SUBHEAD: A downward price/availability spiral could take hold over a period of just a few months.
Image above: Autos on American highways maybe be out of reach with oil at even $60 a barrel. From article.
By Steve Ludlum on 6 August 2010 in Economic Undertow -
(http://economic-undertow.blogspot.com/2010/08/heaving-into-view.html)
The media retirement of economic bogeymen such as Dubai World, California and Portugal by the expedient application of (self- borrowed) money would seem to clear the way to unbounded bull markets in equities, bonds and commodities. Who cares about the real economy or Main Street when computers can make money selling that one share of Cisco stock back and forth 6 billion times a day?
How easily are corroding structural deficiencies slain by soothing words and finance trickery! Since the 'Crisis crisis' has begun, nothing important has been fixed. At the same time, the idea advances that, 'what is not on television does not exist'. In our bizarro-world the absence of ongoing catastrophe suggests 'recovery'. Nonsense is a substitute for 'positive thinking' and 'confidence'.
The idea is to keep the borrowers paying interest and lenders from calling in their loans or selling these assets for what ever cash that can be had behind the cushions of car seats and sofas.
The struggle of Nymex crude to break out of the $80- 82 price level (along with gold's struggle to retest $1220/oz.) suggests that despite the whoopla the country is poorer than it was back in May, certainly a lot poorer than we all were back in the summer of 2008, when oil futures were bid up to ~ $150 a barrel.
The dollar crude price is an analog of disposable wealth and available credit. Shrinking high prices paid for crude since 2008 suggests that wealth and credit are shrinking as well. This price shrinkage trend is taking place within the context of a structural bull market in crude that began in 1999. The world does not use remarkably less crude, 'peak demand' is a myth. The constraint is on consumption which which struggles to generate returns sufficient to service itself. Commerce would certainly willingly pay whatever price to ensure the continued flow of what is essential to its own survival.
Right?
Since commerce lends into existence whatever funds it needs the limits to the amount of 'wealth' that can be generated is what borrowers can afford to repay. That amount appears to be declining:
The black arrow indicates the decline in high dollar prices since 2008. The price itself does not make any judgment about the amount of oil available nor does it suggest oil' 'real price' or value measured against the value of the goods/services it enables.
Here's weekly crude with weekly gold Comex futures superimposed. Gold is another measurement of credit availability. Dollars are lent into existence to buy the gold. The currency value uncertainties that have driven gold prices to this level have not disappeared, but the credit/wealth availability has done so to some degree.
If we cannot afford $82 a barrel then the nightmare scenario begins to emerge from behind the curtains the establishment has been draping over it since 1982.
This being when oil that is affordable to its end users cannot support replacement oil production.
Think about it for a minute! Peak oil is always framed as a physical relationship between available reserves or production flows relative to consumption. What matters most is whether consumption can pay its own way.
It's difficult to visualize as it is the 'flow itself that measures the flow'. We need higher oil prices to allow the 'industry' to profitably pump new oil out of the ground a mile or more under the ocean or beneath the arctic or in other hostile or hazardous production environments.
This new oil is to replace the much cheaper oil that was extracted from dry- land wells - which is rapidly depleting - as well as supply the expanding consumption of both the industrial and developing countries.
The effects of declining ability to pay are likely to arrive far in advance of the physical limits to the same production. What is unknowable is what the triggering price level will be? It could be $70. At that price the oil that costs more than $70 to produce would be shut in leaving the consumers with rapidly depleting oil that costs less than $70. This shutting in process would represent a real reduction in available reserves which would be felt almost at once in the form of physical shortages.
As more oil is depleted from the easily accessed reservoirs what is left would become either unaffordable - due to scarcity - or would be held off the market. The ability of commerce to leverage oil into returns would decline faster than the availability of crude itself. Eventually at- scale industrial commerce would falter as affordable oil inputs disappeared into a compounding energy- decline spiral. Unlike physical depletion that can take years to manifest itself, a price/availability spiral could take hold over a period of months.
The rationing mechanism of higher price would not be 'available' since price rationing is what has been taking place all along - since 2004. This is not a new phenomenon rather a matter of people purposefully not paying attention. Price rationing would in fact be the precipitate cause of the shortages. The price at the time would represent the highest affordable to the market, just as it is now. There would not be the funds available to press prices higher except for the shortest term - in the form of emergency government loans or 'free' oil from the (insignificant) strategic reserve.
Loans would not really work that well as they would not represent any real value but rather a re- division of existing value or redundant claims against it.
Since a high and increasing price for oil is required to pay for oil- dependent alternatives, (the flow that measures the flow) the economically destructive price level would fall to less than the cost of replacements. The declining short-term price trend suggests this process is underway, fewer have money in their pockets to afford high tech energy alternatives. This is because of the largely absent returns on the consumption of petroleum.
Alternatives are oil-dependent because they are and must be (for the foreseeable future) products of the petroleum economy. An alternative-energy economy does not exist yet except in a few places such as near hydro and nuclear energy sources. These are held hostage to the petroleum economy, to a very large degree, by the same 'return-on-consumption' price mechanism.
The real problem is the (dishonest) interchange of resource capital with 'time' capital. There is no real return on the use of our natural capital other than its sale. This is the same return as on time ... which is an abstraction, costs nothing and creates no waste. Corporations and businesses are theoretically eternal and have access to limitless amounts of time. By pretending that oil is another form of time and by pricing it the same way we have outwitted ourselves into squandering our irreplaceable capital.
Nevertheless,
the establishment endlessly promotes auto-centric consumption with the single- minded intensity of the truly insane.
We are all 'saving time' ... right?
What do you do with all the time you save?
The check-mate of this economy of 'predator/prey' and game theory heaves into view. It's all on that oil price chart and its accusing black arrow.
.
The black arrow indicates the decline in high dollar prices since 2008. The price itself does not make any judgment about the amount of oil available nor does it suggest oil' 'real price' or value measured against the value of the goods/services it enables.
Here's weekly crude with weekly gold Comex futures superimposed. Gold is another measurement of credit availability. Dollars are lent into existence to buy the gold. The currency value uncertainties that have driven gold prices to this level have not disappeared, but the credit/wealth availability has done so to some degree.
If we cannot afford $82 a barrel then the nightmare scenario begins to emerge from behind the curtains the establishment has been draping over it since 1982.
This being when oil that is affordable to its end users cannot support replacement oil production.
Think about it for a minute! Peak oil is always framed as a physical relationship between available reserves or production flows relative to consumption. What matters most is whether consumption can pay its own way. It's difficult to visualize as it is the 'flow itself that measures the flow'. We need higher oil prices to allow the 'industry' to profitably pump new oil out of the ground a mile or more under the ocean or beneath the arctic or in other hostile or hazardous production environments.
This new oil is to replace the much cheaper oil that was extracted from dry- land wells - which is rapidly depleting - as well as supply the expanding consumption of both the industrial and developing countries.
The effects of declining ability to pay are likely to arrive far in advance of the physical limits to the same production. What is unknowable is what the triggering price level will be? It could be $70. At that price the oil that costs more than $70 to produce would be shut in leaving the consumers with rapidly depleting oil that costs less than $70. This shutting in process would represent a real reduction in available reserves which would be felt almost at once in the form of physical shortages.
As more oil is depleted from the easily accessed reservoirs what is left would become either unaffordable - due to scarcity - or would be held off the market. The ability of commerce to leverage oil into returns would decline faster than the availability of crude itself. Eventually at- scale industrial commerce would falter as affordable oil inputs disappeared into a compounding energy- decline spiral. Unlike physical depletion that can take years to manifest itself, a price/availability spiral could take hold over a period of months.
The rationing mechanism of higher price would not be 'available' since price rationing is what has been taking place all along - since 2004. This is not a new phenomenon rather a matter of people purposefully not paying attention. Price rationing would in fact be the precipitate cause of the shortages. The price at the time would represent the highest affordable to the market, just as it is now. There would not be the funds available to press prices higher except for the shortest term - in the form of emergency government loans or 'free' oil from the (insignificant) strategic reserve.
Loans would not really work that well as they would not represent any real value but rather a re- division of existing value or redundant claims against it.
Since a high and increasing price for oil is required to pay for oil- dependent alternatives, (the flow that measures the flow) the economically destructive price level would fall to less than the cost of replacements. The declining short-term price trend suggests this process is underway, fewer have money in their pockets to afford high tech energy alternatives. This is because of the largely absent returns on the consumption of petroleum.
Alternatives are oil-dependent because they are and must be (for the foreseeable future) products of the petroleum economy. An alternative-energy economy does not exist yet except in a few places such as near hydro and nuclear energy sources. These are held hostage to the petroleum economy, to a very large degree, by the same 'return-on-consumption' price mechanism.
The real problem is the (dishonest) interchange of resource capital with 'time' capital. There is no real return on the use of our natural capital other than its sale. This is the same return as on time ... which is an abstraction, costs nothing and creates no waste. Corporations and businesses are theoretically eternal and have access to limitless amounts of time. By pretending that oil is another form of time and by pricing it the same way we have outwitted ourselves into squandering our irreplaceable capital.
Nevertheless, the establishment endlessly promotes auto-centric consumption with the single- minded intensity of the truly insane.
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