This article was written by Charles Hugh Smith and originally published at his Of Two Minds blog.
Editor’s Comment: **Welfare** isn’t just for poor people. Welfare for the elites – including corporate welfare and crony capitalism – is one of the biggest problems in society, all the more so for rogue oil empires, who are downright dependent on the dynamic. Supporting the decadence and controlling classes with lavish petrodollar wealth has created a cycle of tyranny, price manipulation and dangerously unstable regimes – ready to strike out for survival like a cornered animal.
Of course, the money needed to support the welfare state of the lower and average classes is also critical to keeping these regimes afloat. Promises made in the way of assistance during peak price times are now becoming difficult to maintain, and could be trigger causes for instability or conflict to come. This has already been evident in the case of Russia, Venezuela, Iran and, to an extent, the United States. Saudi Arabia claims it can endure deep cuts in the oil price and keep on pumping, but how low can they really go? What was the nature of the talks and deals made between the Saudis and the Americans last week?
Either way, the are some big moves in the works here, with China and Russia now formally dumping the American petrodollar, and the attack on the dollar having sometimes dire consequences for foreign debtors, as well as investors.
The Decline of Oil: Head-Fake or New Normal?
by Charles Hugh Smith
When production does finally collapse, that will set up the “nobody saw this coming” ramp in the price of oil.
In May 2008 I proposed the Oil “Head-Fake” Scenario in which global recession pushes oil demand down as oil exporters pump their maximum production in a futile attempt to fund their vast welfare states and thus retain their precarious political power.
Oil: One Last Head-Fake? (May 9, 2008)
The terrible irony of the head-fake, of course, is that the exporters’ efforts to pump more oil exacerbates the oversupply, further depressing prices. As exporters receive fewer dollars for their production, they attempt to compensate by pumping even more oil. Perniciously, this suppresses prices even more, setting up a positive feedback loop which pushes prices to the point that exporters are no longer able to fund their welfare states and Elites.
Something has to give, and that something is the existing power structure in oil exporting nations.
Another factor deepens the eventual crisis triggered by drastically lower oil revenues. The majority of exporting nations under-invest in their oil production and exploration infrastructures, essentially guaranteeing declining production once the easy oil has been extracted.
This cycle of spending the fruits of current production while starving investment for the future is part of what is known as the resource curse: nations with an abundance of resources rely on the income generated by the sale of their resources which effectively stunts the development of a diverse economy and the institutions which such a diverse economy requires as a foundation.
The net result of the resource curse is national impoverishment as the resources are depleted. Diverting the majority of the oil revenues to support welfare states and Elites dooms the oil exporters to under-investment in future production.
In other words, the decline in the price of oil does not mean oil will remain cheap for years to come; it’s a head-fake that fools the unwary into assuming the glut is The New Normal.
Here is a basic chart of the head-fake:
There are additional twists to the head-fake. I first addressed this a year ago in The Oil Head-Fake: The Illusion that Lower Oil Prices Are Positive (September 29, 2014).
There’s a number of dynamics in play, but let’s focus on three of particular interest:
1. Oil production in the U.S. has soared since 2011. yes, we can debate the financial overhang–i.e. the servicing of debts taken on to expand production–and question the longevity of the production increases.
But right here and now, this expansion of U.S. production is adding to the global supply in sufficient quantities to change the global supply-demand structure.
2. The need to keep pumping in the U.S. to service debt. Many observers reckon a whole slew of U.S. producers will go bankrupt if oil hovers around $40/barrel for long.
Perhaps, but what a lot of people miss is the costs of production are not static. A significant percentage of U.S. oil production is operated by independents–small, nimble firms that can deploy new technologies quickly and squeeze subcontractors.
What cost $100,000 in the bubble, when demand enabled contractors to charge a premium–well, nowadays, that job might only cost $50,000.
The point is that U.S. production could stay stubbornly high for a lot longer than is generally anticipated.
3. The decline in petro-dollars could push the value of the U.S. dollar (USD) higher, further pressuring oil exporters and emerging markets. When oil prices are high, oil exporters have huge surpluses of cash they need to recycle into assets. Since oil is typically traded in USD, the easy trade is to buy USD-denominated assets such as Treasury bonds.
A sharp decline in the amount of USD that needs to be recycled means the global supply of surplus USD is much lower than in eras of high oil prices. As borrowers of USD-based debt buy USD to service their loans, the shrinking supply and rising demand will push the U.S. dollar up vis a vis other currencies. This will exacerbate the declining purchasing power of emerging market currencies and make servicing the estimated $9 trillion in USD-denominated debt more burdensome.
This will further depress demand for oil, which will push prices lower. Attempts by oil exporters to maintain revenues by pumping more oil will increase supply, further increasing the global glut of oil.
Once welfare spending and subsidies of Elites collapses, the social and political stability of oil exporters becomes extremely fragile.
The leadership of oil exporters without a stash of USD to tide them over as oil prices crash would be wise to start building their bug-out island fortresses.
But eventually production will crater. It might be from depletion, or rising domestic demand within exporting nations, or a revolution that disrupts production, or the consequences of under-investment in exploration and production infrastructure.
When production does finally collapse, that will set up the nobody saw this coming ramp in the price of oil.
This article was written by Charles Hugh Smith and originally published at his Of Two Minds blog.
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First Finally. Never happened before. Love the site.
“The last will be first, and the first, will be last”
Watch US Oil Producers try to so away with the Oil Export Ban, to keep them in Business. Want to punish them all? Get off the Grid fir starters as much as possible. Solar and Wind is Free Daily. Be your own energy co.
~WWTI
Ya , good yer you in florida , up here in MI , I have 20 overcast days per month and wind ? not dependable.
I say a big damn diesel generator and buried tanks.
Works for me , and i AM prepared to go lights out .
That antique diesel will run anytime as long is i can pour drain oil or kerosene or whatever in it, not fussy.
Better to disregard the doomsayers though , they want money and they wont get it without provideing a certain level of service .
An insignificant amount of electricity is generated using oil.
Here come Iranian oil which will depress the costs of oil even further. Yes, our oil industry is being destroyed here in the good old USofA. Just another product we cannot compete with the rest of the world to produce like the TV, let the list goes on.
Globalization and death by a thousand cuts by the rest of the world against us here in America. We are lost in a world we allowed our politicians to create.
BigB
Saudi Arabia was making this move on purpose, to hamstring Iran. If Iran gets a nuke, they may just want to drop it on Saudi Arabia. Sunni and Shia hate each other nearly as much as they hate the US. But it comes down to power and control. Shia hate Saudi’s for controlling Mecca! They might even nuke it with the idea to blame Israel.
Ok, what solar / wind product do you personally use that successfully got you off the grid? Fucking moron.
This is why war is consuming the middle east. When the government shuts off the checks people freak out and want revolution.
If the State continues to buy off the savages with oil money then they will remain calm and only do war against the Great Satan (America).
But when there is no money, they savages turn on each other.
Its kind of like, “What goes down will come up”.
Personally when the DOW crashes and oil bottoms (no one catches the bottom of the bottom) buy into the Integrated Major Oil Companies with a significant investment in the downstream E&P area. If oil goes into the mid $30s it isn’t staying there. The US doesn’t have such a big foot print in the Middle East because they export coconuts.
I don’t know how good that would work out, but i do love the gas prices of $1.69 a gallon in S. Carolina. We are gonna love going to the beach in the Prius getting 45 miles to the gallon and only paying a buck seventy.
As soon as the dust settles from the market crash, and whatever else comes crashing down over the next few weeks, we got the surf rods and the pier rigs ready for a couple weeks of fishing and relaxing, at the new camper, within walking distance of the beach access.
Hope all my brothers and sisters here, keep the spirit alive while I am gone. God is great, and He will shower you with warmth and blessings if you walk in His light. Love you guys and gals and look forward to spending eternity with all of you.
What are you going after? Bluefish? Hope you catch quite a few. Cheers.
Thanks, PO’d Patriot,
Yea, some blues, spots, and hopefully flounder too. Don’t care for sand sharks.
The spanish mackerel run in the fall also. That is my favorite if you hit the runs off the pier.
Cuz, any damn body that a wants to be spindin an eternity with ya’ll done deserves it. Imagun that, lissenin to ole cuz a quotin bible verse fer eeeternitee, I say can I git a yayahh Gessuz!
On the beach in horry
All those Prius’s are bad for my business!! ( solar & wind farms offshore doesn’t hurt my feelings, I work on the Marine side of offshore oil and gas, so they’ll still need ships and qualified operators…..now those guys in the rig floor, better get some schooling!!)
Ain’t gonna lie, my paychecks, perks and bonuses have all but dried up compliments of this ole oil cost. I’m happy to still have a steady check, but the happy days are over.
The comment about the $100,000 bubble job actually only costing $50,000……there is no better truth than that, every job and contract is under constant scrutiny, last years price is a joke this year.
Stock up and cycle it out the cheap prices for storing fuel……1 well planned explosion in the SOH (Straights of Hormuz) will send prices skyrocketed IMO; not advocating that, but I have to wonder if that’s a planned action in the near term.
on the beach in horry
Betting the Dow 30 goes down.
Oil, who knows???
To much crazy stuff going on.
Placed a long story on ‘Salt of the Earth’, but alas, went into moderation… Hope yall like it.
To all here.
Please thank Mac for all he has done here.
Sure the comments make this site exciting, great to read things that others write and post.
I try to limit what I post here, and what I do post I hope makes one smile, laugh, and think…
Thank you Mac….
Enjoyed your story, eppe.
I bet the markets are down today also. The world markets site I have as a fav, shows everything around the world in the red in the past 18 hours.
I don’t remember ever seeing all markets, everywhere, in the red at the same time period.
I wonder if this is an indicator of how they will close and open Sunday, and Monday? Shemitah may be more important than the naysayers realize.
We got all our mutual funds out, even before 2008, and have never regretted taking some lumps on the retirement/401k.
I follow because of the old man and his hard head way of thinking and being so greedy. He worked all his life and put it all in the markets. It has worked out pretty well for him, but at near 80, he should be out of it completely.
I put a spark in him last week, and he was supposed to meet with his broker last wed. Hopefully, he listened to some sound advice. He would not listen in 2002, but did what his broker at the time, said, and it cost him about 10k. If he had listened to me and sold some junk stock, and bought a stock that had dropped to $7.00 and change price in March of 2003, it was selling for $45.00 in June this year. After fees, he could have sold 1000 shares and racked up a profit of about 37k.
Many of the players will lose their shirts this go around, I believe. Some folks have no options of doing anything because they have it all tied up in retirement funds like 401k, and are still working.
Sadly, many may end up with almost nothing.
This is all bullshit we were gouged for years the price of oil is what it should be right now. The oil industry going bankrupt is the biggest lie ever. They are the richest people in the world and will kill millions to keep it that way. Why should we feel bad about cheap oil after being gouged for so long. I fill every other week $40 pretty cheap to get to work. Topped off the heating oil cheap as well $1.99 gal. Was gonna get fire wood but it’s more expensive. Oil is cheaper and no splitting stacking watching a fire. Just set the thermostat and go to sleep. I’m no fool I will take the easier road if it saves me $ and headaches. I know folks that sell their chickens to go to the store and get more meat than the chickens would provide this is smart when you have mouths to feed. Just like gold and silver being worth more than cash that is a hoax when your paying more than spot for it. Casinos were built to make ordinary folks rich too. The mighty buck is what everyone wants hoard them and your set.
SEND THEM ALL FUCKING BACK TO SYRIA
If Islam is so fucking great why do they need to be let in to Europe?
Why?
Because your phucking Kunt asswipe nation is making life unbearable for EVERYONE on this planet.
A nuke soon comes your way, sadly, but karma settles all arguements.
Trex & Sgt, An old one, but rings true…
Sorry, it has a few verses at the bottom…
SALT OF THE EARTH Dr. Babu Philip
A king had three daughters. He wanted to test their love for him. He called them and asked them, “Tell me how much do you love me.”
The eldest daughter said, “Father, I love you like jewellery.”
The king was very pleased with her as he was very fond of gold and jewels and had a large collection of exquisite jewellery in his palace. The second daughter said, “Father, I love you like the best wine!” The king was happy to hear this as he was addicted to wines and other alcoholic drinks.
Then the youngest daughter replied, “Dear Father, I love you like salt.” The king became furious on hearing this reply. Angrily, he shouted, “What do you mean, you mean creature? Salt is a useless, cheap and ordinary object which you can find even in the poor slums of my kingdom. I know you don’t love me. I don’t want to see you again. Go away.”
But the youngest daughter met the palace chef and requested him to avoid salt in all the dishes to be served during the royal feast on the next day. The old chef had a special affection to the youngest princess as she was simple, humble and innocent. He agreed to do as she wished.
During the feast, the king tasted his favourite dishes and cried aloud, “What is this? It has no taste at all!” He summoned the chef and questioned him. The wise chef answered, “Oh, Sir, I was afraid to include salt in the royal dishes because yesterday you declared in the court that salt was a useless and ordinary article. I avoided it .”
The king learned a lesson. He realized the importance of salt and asked the youngest daughter to forgive him for his harsh remarks and rash behaviour. He understood the extent of her love towards him and embraced her.
Jesus announced the Beatitudes during the ‘Sermon on the Mount’. Following this sermon, He described the responsibilities of His ‘blessed’ followers in the words, “You are like salt for all mankind” {Matthew 5: 13}.
Salt is important and indispensable for mankind in many different ways.
1. Salt enhances the taste and flavour of food and makes it pleasant and palatable. Without salt, many foods become insipid. Its deficiency in food is felt easily.
2.Salt preserves food and prevents putrefaction.
3.Salt dissolves in water and mixes fully with food. It apparently disappears by dissolution or disintegration. Lumps of salt in food may cause objectionable taste.
4. It remains as an invisible presence in the dishes. Other spices like chilly and turmeric give conspicuous colour which makes their presence visible.
5. Salt had a sacrificial significance in the Old Testament. As the salt added to offerings is indestructible by fire, salt represents the eternal covenant with God {Leviticus 2: 13}.
The instruction of Jesus to His followers to be the ‘salt of the earth’ implies that they should mingle freely with others and add flavour to the life of every one to promote peace, fellowship, joy and harmony in society by their silent and sincere service. They should live in close communion with God and men. By their humble and unpretentious actions they have a major role in preserving the integrity, values and moral principles of society. They should be deeply concerned with the well-being of all and serve as the ‘salt of society’. When Christians and the leaders of the Church turn towards wealth and worldliness, they become inert pillars of salt like Lot’s wife {Genesis 19: 26}.
May all be well here…
Don’t you wish more people were salt of the earth???
I do Eppe. But not live in New York.
BigB
BigB, what is the difference between a ‘yankee’ and a ‘redneck’???
About a thousand miles…
LOL
BigB
Peak Oil is the actual reality. This other convoluted unlikely explanation is the powers-that-be’s way of easing the news to the public who are addicted to the Big Oil culture.
The modern public can’t bear to know that their precious cars, trucks, planes and motorbikes and boats will soon be no more. The slump in price is to attempt to woo those who’ve already gone to bicycles and other non-oil transport back to cars.
It ain’t workin’ so, now, this cooked-up scenario of why there’s low prices for oil. It’ll be used, no doubt, as the excuse for many other things, though.
The regime in the United States also floats on the same petrodollar. Americans are just as placated by goodies as are the peasants of the Old World. What a sad outcome for what Thomas Jefferson hoped could become a world of independent yeomen!
Flawed logic in the article… The top graph suggests that, and I quote… ” As Global demand recovers” Recovers???? When… How!!! Never…
We are truly in perilous times. The quickening…
While middle east oil is fast running out we have a large supply here to fall back on. With the planet in a world wide recession the price will stay low for awhile. Eventually it will rise again and we’ll be in the driver’s seat. Perhaps with a new set of politicians in Washington we can get things somewhat turned around and eventually get our heads above water.
A collapse in commodity prices is all a normal part of a Great Depression! That’s cooked into the plan too.
I do remember how Saudi’s crashed oil prices when the solar movement in the US started to reach self sufficiency in the US in the 1970’s. Saudi’s have been brutal and completely self serving in the past, I see no reason why those that were really behind 911, would suddenly find Jesus!
“When that happens” is when you take a bunch of A10 Warthogs and M1 Abrams tanks and go blow the shit out of some goat herders.
If this is the worst it is… you know what? It’s been working since Nixon…
Experiment here all…
Trex & Sgt, An old one, but rings true…
Sorry, it has a few verses at the bottom…
SALT OF THE EARTH Dr. Babu Philip
A king had three daughters. He wanted to test their love for him. He called them and asked them, “Tell me how much do you love me.”
The eldest daughter said, “Father, I love you like jewellery.”
The king was very pleased with her as he was very fond of gold and jewels and had a large collection of exquisite jewellery in his palace. The second daughter said, “Father, I love you like the best wine!” The king was happy to hear this as he was addicted to wines and other alcoholic drinks.
Then the youngest daughter replied, “Dear Father, I love you like salt.” The king became furious on hearing this reply. Angrily, he shouted, “What do you mean, you mean creature? Salt is a useless, cheap and ordinary object which you can find even in the poor slums of my kingdom. I know you don’t love me. I don’t want to see you again. Go away.”
But the youngest daughter met the palace chef and requested him to avoid salt in all the dishes to be served during the royal feast on the next day. The old chef had a special affection to the youngest princess as she was simple, humble and innocent. He agreed to do as she wished.
During the feast, the king tasted his favourite dishes and cried aloud, “What is this? It has no taste at all!” He summoned the chef and questioned him. The wise chef answered, “Oh, Sir, I was afraid to include salt in the royal dishes because yesterday you declared in the court that salt was a useless and ordinary article. I avoided it .”
The king learned a lesson. He realized the importance of salt and asked the youngest daughter to forgive him for his harsh remarks and rash behaviour. He understood the extent of her love towards him and embraced her.
Jesus announced the Beatitudes during the ‘Sermon on the Mount’. Following this sermon, He described the responsibilities of His ‘blessed’ followers in the words, “You are like salt for all mankind” {Matthew 5: 13}.
Salt is important and indispensable for mankind in many different ways.
1. Salt enhances the taste and flavour of food and makes it pleasant and palatable. Without salt, many foods become insipid. Its deficiency in food is felt easily.
2.Salt preserves food and prevents putrefaction.
3.Salt dissolves in water and mixes fully with food. It apparently disappears by dissolution or disintegration. Lumps of salt in food may cause objectionable taste.
4. It remains as an invisible presence in the dishes. Other spices like chilly and turmeric give conspicuous colour which makes their presence visible.
5. Salt had a sacrificial significance in the Old Testament. As the salt added to offerings is indestructible by fire, salt represents the eternal covenant with God {Leviticus 2: 13}.
The instruction of Jesus to His followers to be the ‘salt of the earth’ implies that they should mingle freely with others and add flavour to the life of every one to promote peace, fellowship, joy and harmony in society by their silent and sincere service. They should live in close communion with God and men. By their humble and unpretentious actions they have a major role in preserving the integrity, values and moral principles of society. They should be deeply concerned with the well-being of all and serve as the ‘salt of society’. When Christians and the leaders of the Church turn towards wealth and worldliness, they become inert pillars of salt like Lot’s wife {Genesis 19: 26}.
May all be well here…
Sorry all, 2.75 hr in moderaton…
Strange…
I just found a source for old gas cans, so I’m going to buy all of them. Then, when I think gas is about as low as it will go, I will fill up the cans. As I empty one, I’ll get it refilled. That way, I’ll be ahead of the curve as the price goes back up.
@Archivist,
It is just such a hassle to keep track of how long you have had the gas. Plus I really, really hate rotating it into my cars by hand out of the can. I do it but it it’s one big merry go round. To top it off these new gas can spouts are a bitch to work with.
BigB
That’s why I’m buying old gas cans. Also, when an old gas can gets empty, I refill it from one of the new cans that I hate. I have one that I can’t even get the spout to work.
The old ones I am buying are $5 or less apiece. Plus the person I’m getting them from wants to give me some of them free because of a little work I did for them a while back. I didn’t charge them, but they still want to pay me some how.
The Asian markets are now open and every one but Bombay is in the red. We might have another red day in the US tomorrow.
I was at a gathering earlier this evening, and even some of the older people without internet were mentioning the Shemitah and what might happen to the stock market sometime in the next month or two. I think more people are seeing what’s happening. I just don’t know how many are actually doing any prepping. It may just be OPSEC, because I don’t tell just anyone what I’m doing either.
I’ve been in the oil industry for 35 years. There are regular cycles up and down in prices every 5 to 9 years. This down cycle is being manipulated down by our government more than in the past for 2 reasons. First, we are trying to break the oil cartel controlled by the Saudis. With the Saudis income less than half what it was just a year ago it is causing big problems for the royal family there. They can no longer support the promised social programs and their citizens are becoming restless. The longer the prices stay low, the more problems the royal family will have maintaining power. It seems the administration in Washington no longer wants to cozy up to the Saudis as in the past and is trying to destabilize the whole middle east. 2nd, Washington is trying to cause an economic collapse of Russia. Russia needs $90 to $100 oil to fuel their economy, anything below that and they are losing ground. This is why they are having expansionist dreams again, they need to rob their neighbors to fuel their economy as well as rebuild their military. Our problem is the saudis, russians, and now the Chinese realize the USA started this economic warfare and are teaming up along with other countries to destroy the Petroleum Dollar. With the USA now over 18 trillion in debt and printing money as fast as the presses can put it out the world is realizing the dollar isn’t really backed by anything. If we didn’t have all this debt, we wouldn’t need to print bogus dollars and the world’s faith in the dollar as the world’s reserve currency would be safe. The only reason we are seeing a strong dollar right now is because of the collapse of smaller economies around the world. They are investing in the U.S. thinking it’s a safe investment. Soon though, real soon I’m afraid, the rest of the world is going to realize our dollar is about as worthless as toilet paper because we can never pay off our debts no matter how many worthless dollars we print. We are already seeing the russians, saudis, chinese, and Brazil trying to get rid of dollars. Right now, they are doing it in a calculated way so that the still get something for all the dollars they hold. Soon though the cat is gonna be out of the bag and the whole world will start dumping dollars. When that happens you’ll see the dollar collapse almost overnight. Keep prepping my friends, because soon the dollars you have will be worth less than a roll of toilet paper.
Texas prepper
Since you are in the oil business I’ld like to know if there is any truth to something I read on the Internet. Did Isreal discover a huge oil deposit on their land? And if they did, how will that effect The USA? Or is this some BS?
Thank you.
Also: Are not all those bases across the Middle East helping us or not? And Why??
Again Thank You.
Billy Hill
you asked a question a couple of treads ago that I just read.
No I would not lock down the whole town. Only the area where the crime was committed. At most two blocks.
If there was information given that told us that the bad guy was in the 100 block of N Main I would lock down, 100, 200, and 300 North and South. Reason if he is a shooter I don’t want citizens getting caught in a cross fire if there was one. And close off an escape route.
Sgt.
Thinking about getting another 5 gals of gas to put back.
Obummer said America is morally obligated to take in Syrian refugees. Obama is trying to use morality when it suits his causes but making states marry gay couples is totally moral right. Everything Obama says is shit. Let’s jail a woman refusing to compromise her morals. So let’s get it right Obama says what’s morally right in this new America. Dick tater.
Oil still above $2 here, I agree with the above poster who stated the oil industry have already gouged enough. Where are all those hundreds of billions of dollars stashed away? No pity here for the mass polluters of the entire Earth environment. The auto manufacturers are no better with their pitiful gas hog autos they churn out that die inside a decade at grossly escalated pricing. What a freaking joke! This ain’t progress. This is going backwards. What a crony corrupt system set up to impoverish the masses. Watching the sheer stupidity of the Civil war replayed on PBS is depressing, countrymen against countrymen waging war against each other for absolutely nothing. Today’s mindset has barely budged from that insanity.