Peak Cheap Oil Ends Globalization

Re: Peak Cheap Oil Ends Globalization

Yes I am still here. We do indeed have the global recession / deflation induced oil glut in progress. But of course there's a catch in that we can liken the world economy to a man who's just plunged down through a scaffold with a noose around his neck (the global oil production numbers). As he falls for a little while it feels like the noose has gone all slack and the rope isn't there. But at the end of the brief fall (global recession) the effect is going to be an almighty yank of that rope and Mr. Global Economy's neck is going to see some serious stretching.

The snapback in the petroleum price, and along with it the entire energy price driven commodity complex, is going to be hellacious and arrive all in a hurry when this global recession ends. In fact the event is more complex than that. According to the energy analyst Andrew McKillop, a bull market in petroleum feeds into the entire commodities complex, which feeds directly into renewed pricing power for all the commodity producer countries and their satellites, the industrialising countries, and you get a feedback loop renewing which siphons a great deal of the world's wealth into this tier of developing / commodity producer nations. McKillop's point is that energy market booms historically spark emerging nations booms, which spark global booms.

What I see up ahead is a renewal of the same inflationary / energy bull market driven booms as we've just seen the end of. In fact, given peak cheap oil, this boom has technically never even really gone, because there is no such thing historically as "back to back" commodity booms. They occur, and then the economic cycle takes 30 years to bring them back once again. This time the crisis in global petroleum production is going to shove this event right back down the world's throat in a brief span of time. So 50 years from now what you'll see on the charts describing commodities history in the early 21st Century, will be one very long commodities boom, which spanned from the start of the 2000's, and ran right out to 2030 and beyond.

Peak Cheap Oil will be so large an event as to spark a sharp increase in the earnings of commodity producers for a longer boom than we've seen in commodities in a century.

Put that in your pipe and smoke it.

Who is Andrew McKillop?

[Sapiens]

Re: Peak Cheap Oil Ends Globalization

I hate to burst your bubble, but the present price of oil is not wholly attributable to resource depletion. I will not be surprised to see an “Oil Glut” once the credit contraction is in full swing.

We will have this exchange then, that is, if you still have internet access.

Hey Lukester! Still around?

Re: Peak Cheap Oil Ends Globalization

Okay as far as it goes, Lukester the Prolific Poster, but rather than attack Finster's position, perhaps you should set out your own explanatory theory as an alternative -- stating as candidly as possible the strengths and weak points, the supporting evidence, etc. -- and then invite one and all to consider your theory on its own merits.

When facing a chaotic feature, some theory, even one that is wrong in part, even mostly wrong, is often likely to produce better results than no theory at all. The latter is an invitation to cognitive paralysis or random action. Finster's ideas have served a useful purpose in this regard. Care to present your alternative?

There appear to be one or two false premises in there Verrocchio.

I have no "explanatory theory" and here's a difference between you and me. You sound like you are drawn to people who have broadly ambitious theories, I regard all broadly ambitious theories with diffidence. The "wider" and "more ambitious" a theory, the more it's proponent needs to be on his toes, and the less I'm eager to bet big on it. I say only this much, and it has plenty of **common sense**. Build any theory you like, but make sure to "land it" down right in there among all the "facts on the ground", e.g. all the distortions we see going on around the oil price which are crying out for a "real price input" to justify them. When you start seeing five, six, seven, ten or twelve different "awkward corollaries" which are total paradoxes if the price of oil has supposedly gone nowhere, get your guard up. If you don't get your guard up, your skeptical faculties are on vacation.

If you are test flying this "oil price is 100% inflation" thesis and suddenly all these current events swirling around oil stop making much sense? Then have the good sense to dismantle your entire theory and look for the "piece missing" because that is evidently the issue. What's so controversial about that as it's merely anyone's description of average due caution?

Explosive energy exploration budgets? Look for a "real price issue". International commerce under breaking strain due to high fuel costs? Look for a "real price issue". EROEI looking really "saggy" on all new projects? Look for a "real price issue". Oil selling countries getting so stinking rich they can buy our DOW right out from under us? Look for a "real price issue". Oil exploration migrating out to deep water, with soaring exploration budgets? Look for a "real price issue". Flaming tensions in the gulf and the world hanging on OPEC's every pronouncement? Look for a "real price issue". And so on, and so forth. The questions going begging here are strewn so thick you could send a ten year old out to collect them.

What's so startlingly novel about these notions? How is it possible that no iTulipers have gone around and patiently collected all these small but entirely relevant reasons why there must be some real price component in the oil price for all these events to be swirling around oil today to be explained? Well, maybe no-body can be bothered. It's considered "too confrontational" by too many "get along Charlies". Instead you get querulous inquiries as to what your own "universal theory of everything" must be, as though any intelligent commenter worth his salt must have a "universal theory of everything" if he has the temerity to question the prevailing one. Sorry, I'm not buying that! What about the rationality of those of us merely pointing out the holes in theories already consideredd "accepted wisdom" around here?

Think for yourself - don't ask me for a "substitute macro-theory". How should I know? I only know how to string together a bunch of contradictions to the prevailing theory, and you might note, that it took me all of five minutes to conjure up a whole list of reasons why the real oil price had to be doing something for all these little "details" to make some sense. It only takes five minutes to collect all of these little "paradoxes on the ground" yet apparently no-one else saw fit to pose them as "non-confirmations" to the "100% fiat" thesis? So how many people around here are actually asking any probing questions on the topic of "oil-inflation"? It feels faintly like one of those White House press conferences, with everyone asking "softie" questions out of "deference". "When facing a chaotic future", as you put it, trust your own inquiries first. Feeling a pressing need to have "some theory" because it's "more productive than not having a theory" is a conclusion I have no compelling desire to subscribe to.

Tell you what, why don't you expressly ask Finster what he's meaning by "mere epiphenomena", regarding all these "awkward corrolaries suggesting the real oil price must be doing something - because I can't make heads or tails this reply.

[Verrocchio]

Re: Peak Cheap Oil Ends Globalization

Everyone here is entitled to their views. I find the "pure expression of fiat inflation" thesis a brittle notion, at best. Take your pick.

Okay as far as it goes, Lukester the Prolific Poster, but rather than attack Finster's position, perhaps you should set out your own explanatory theory as an alternative -- stating as candidly as possible the strengths and weak points, the supporting evidence, etc. -- and then invite one and all to consider your theory on its own merits.

When facing a chaotic feature, some theory, even one that is wrong in part, even mostly wrong, is often likely to produce better results than no theory at all. The latter is an invitation to cognitive paralysis or random action. Finster's ideas have served a useful purpose in this regard. Care to present your alternative?

[metalman]

Re: Peak Cheap Oil Ends Globalization

Finster's "latent inflation" clause is an "escape clause" to permit actual inflation to pop up wherever and whenever it's required to fulfill a thesis. I could even flex my theoretical skills and be the orchestra conductor of Kondratieff cycles, and "claim" latent inflation from the 1970's last inflationary cycle is still "stored up" and is only now spilling over into commodity prices. I can make "latent inflation" sit up and balance on a beachball, like a circus elephant or balance a beach ball on it's nose like a circus seal. Latent inflation is the glue that holds together any kite I want to fly.

Meanwhile I have iTulip "stalwarts" like Metalman (Mr. Full Metal Jacket) posting dead donkeys lying in the middle of the road with "thought bubbles" explaining that they died out of "terminal foolishness" for having questioned "handed down wisdoms" around here. This particular "percieved wisdom" on the overarching principle of inflation being the clock that determines when China and India awaken from a thousand years of pre-industrial slumber seems to have a heck of a lot of sleepy minded converts around here. Frankly, they can park all these wisdoms up on the lecture hall trophy cabinet and I'm no more entranced with the concept. I will remain "un-entranced" to sign up for this thesis if it were elevated to a marble pedestal with a bronze plaque. I just don't have to buy it, that's all.

Re: Peak Cheap Oil Ends Globalization

I don't believe in either of those any more than I believe the "peak everything" argument today.

Finster's "latent inflation" clause is an "escape clause" to permit actual inflation to pop up wherever and whenever it's required to fulfill a thesis. I could even flex my theoretical skills and be the orchestra conductor of Kondratieff cycles, and "claim" latent inflation from the 1970's last inflationary cycle is still "stored up" and is only now spilling over into commodity prices. I can make "latent inflation" sit up and balance on a beachball, like a circus elephant or balance a beach ball on it's nose like a circus seal. Latent inflation is the glue that holds together any kite I want to fly.

Meanwhile I have iTulip "stalwarts" like Metalman (Mr. Full Metal Jacket) posting dead donkeys lying in the middle of the road with "thought bubbles" explaining that they died out of "terminal foolishness" for having questioned "handed down wisdoms" around here. This particular "percieved wisdom" on the overarching principle of inflation being the clock that determines when China and India awaken from a thousand years of pre-industrial slumber seems to have a heck of a lot of sleepy minded converts around here. Frankly, they can park all these wisdoms up on the lecture hall trophy cabinet and I'm no more entranced with the concept. I will remain "un-entranced" to sign up for this thesis if it were elevated to a marble pedestal with a bronze plaque. I just don't have to buy it, that's all.

[GRG55]

Re: Peak Cheap Oil Ends Globalization

I have no fixation on ANY date GRG55. I'd probably prefer a date not too far prior to that as otherwise Finster's theories can "really take flight" into some "macroeconomic macrame" with the longer time frames to play with. I just was asking Igor whether his reply above indicated that the oil price had risen in any "real terms". What's the problem, is this question too simple and straightforward for your taste?

Your question to Igor is disingenous, rather than straightforward. And as has become your custom you are again attempting to avoid the question you can't, or don't want to, answer.

As I have rattled on to Finster, and had hoped perhaps you might have absorbed, we could just as easily look at the period from the end of the second Volcker recession to 1999. Lo and behold, money supply increased. Inflation was positive throughout that entire period. US $ purchasing power for oil, and virtually all other commodities, also increased during that time period. A lot. Now how could that be? Simultaneous oil glut, copper glut, nickel glut, zinc glut, wheat glut, uranium glut, fertilizer glut, ...? Or maybe it was macroeconomic macrame?

I don't believe in either of those any more than I believe the "peak everything" argument today.

Re: Peak Cheap Oil Ends Globalization

Idianov - thanks for a refreshingly straightforward response. I tend to agree with you. Describing this kind of market distress (due to real fuel costs) without acknowledging any real increase in the cost of energy seems an illogical exercise. Insisting that that oil price is in fact "really neutral, due to it's being 100% inflation" has no answer for why international industry is even feeling any stress from this event. I dug up a number of other such "unexplainable paradoxes", such as how some countries are gathering such large amounts of spending power if the oil price is "all inflationary illusion", but Finster told me these are merely "epiphenomena". I'm unsure what he means by that. I find the great majority of Finster's views very lucidly explained and engaging. But this particular thesis about the price of oil being a pure expression of inflation, and commodity cycles being pure expressions of inflation too seems like a doughnut to me. Very tasty and interesting on the outside, but with a hole in the middle.

Luke, The answer is real and simple:

2007 Total World Production: 84.60 mbd
2007 Total World Consumption: 85.40 mbd
2007 Total Stock Draw: 0.80 mbd

The consumers are competing for imports as producers hit their peak export capacity in 2005.

Re: Peak Cheap Oil Ends Globalization

What's so magical about 1999 as the starting point for your analysis Lukester? Why not 1989, or 1979? You and Finster can each prove your point by picking the correct time frame. So what is the "right" time frame then?

I have no fixation on ANY date GRG55. I'd probably prefer a date not too far prior to that as otherwise Finster's theories can "really take flight" into some "macroeconomic macrame" with the longer time frames to play with. I just was asking Igor whether his reply above indicated that the oil price had risen in any "real terms". What's the problem, is this question too simple and straightforward for your taste?

[idianov]

Re: Peak Cheap Oil Ends Globalization

Igor - I'm asking a much simpler question really. Your comment refers to higher energy prices and shipping prices. A lot of people here believe these "higher prices" are only an expression of a devaluing currency - that means, that oil has not risen in real price compared to that international commerce, from ten years ago - it's just an inflationary distortion. I think the very fact that international commerce is feeling distress clearly shows that oil has risen in real price. What do you think?

Your reply clearly suggests that all of this is occurring precisely because oil has risen in real price. Which is it - has oil risen in real price for you since 1999, or hasn't it? If it has, how can it's current price be a product of "pure inflation". It is then a factor, in inflation, not a pure product of inflation. This throws the entire idea of "measuring oil's price rise" against the money supply right out the window, because the oil price contributes to, and hopelessly messes up any accurate read of the money supply as something sealed off from the oil price.

I hope I'm not being unclear here. Has oil's real price risen for you in real terms, or hasn't it?

Luke,

The answer is real and simple:

2007 Total World Production: 84.60 mbd
2007 Total World Consumption: 85.40 mbd
2007 Total Stock Draw: 0.80 mbd

Source: International Petroleum Supply, Consumption, and Inventories

The consumers are competing for imports as producers hit their peak export capacity in 2005:



Source: World Oil Exports: A Comprehensive Projection

[GRG55]

Re: Peak Cheap Oil Ends Globalization

Igor - I'm asking a much simpler question really. Your comment refers to higher energy prices and shipping prices. A lot of people here believe these "higher prices" are only an expression of a devaluing currency - that means, that oil has not risen in real price compared to that international commerce, from ten years ago - it's just an inflationary distortion. I think the very fact that international commerce is feeling distress clearly shows that oil has risen in real price. What do you think?

Your reply clearly suggests that all of this is occurring precisely because oil has risen in real price. Which is it - has oil risen in real price for you since 1999, or hasn't it? If it has, how can it's current price be a product of "pure inflation". It is then a factor, in inflation, not a pure product of inflation. This throws the entire idea of "measuring oil's price rise" against the money supply right out the window, because the oil price contributes to, and hopelessly messes up any accurate read of the money supply as something sealed off from the oil price.

I hope I'm not being unclear here. Has oil's real price risen for you in real terms, or hasn't it?

What's so magical about 1999 as the starting point for your analysis Lukester? Why not 1989, or 1979? You and Finster can each prove your point by picking the correct time frame. So what is the "right" time frame then?

Re: Peak Cheap Oil Ends Globalization

Luke, ... Higher energy and shipping prices result in declining profit margins If producer profit margins become negative the production stops. With low JIT inventories, there is no inventory accumulation going into recession. This sets the new price floor under any finished product or commodity. Costs of needs are to be pushed to consumers while cheap monetary policy of FIRE and government will try to support the demand because too much is at stake. The result is inflation when too much money chasing diminishing supply of goods. ___ Igor

Igor - I'm asking a much simpler question really. Your comment refers to higher energy prices and shipping prices. A lot of people here believe these "higher prices" are only an expression of a devaluing currency - that means, that oil has not risen in real price compared to that international commerce, from ten years ago - it's just an inflationary distortion. I think the very fact that international commerce is feeling distress clearly shows that oil has risen in real price. What do you think?

Your reply clearly suggests that all of this is occurring precisely because oil has risen in real price. Which is it - has oil risen in real price for you since 1999, or hasn't it? If it has, how can it's current price be a product of "pure inflation". It is then a factor, in inflation, not a pure product of inflation. This throws the entire idea of "measuring oil's price rise" against the money supply right out the window, because the oil price contributes to, and hopelessly messes up any accurate read of the money supply as something sealed off from the oil price.

I hope I'm not being unclear here. Has oil's real price risen for you in real terms, or hasn't it?

Re: Peak Cheap Oil Ends Globalization

Then why has a basket of commodities risen EXACTLY AS MUCH as oil?.

It hasn't. You are referring generically to "a basket of commodities" as though it were a single item (and you are reiterating what may be incorrectly percieved as an " iTulip AXIOM " [ orig. TM. Finster ] apparently in the process).

It has not risen "in lockstep", various commodities have been all over the map percentage wise. You are using a synthetic, (arm's length) notion of "all those commodites" as being a nice neat package. Actually, I agree with there being a large input from a fiat inflationary wave - it got a big kickoff after 09/11, but I do also know this - the oil input into most mined (and agricultural) commodities is massive, so employing those commodities to "measure" the oil price is highly imprecise. Calculations employed to "back out" the oil quotient from "the CRB" are mechanical constructs every bit as synthetic as percieving oil's price as a unidirectional set of signals coming exclusively from fiat money. Just because JK found this explanation watertight, does not mean a peer review would. If you see this methodology employed to produce certitudes with nice crisp "percentages", let alone "100% assurances", you are taking this on faith more than stringent method. Entirely absent from this method also is the extent to which the commodities (primarily oil) could be completely corrupting any "clean read" of the monetary aggregates.

Most important component of this "fiat world cosmology" missing is the attribution of "causality". If someone tells you the causality is singular, emerging from the wonks at the Federal Reserve, in my view their analysis is narrow, simplistic and brittle.

In fact what this methodology comprises of is A) the commodities compromised by the energy input, B) the money supply compromised by feedback from the commodities. C) all these yardsticks jinking around wildly in their respective ratios. This is not a reliable measuring system from which to draw conclusions at the outset.

Then you've got all the "conundrums" - like how countries with lousy balance of payments transitioned in a flash, a mere half dozen years, to being so wealthy they can buy half the DOW without breaking a sweat, all on the strength of oil earnings which are purportedly denominated in fictitious new purchasing power. There are innumerable other such "conundrums" - but they only start becoming apparent once you've abandoned your belief system as instilled here for the past 2-3 years, that it's all a fiat chimera, and start looking for more such "conundrums". I made a list of just a few of them on a Finster thread, and they were apparently dismissed in one lofty phrase as being "mere epiphenomena", (search me what this was intended to mean substantively). I felt as though I'd just paid a couple of Jackson's for a square meal of an answer, and had been given a hostess twinkie instead, while being told it was a porterhouse steak.

Everyone here is entitled to their views. I find the "pure expression of fiat inflation" thesis a brittle notion, at best. Take your pick.

[idianov]

Re: Peak Cheap Oil Ends Globalization

Idianov - answer me this. How does this massive impairment of global trade by the "price of fuel" fit into a theory of oil's price as a pure expression of inflation? If this is all one more symptom of the generally inflating price level, why doesn't the global price structure of international commerce accomodate the new cost of transport within the same ratios to profitability as it was ten years ago? Can anyone clarify this? It seems to me, the portion of global trade occupied by the "price of fuel" today, is a completely different percentage than it was ten years ago. That seems like a "d'uh" observation, but if it's true, how can this all be pure inflation?

Luke,

Higher energy and shipping prices result in declining profit margins If producer profit margins become negative the production stops. With low JIT inventories, there is no inventory accumulation going into recession. This sets the new price floor under any finished product or commodity. Costs of needs are to be pushed to consumers while cheap monetary policy of FIRE and government will try to support the credit demand because too much is at stake.



The result is inflation when too much money chasing diminishing supply of goods.

Igor

[WDCRob]

Re: Peak Cheap Oil Ends Globalization

Net out all factors to do with money supply - i.e. assume money supply s static, and filter out "latent inflation" accumulated from previously, just for the sake of examination. You have money as "inert" component. Now either reduce the supply of a commodity, or leave it static, and increase the supply of bids upon it. You get, as you note, an increment of comparative price on that commodity, and a concomitant reduction in available funds for other expenditures. But the "holistic insight" is that not all commodities command the same degree of financial response. The critical, "oxygen like" commodities command an instant monetary response, because they instantly disperse that price signal across a very large segment of other goods and services, draining funds from the organism. Oil does this more than any commodity. There is then "no such thing" as a static money supply in response to this predicament, when the commodity is oil, because it is the most powerful transmitter of price signals into virtually every other goods or service segment.

Then why has a basket of commodities risen EXACTLY AS MUCH as oil?

Under your scenario above, wouldn't those commodities rise in tandem with oil, but only to the degree that they required oil as an input? Why would the entire basket rise in lockstep?

If oil indirectly makes up only 50% of another commodity's price, why would, say, a 311% rise in the price of oil result in a 311% rise in the commodity? Wouldn't you expect something on the order of a 150% increase instead?

TIA for your response. And remember, "Brevity is the soul of wit."

Or, as 'Reading Digest' once said on the Simpsons, "Brevity is...wit."