The View From 1776

Oil Price Main Recession Culprit?

Onset of the worldwide recession correlates with the timing of oil price increases, but that’s only part of the story.

Posted by .(JavaScript must be enabled to view this email address) on 04/23 at 10:21 PM
  1. I found the article interesting because it focused on a single culprit for this recession, typical of conservative thinkers. It may be true that other recessions were trigger by oil but not this one. The world, economically, has grown to complex and interwoven for such a conclusion to be satisfying.

    If this is a recession caused by high priced oil, then why do we see so many other sectors of the economy in deep, deep trouble, from real estate, commercial and private, to banking and financial institutions. That's because those sectors initiated their own demise. We have never see such a convergence of horrors before in past recessions. High price oil may have been the tipping point. But in hindsight we know its routes are elsewhere and everywhere.

    It can't be denied that speculation also drove up the price of oil. This speculation was driven by the same mentality that drove Wall St. and its institutions to the brink. So it is wrong to declare that the price of oil is solely responsible for this recession, when in fact it is really systemic. Oil is only one piece of the puzzle, a convoluted puzzle of financial scheming and shell gaming that has gone on for years. And if oil is the chief culprit of this recession why is it expected to be deeper than other recessions, and perhaps even be a depression. Why, because past recessions led by high oil prices weren't coupled with and didn't expose anything like the financial and economic toxins we have today, cause by systematic over leveraging, scheming and greed.

    Someone else wrote: The spike in oil prices provided the "push" to get this recession rolling, but blaming oil for this situation is like blaming the wind for blowing over a building that has a rotten foundation.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/24  at  09:16 AM
  2. David,

    Good points, all.

    Speculation may have contributed to the rise in the price of oil, but many have their head in the sand about the undeniable fact that demand and scarcity also played a part. The easy to obtain oil has largely been exhausted.

    Yes the price of oil is down now, but that is mainly because of the recession-caused drop off in oil demand.

    Our Republican friends are fooling themselves if they think that when the world economies begin perking again that the oil price will not go right back up, speculation or no speculation.

    (And let us not forget that the "market's" right to speculate is one of those cherished rights enshrined in and guaranteed by the Constitution, the Bill of Rights, the Declaration of Independence, the Ten Commandments and the Sermon on the Mount.)
    Posted by .(JavaScript must be enabled to view this email address)  on  04/24  at  09:29 AM
  3. Oil will go up based on what the dollar does. Oil moves up or down about $4 for each 1% move in the dollar.

    The recession (actually a depression) was triggered by many things but, the symptom was the falling dollar that drove oil prices up so much. When the dollar dropped to about 71 we saw oil soar and when the dollar started back up, we saw oil falling. $62 of the rise was just from the dollar and the rest from speculation that demand would outstrip supply.

    Then we rose from 71 to 89 or 25% which was a $100 move just from dollar change and the rest from speculation of a long depression with demand much lower than supply.

    While that is just a rough gauge, if you watch the price daily of the dollar and oil, you see this ratio over time, holding up pretty well when there is little change in the supply/demand ratio.

    Now we have massive losses of supply at the same time we have massive losses of demand. The price of oil will go up both due to a falling dollar, if that happens, and rising demand in a recovery.

    As you know, you don't have supply return for a long time after demand picks up because of the risk of bringing it back on line only to see the price fall.

    With Cantarell in double digit decline in Mexico and all exports from Mexico ending by 2014 if they don't do something major soon, (we get about 11% of our imported oil from them) and the steep declines in the North Sea and Prudhoe, we will see $100 and more oil again if there is any global recovery.

    Right now, oil is being stored on tankers again. We had reduced the 80 million stored in tankers down to about 40-50 million and now are up to 100 million barrels sitting in tankers for delivery later when oil prices go up more.

    China is buying all the oil, copper, iron, etc. it can, for one thing, while prices are low and keeping the price from dropping even more and thus, keeping suppliers open that might have otherwise shut down. This will give them cheaper raw materials when a recovery takes place and also give supply a chance to come back on line as prices rise without a huge problem from demand rapidly outstripping supply.

    Speculation is driving prices now as they were during the oil price bubble but, it was based on many things like the FED's saying that we wouldn't have a recession due to housing. All the government talking heads were saying nothing but growth was ahead and that, if it had been true, would have meant oil supplies wouldn't keep up with demand.

    Those who followed Austrian economists knew that the housing bubble would carry over in spite of all that the government fools were saying and that oil and everything else would fall. But, the majority of people didn't follow Austrian economists and labeled them fools for even thinking there was a bubble in housing or that it could impact all other sectors of the economy.

    Oil was a symptom of what was going on in the thinking of too many people who were out of touch with reality. So was home prices and market indexes.

    Now we have a new President doing all the things Bush was doing only faster and with even more debt because he uses the same advisers both parties have always used. Again, only the Austrian economists are calling for this to fail and the government talking heads are saying it will work.

    Now, after 95 years and over a dozen recessions, boom/bust cycle after boom/bust cycle our 3rd banking crisis, 2nd depression and 95% devaluation of the dollar, who do you believe. Those who for 95 years got us here and who the Presidents in both parties listen to, or the Austrian economists who warned for decades of where this would lead?

    One only has to look at what caused the great depression (total debt) in this chart and how long it took to get debt under control and current total debt, to see how bad this is.

    http://www.financialsense.com/Market/panzner/2009/0326.html

    It took 200 years to reach our first $1 trillion in debt. It took Bush only 8 years to double debt and get to a $1 trillion deficit (including off budget spending) in a year and only one year under this President to double that to $2 trillion and an attempt to borrow that $2 trillion when only $600 billion is available to lend us due to the global recession.

    Oil is a good indicator of many things but, only if you understand that the supply/demand ratio has only recently made it so. Watch oil to see how investors are speculating not so much on oil as they are on the dollar. The price of oil will probably move more now on dollar changes than on supply/demand changes.

    Right now, if you look, the dollar fell from its recent peak of 89 to the current 84.5 or a 5% move which would be about a $20 rise in oil prices from the low of about $31. Today's oil price is currently as I write this, $51.44 or just about $20 higher as would be correct without any supply/demand issues driving the price up.

    We are too focused on symptoms instead of the real problems of too much debt, bad monetary policy, bad economic policy, bad tax policy and bad foreign and trade policies. Instead of massive reform (which would cause a major depression that would be even deeper and longer) we are treating symptoms while we delay as long as possible the inevitable collapse the Austrian economists are warning of.
    Posted by JanPBurr  on  04/24  at  12:45 PM
  4. By the way, recently, George Zapata, an oil expert warned his clients and listeners to sell all U.S. oil companies and buy Canadian oil companies due to the risks to the dollar and energy policies in the U.S.

    That is just a side note for those who use oil, like I do, as part of my hedge against a dollar collapse. With so many nations moving away from using the dollar and the trial run of the SDR currency by the IMF, I think some insurance against a dollar collapse is needed.

    We can tax or grow out of this according to what Congress has been told. That means that due to the debt we are running up, only default and hyper-inflation are left and most nations choose hyper-inflation. Thus, oil will be a major way to protect against this but, certainly not the only way and maybe not the best way. I think food investments may be even better. Grain ETF's like DBA may do better than oil or gold or silver.

    But, $1,000 oil is not unlikely. The rest of the world would be paying about the same as now but, the U.S. would be paying that or more and in a hyper-inflation depression.
    Posted by JanPBurr  on  04/24  at  12:55 PM
  5. Sorry that was we "CAN'T" grow or tax out of this.
    Posted by JanPBurr  on  04/24  at  12:56 PM
  6. 'Conservative' thinkers are simpletons indeed, focussing on single issues when we all know it's just the fault of the previous administration!

    The few sectors you mention have one thing in common: they are heavily regulated sectors in the economy. All fiat money operations serve one purpose namely, priming the pump in order to 'stimulate' economic activity rather than letting markets clear in time of 'crisis'. The problems arise because fake money tends to generate fake economic activity unrelated to real market needs, thus the crisis in banking, real estate, both commeercial and residential, as well as artificial demand in the commodity arena mainly driven by a depreciating global currency. The money has to go somewhere in search of returns through either savings, investment or straight to consumption. When interest rates no longer correspond to market forces or encourage real savings, otherwise known as deferred consumption, fuel is only added to the fire of the misallocation of capital in things like real estate, both commercial and residential, financial products and services as well as speculation (whatever that is) in other hot sectors like commodities, particularly energy. Searching for returns when it simply doesn't pay to save created this crisis and it certainly dosen't pay to save with rates this low and tax policy being what it is.

    Our central banknig system, governmnet regulations restricting production (remember energy price controls and gas lines pre-reagan?) and fiat money controlled by the kind of people who do, i.e., power hungry, greedy and rent-seeking bureacrats and politicians makes it a systemic problem. It's really not as complex, interwoven or mysterious as DA like to think as excuses are made to deflect responsibility as politicians and governmnet are wont to do. Gotta make it as mysterious as possible to keep the peanut gallery on board.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/24  at  04:18 PM
  7. Jan,

    Interesting point. But isn't Exxon Mobil a multinational? Isn't most or all oil trade denominated in dollars, no matter what country sells the oil? If we buy Imperial Oil, won't it go down the tubes with Exxon, if the dollar tanks?
    Posted by .(JavaScript must be enabled to view this email address)  on  04/25  at  10:58 AM
  8. All currencies are convertable to dollars. The world only uses dollars to price goods and commodities involved in international trade. A dollar collapse only affects us AND those holding dollars in the form of savings or debt thus the potential for a snowballing collapse in our currency. Other currencies will buy more dollars.It will have no effect on dollar priced oil paid for with other currencies aside from those currencies buying more oil (or gold or anything else) relative to dollars.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/25  at  12:01 PM
  9. Yes, J.Jay. I thought of that point as well and I think the concern is that it is headquartered here and thus, more subjected to any policies directed at energy which would reduce profits.

    As you probably read in one of my earlier comments a few weeks ago, a lot of companies are leaving the U.S. that are tied to oil. If not, here it is again.

    quote:
    The tidy towns and mountain vistas of Switzerland are an unlikely setting for an oil boom.

    Yet a wave of energy companies has in the last few months announced plans to move to Switzerland -- mainly for its appeal as a low-tax corporate domicile that looks relatively likely to stay out of reach of Barack Obama's tax-seeking administration.

    In a country with scant crude oil production of its own, the virtual energy boom has changed the canton or state of Zug, about 30 minutes' drive from Zurich, beyond all recognition. Its economy was based on farming until it slashed tax rates to attract commerce after World War Two.

    snip----------------
    Over the past six months companies including offshore drilling contractors Noble Corp and Transocean, energy-focused engineering group Foster Wheeler and oilfield services company Weatherfield International have all announced plans to shift domicile to Switzerland.

    http://www.reuters.com/article/rbssEnergyNews/idUSL312427120090312?feedType=RSS&feedName=rbssEnergyNews&rpc=22
    =====================

    This is, of course, expected. Bernanke warned Congress in Jan. 2007 before this crisis hit, that raising taxes could impose burdens on the economy that would hurt the U.S. in the long run.

    Naturally, we have to have taxes and we have to pay for what we need but, when you have tax compliance costs and other costs 300-500% higher than the tax paid in many cases, any increase whether in tax or tax compliance costs can drive a company to leave.

    We don't need lower taxes, in reality for most companies but, we do need tax reform to reduce the cost of taxes. Also, we need lower costs for regulation.

    quote:
    According to a 2001 U.S. government report entitled "The Impact of Regulatory Costs on Small Firms," companies spent roughly $800 billion annually on federal compliance issues before Sarbanes-Oxley was even drafted.

    snip--------------------
    According to Financial Executives International, an association for accounting and finance professionals, companies spent more than half of the money that went toward SarbOx on auditors
    Posted by JanPBurr  on  04/25  at  12:02 PM
  10. Tom C. said
    All currencies are convertible to dollars.
    --------------------------

    Correct for now. When the dollar folds, then it will be different as some nations will no longer accept them or trade in them.

    Right now, when the dollar changes value and we pay more or less in dollars for oil, that doesn't mean the rest of the world pays more or less. They may or may not, depending on how much the dollar moved to their currency.

    Also, if other currencies are falling with the dollar, they will pay more just as we do even though other currencies may be rising and paying less.

    More and more articles are coming out on what China is doing to limit their pain due to the dollar. It appears they may have decided to have a lot of pain now, rather than wait too much longer and have even more pain as there doesn't appear to be any way to stop the demise of the dollar as the global currency or it fall in value.
    Posted by JanPBurr  on  04/25  at  12:17 PM
  11. Quote
    With these new currency swaps, China is in effect saying to its major trading partners,
    Posted by JanPBurr  on  04/25  at  12:43 PM
  12. Jan- The dollar, at the moment, is the tallest midget in the room. Gold/silver will, eventually, reconect to what are now fiat currencies. It's only a matter of time. The emperor has no clothes regardless of what our wishful thinking, cargo cult thinking and economically challenged friends on the left think. I know that they believe these problems are somehow new but they have a long and complicated history and the chickens will come home to roost. It's unavoidable.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/25  at  10:57 PM
Commenting is not available in this channel entry.