to 'second most corrupt' - behind Nigeria.

The 'bon mot' from one of my world-weary customers was that the Nigerians must have offered TI more, to get to first place....

"I'm too old to cry - and it hurts too much to laugh"

ATB

PS I also worked for a UK clearer that saw no problem in facilitating payments in the 80's to a certain 'rogue state' for 'spare parts LCs' or to the Argentinian atomic energy agency.....post Falklands !
Curruption takes many forms.

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drowsy 1st Sep '11 15 of 26
4

the German gas was the best - they had more practice, you don't gas six million Jews without getting a technological edge;

Absolute nonsense......totally destroys the credibility of the writer

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tournesol 1st Sep '11 16 of 26
8

Have only just read the detail in post 7 - I'm shocked that anoyone could be so flippant about such an issue. I strongly endorse drowsy's comment above.

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Andrew Butter 1st Sep '11 17 of 26

In reply to tournesol, post #13

No the intercept was where it was and is any case a function of the different scales used and is a coincidence.

What interested me is that the peak in oil price and the start of the dramatic fall-off of nominal GDP happened before Lehman broke.

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Andrew Butter 1st Sep '11 18 of 26

In reply to tournesol, post #16

Not as flippant as George Bush:

International Criminal Court (ICC) Complaint Against Bush/Cheney et al

On January 20, 2010, Professor Francis Boyle and Lawyers Against the War filed a complaint against "Bush, Cheney, Rumsfeld, Tenet, Rice and Gonzales for:

"their criminal policy and practice of 'extraordinary rendition' perpetrated upon about 100 human beings. This term is really their euphemism for the enforced disappearance of persons and their consequent torture. This criminal policy and practice by the Accused constitute Crimes against Humanity in violation of the Rome Statute establishing the ICC."

Though America isn't party to the treaty, "the Accused have ordered and been responsible for the commission of ICC statutory crimes within the respective territories of many ICC member states, including several in Europe. Consequently, the ICC has jurisdiction to prosecute the Accused (under) Rome Statute article 12(2)(a) that affords the ICC jurisdiction to prosecute (these crimes) in ICC member states."

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scubaroo 3rd Sep '11 19 of 26
1

Andrew et al,

I suggest you view "The Crash Course" @ www.chrismartenson.com.

Good insight on what's happening in the global economy with practical advice to plan your future finances/life.

Cheers

SR

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Thomas Finnell 4th Sep '11 20 of 26
6

In reply to scubaroo, post #19

Wikipedia notwithstanding, I believe that Brownshirts, Jackboots and Military parades are neither necessary nor sufficient for Fascism.

A couple of quotes:

“Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power.”
--- Benito Mussolini

And…

“The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism — ownership of government by an individual, by a group, or by any other controlling private power.” — Franklin D. Roosevelt

This is where we are now. The controlling private power is Wall Street. The jackboots will come later when we start protesting the austerity measures in the streets. See what is happening in Greece:
http://therealnews.com/t2/index.php?option=com_content&task=view&id=33&Itemid=74&jumival=744

If you want to be really scared, Google “FEMA Camps”. (May be B.S.)

Scubaroo: I thought that it was coincidence that I was reading this on Martenson’s website, till I discovered you posted it. Good on you.

Anybody who doesn’t know Chris should Czech him out at http://www.chrismartenson.com/taxonomy/term/633/0

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Thomas Finnell 4th Sep '11 21 of 26
1

Food for thought

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Andrew Butter 5th Sep '11 22 of 26

In reply to Thomas Finnell, post #20

THANK YOU

That's what I wanted to say, but I got a bit too emotional.

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emptyend 5th Sep '11 23 of 26
5

The controlling private power is Wall Street. The jackboots will come later when we start protesting the austerity measures in the streets.

(from post 20)

I'm not going to enter into the debate about etymology, which I think is a distraction from the central point above.

There is NO doubt IMO that what has happened over the last 20 years is that much of the modest wealth of the many has been transferred into the hands of the few - and the many, quite correctly, won't continue to stand for it!

Whether one is looking at specific cases where the credulous masses have been misled with false promises (Equitable Life comes to mind there) or the more targeted assaults on their savings (such as Precipice bonds and other structured products)......or the deliberate volatility-generating activities of the hedgefunds who, in order to make their vast profits, must make life more difficult for everyone else and their steady savings approach.....the fact is that there has been a transfer of wealth into the hands of the rich.

Sensible governments will  be looking hard for ways to tax the rich heavily to redress the balance - and that wil either require some sort of global agreement (unlikely) or perhaps some sort of serious taxation of physical property (it would have to be physical, as financial property can simply be transferred across borders).

Though I wonder how practical exchange controls might be in the modern era, if one were to consider that international business is not the be all and end all?

ee

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Andrew Butter 5th Sep '11 24 of 26
1

In reply to emptyend, post #23

Well said but I'm not sure how realistic it is to rely on "sensible" government.

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marben100 5th Sep '11 25 of 26
1

Coming back to the core of this thesis, just came across some interesting reseach from Scotiabank. It shows that global car sales this year will be 50% higher than the average for the 1990-99 period, driven almost entirely by emerging market sales. Sales in the US are actually slightly down on the earlier period and Western Europe is only very slightly up.

That implies to me that demand ain't going away any time soon and, given that there is no sign of supplies increasing, despite already high prices, that will keep the pressure on those prices. That will be bad news for the US consumer and economy, and I don't like to think of the political consequences, when ignorance, predjudice and vengefulness may prevail...

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emptyend 6th Sep '11 26 of 26
1

In reply to Andrew Butter, post #24

Well said but I'm not sure how realistic it is to rely on "sensible" government.

True - but faced with really very serious alternatives and career-ending threats, even the most self-serving incompetants can make the right decisions.

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About Andrew Butter

Background  technology-orientated EPC (1980-90), market research (1990-2000) and real estate development management  (2000-2005), currently doing ad-hoc interim management mainly relating to turnarounds and start-ups. Based in Dubai, degree in bio-resource engineering.   more »


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