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THE MARKET GETS OILED! 18 Feb. 2016 PDF  | Print |  E-mail

THE MARKET GETS OILED!

18 Feb. 2016

Dear Friends and Patriots,

          The stock market seems a bit bearish these past couple of months.  It’s no wonder.  Sooner or later the barrel price of oil was bound to have an effect.  Oh, it’s true most people tend to celebrate cheap oil, and rightly so.  But, there is a point beyond which it becomes apparent oil has become too cheap, and the attendant costs of cheap oil begin to affect the nation in a negative way.

          The current condition of the US stock market, as well as all the stock markets and economies of the world, is pretty poor.  The wave the markets rode upon for the past few years was never much more than the effect of bad economic policies.  Even the dumbest Keynesian money manipulator understands quantitative easing (QE) is a risky gambit at best and, if continued too long, has a significant destabilizing effect.  The US decided to lead the world’s money manipulators by carrying on QE for a protracted period of time.  Our Fed dumped trillions into the coffers of the major New York banks in a concerted effort to inflate the dollar and weaken it when compared to the other major currencies of the world.  Lucky for us (if you think ‘lucky’ is the right word) the rest of the world was practicing dumb economics in parallel with the Fed and it appears the entire QE effort backfired.  Instead of weakening, our US dollar grew stronger.  Worldwide attempts at money manipulation seemed to do very little, either positive or negative.  The Japanese central bank became so desperate for signs of positive change they doubled their rate of QE money dumping, to no avail. 

          Last fall our Fed decided to cease QE and allow the interest rate to rise.  A proper characterization is, they allowed interest to be charged.  For several previous years the Fed not only increased the money supply, but gave that money away.  It was free debt.  Think about it another way – our government wanted our fiat currency to be given away to any taker.  For the big banks it was the same as a private individual obtaining a home or car loan with no money down and zero interest.  The policy should have produced significant inflation, which would have translated to phony economic growth.  But, it didn’t.  It didn’t do much of anything at all.

          Today’s question regarding the economy relates to the relative power of currency manipulation when compared to that of a major commodity.  The Fed’s game with the money supply seemed to affect our economy very little.  It had a positive effect in only one economic sector.  Riding that wave of zero interest money the US stock market saw steady gains from its valley in the 7,000s up to its peak at over 18,000. Those who played market gains got very, very rich.  Those who didn’t, didn’t.  But, they didn’t get much poorer, either.  It would be very easy and relatively correct to state the entire Fed QE gambit was a currency scam designed to allow a certain segment of our economy to grow very, very wealthy.  What’s strange is the people behind it are the same people who constantly and publically carp about “The 1%” and how unfair the concentration of wealth there and the ever-shrinking middle class is, and how destructive it all is to the economy and the so-called “average guy.”  They blame capitalism for it all, even though there’s very little about these shenanigans that represents free-market capitalism.  No, we’ve been experiencing a highly contrived and regulated form of capitalism, with little about it that’s free.

          While all the financial manipulation was going on in the major industrial nations there was a parallel economic phenomenon happening in the Middle East.  The price of oil peaked several years ago and had been slowly and gently falling for some time.  Those in the major oil producing Arab nations understood it served them little if western economies collapsed.  They needed strong customers.  If the money policies of the west tended to make the consuming nations weaker, giving them a small break on the price of oil would at least ensure the flow of wealth from the west to the oil producing nations continued at a decent rate.  The oil price policies of OPEC seemed to moderate the financial insanity of the west and the world economy seemed to be in a sort of stasis.  But, it was all an illusion and bound to fail over time.

          The balance of the world’s economy was upset once the US private oil industry went whole-hog into fracking.  There was a relatively brief period of about three years before the US domestic oil industry began to show the rest of the world its potential to change all the economic dynamics in play.  Once the US oil and gas production began to ramp up at a steadily increasing rate there were lots of other nations wanting to get in on the game.  Many European nations realized their socialist economies could reap major rewards from fracking and might even wean themselves from dependency on Russian energy supplies.  Instead of being hostages to the whims of a strengthening Russian bear, the western Europeans understood they could regain lost independence.  They knew of the power upsets of a new energy revolution, but it looked like the great debate on the subject might result in a shift of some magnitude in their formerly grass-green energy policies.  The Russians weren’t any too happy.  They joined the Saudis and Kuwaitis in their concern.  Something needed to be done to head off the European stamped toward fracking.  And, it was.

          The era of truly cheap oil is upon us.  OPEC, led by the Saudis and their Arabian Gulf neighbors, decided it had enough of the US move toward energy independence, and the scary prospect of Western Europe following suit.  They knew they could still out-produce the US and had a significant production cost advantage.  Saudi crude can be produced for $5/barrel.  US fracked oil isn’t as cheap.  Originally the Saudis believed our oil to cost over $60/barrel, so their original intent was to drive the world market price to that level.  A funny thing happened though.  Even though $60 was achieved, the US didn’t slow down a bit.  Obviously someone was guilty of false advertising.   So, the Saudis sucked it up and pumped more, then sold at ever lower prices.  It wasn’t until the world price fell below $40/barrel that there was a noticeable reaction in the US oil fields.  New exploration ceased.  Fracking slowly stopped, first with the companies with higher overhead costs, then all of them.  But, the existing wells still pumped, so the Saudis knew they still hadn’t achieve their objective.  They drove the price lower still. 

          World oil production is now to the point there is no place to put more crude.  Full tankers are riding at anchor in harbors all over, waiting their turn to off-load.  Empty tankers are hard to come by.  Tank farms are filled to capacity.  Refineries are running at maximum capacity.  Refined fuel tanks are all filled.  The world is currently awash in oil.  What’s going on?

          One answer is China.   Their bubble has burst.  Their building industry is in collapse.  Their steel industry is in collapse.  Their whole economy is teetering and in danger of collapse.  The Chinese are in something of a panic.  They’ve devalued their currency at least twice.  One would think cheap oil would be their salvation, but the effect of that bargain is lessened due to a weakening demand.  The same is true in many economies of the world.  Even though gasoline and diesel are being sold at fire sale prices demand for the stuff reflects the weaknesses of the world’s economies.  Too many people are without jobs.  It’s really that simple.  In the US alone well over 250,000 oil field workers are idle.  That doesn’t account for the many businesses that have closed due to the shutdowns in the production fields.  Think of offshore service companies, freight haulers, drill pipe manufacturers, waste disposal companies, hotels, cafes, home builders, car dealers, grocery stores, mom and pop stores of all kinds.  The areas surrounding the oil fields were boomtowns just last year.  Now they more and more resemble ghost towns.

          The US stock market, as well as markets the world over, felt the effects as oil company profits began to dwindle.  The markets began to dive.  It was inevitable.  When markets dive, personal fortunes are lost and the cascading effects of poor economies and hemorrhaging financial accounts began to affect those nations perpetrating the entire situation. The money manipulators suffer.  The oil production giants suffer.  The world suffers.

          It appears of late the Saudis and other Arabian Gulf states have woken up.  So has Russia.  Their treasuries have been emptying at an alarming rate due to the low return on their oil production.  Russia is nearing economic collapse and needs to push oil prices higher to avoid a major crisis.  The Saudi royals are emptying their nation’s vast reserve funds in order to continue their nation’s lavish welfare system higher oil prices guaranteed.  In both countries the fear is of domestic unrest.  They all know if things don’t change soon the people of their countries will be adversely affected and won’t take it lightly.  Just last week it appears the move was afoot to attempt to push the barrel price of oil to somewhere in the $40 range.  That price point will give OPEC and Russia some breathing room.  It won’t save Venezuela, but that’s a story all its own.

          What lessons should we take away from all these goings on?  One might be that commodity price manipulation is a mighty risky game.  The Saudis and Russians thought they could drive the price of crude so low the US would be forced to stop pumping oil.  They thought the decline in oil company profits would wreck our stock market.  They were wrong.  It was their economies that ended up being more sensitive to the world price of oil.  That realization came as something of a shock to them.  Now, they’re trying to recover.  It will take a bit of time.  Big ships at sea don’t turn around very quickly, especially when they’ve slowed down to the point they are nearly at all stop.  Even if the price of oil rose to $45/barrel tomorrow it would take a few years for the Russians and Saudis to recover their enormous losses.

          The US economy has dodged two bullets intended to fatally weaken it.  It appears to have survived the Fed’s attempt to bankrupt our nation and push us into the arms of the European Union.  It also seems we’ve weathered the worst of the attempt by the Arab states and Russia to collapse our oil industry and stock market.  The markets will slowly rebound.  Our domestic oil industry will as well. 

          Once the barrel price hits $45 we should see our oil production industry start to revive.  They won’t make the same hand-over-fist, gold-rush level profits they did when oil was over $100/barrel, but they’ll make returns decent enough to take the usual exploration risks.  Once the current glut of oil is absorbed in the world we’ll be back in the business once again, albeit not at the frenetic pace of the recent past. 

          The future of energy in the world has never looked better.  If the Climate Change Nazis would only step aside we could see a new golden age in the world.  There could be enough wealth produced to make huge inroads in dealing with worldwide poverty and disease.  There could be.  But, the Agenda 2030 crowd wants the world to run according to its plan, and that should tell us all there will be yet another game afoot to collapse the US economy.  Just wait for it.  Money and energy price manipulation didn’t work.  They’ll be casting about, looking for the next opportunity.

          My bet is their next gambit will involve food.  Stand by and be vigilant.  They won’t wait long.

 

In Liberty,
Steve