Oil theory

Tuesday, 06 January, Year 7 d.Tr. | Author: Mircea Popescu

So I'm by no means an energy trading specialist. Not even close. My interest in that field is peripheral and vague. I am also not a Middle Eastern politics specialist, also not even close. In fact, my interest there is also peripheral and vague, sort-of like you care about sperm whales. "Oh, there exist sperm whales ? And they go around on wheels chewing nonpareils ? How interesting." sort of thing.

Nevertheless, there is a theory that I wish to air, mostly because I can't evaluate on my own - is it something like the whales on wheels or is it more like the Earth spinning around the Sun rather than the reverse ? By all means, actual specialists in either field please, chip in, be it publicly or privately. It goes like so :

    Oil does not come out of the ground naturally, is the unfortunate fact of the matter. Extracting oil is an industrial process, and that industrial process has costs, like any other. The cost to extract one barrel of oil varies, from about 170 dollars in Venezuelai to about fifty-something in Saudi Arabia. Pretty much every producer worth the mention out there falls somewhere on this range, from fifty to a hundred and more.

    The current price of oil is ~47 for WTI, ~50 for Brent. In any case oil is currently being sold for prices under production cost, by all producers. This rare situation, giving the "Peak Oil" agitation a few short years back the very chilling "Global Warming" treatment, is the result of a very amusing interplay of unforeseen consequences, illustrating just how much of governmental policy is essentially built on a "nobody could have foreseen using a plane as a rocket". (Hint : all of it.)

    So : ever since the normalisation of relations after the Oil Shock ('73), the agreements between OPEC and NATOii included a fixed minimal allocation of oil to be sold "no matter what". Price was not specified, on the general assumption of all those involved that Peak Oil, and so generally speaking there's no need. The exact amount can be discerned by simply looking at outputs.

    The current winter has been very mild, and unexpectedly so, which means energy reserves are not drawn as quickly as expected. The US industry (notwithstanding an 8th consecutive quarter of "growth" reported by Wall Street on the strength of sheer inflation) is weaker than it has ever been, and not likely to ever recover. These factors together worked to bring the actual NATO oil need under its allocation for the first time in the forty years since that allocation exists, and otherwise for the first time since the Industrial Revolution some centuries ago. It's really an incredible, history bending first, this. For the first time ever, what used to be the growing body of the West no longer can absorb all energy available and grow on it. Peak Oil indeed, just... a different kind. But anyway.

    Normally the Saudis would have denounced or modified this agreement, but they do not for a number of reasons. One is that the dim, anemic but also only attempt by the US to reindustrialise is centered among the "alternative energy" flag, which is entirely predicated on oil being scarce and thus expensive. Things like Obama's signature "we'll take oil, make fertilizer, pay Monsanto, ferment the corn, make ethanol, change all the engines to less efficient types, because this indirect path creates more jobs than simply distilling the oil" entirely relies on oil not ever going under 100 a barrel, and that in inflation adjusted dollars, so it'd be about 140 by now. The scheme barely works even then, but it's beyond ridiculeiii with a barrel under 50 2015 dollarsiv.

    The US side meanwhile doesn't say anything because hey, cheap oil!!1 (the anti-industrial politicos don't say anything because they figure, in their very dim witted approach to figuring, that this would hurt Russia, at which they're very shake-child-fists angry because it made a mockery of their precious NGO "activists"/nulities, whom they nevertheless whiteknight with all the dedication displayed by the average Internet-enabled chronic masturbator). Russia doesn't particularly mind, because on the mid and long term the destructuring of the US's only [half]serious attempt at reindustrialisation is doing more for its strategic goals than anything it could directly do, and on the short term it really makes no difference, in fact if anything it seriously strengthened Putin's political position (especially in things he wants that aren't easy to get, like get the country more industrially independent, but without using Stalin's methods to achieve such). China doesn't actually believe in interacting with the lower beingsv, so what would it say.

    Cheap oil will therefore continue for at least a year, its most important effect being the unexpected, unprepared for and uncontrollable de facto ballooning of derivatives. The way this works is that if you have ten dollars' worth of actual oil, atop which fifteen dollars' worth of sensible derivatives are carried, the pile of two hundred dollars' worth of insane derivatives are anchored to reality at a ratio of 1:8 or 1:13, depending on how stringent you are with your "banking sector stress tests". Should the oil volume fall to a third, and its price by half, and the derivatives by 80% you now have the much more economically sound situation of a dollar and a half's worth of oil plus three dollars' worth of oil derivatives. Upon which more economically sound situation the same pile of two hundred dollars' worth of insane derivatives are anchored at a ratio of 45:1. Obviously reality doesn't work that simply, because there's also precious metals (heh) and real estate (heh-heh) and other things (like you know, Sony's Intellectual Property, a good anchoring for tons of speculative debentures etc).

    In short : nothing could have been worse for the US in 2015 than very cheap oil, and it's getting it. Good luck and all that.

Comments welcome below.

  1. That country is completely nuts, incidentally. It is perfectly possible for their costs to reflect more of the antieconomic nature of their social arrangements than have anything to do with the topic of oil extraction. Speaking of which, here's a still open exercise. []
  2. Calling it the "US" would be a misnomer. There's layers in the cake the US presents to the world, one's the US proper, a wider one's the 5Eyes spying conglomerate, wider still is the NATO military conglomerate, an even wider one is the "Democracy" ideological conglomerate (notably, there's no difference between "democracy" as used by the US propaganda and the same "democracy" used by the Soviet propaganda - they're both propaganda items, chosen for the positive feelings likely to evoke in the naive target, otherwise unrelated to reality), the sort of folks making a lot of hay about the "public opinion" composed of their own agenda items and how outraged it is, and so on. In this case, it seems to me the proper layer's the third. []
  3. Which will readily explain why all the "comedians" avoid ridiculing it. []
  4. About 15 cents in 1973 dollars. []
  5. You perhaps forgot, having the short memory of white worms, but the original reason the Chinese imperial government didn't want to sign trade agreements with the English two centuries ago was that such a deed would imply some sort of similarity between the white worms in question and the Celestial Throne, a concept thoroughly incomprehensible for the locals at the time. At this time. []
Category: Actiuni si Optiuni
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10 Responses

  1. Do the whales eat the nonpareils one at a time?

  2. Mircea Popescu`s avatar
    Mircea Popescu 
    Wednesday, 7 January 2015

    No, he scoops them.

  3. Good points all round.

    It isn't the dropping oil price that will destroy America's pathetic attempts at re-industrialization via "make more jawbs" technologies... these technologies are built to destroy themselves and leave nothing but a smoldering pile of government subsidies, hope, change, and dead-end careers behind. The point of technology is to reduce the amount of work humans can do—to increase the marginal productivity of labor. Any technology predicated on increasing the amount of labor work necessary is not a good technology, it is an anti-technology. It is retardation, quite literally.

    America could only reindustrialize if it were to stop destroying its currency, or if its currency stops being accepted by foreigners in exchange for actual things. Simply, there is no technology on earth as lucrative as Janet Yellen's magic money printer. For only a few cents' worth of labor, millions of dollars can be generated. Magic! So long as these dollars sell, there is no point in America ever producing anything else, as nothing is as lucrative. Once the green toilet paper stops selling... well.. what else are you good at, bro?

    As to oil, I've always liked to say, to paraphrase Milton Friedman: "Oil prices are always and forever a monetary phenomenon." If you look at the price of oil pre-1971, it was just like the price of any commodity on the market, like eggplants or nickel: it would go up or down by a few percentage points every year depending on the conditions of good old supply and demand, you know… “markets”. Then 1971 happened, the USD was completely delinked from gold and oil prices have been as stable as a heroin junkie on a roller-coaster. That, in my opinion, is because the dollar went from a gold standard to an oil standard. The main reason the USD has not become toilet paper yet is the aforementioned agreement between NATO and OPEC, whose most important factors are not the purchase of oil itself, but the stipulation that OPEC members will only price and sell their oil in USD. This means that any country that wants to import oil will need USDs to pay for it, which means governments the world over need to stockpile tons of USD for their foreign transactions and pray that it doesn’t devalue too much, and once you’ve given the USD that large amount of demand, it makes sense for most other transactions to be denominated in USDs, and so most countries still hold large reserves of USD, even though it’s lost about 95% of its real value since 1971.

    This also helps explain why the US suddenly becomes so fixated on the human rights of people living under the OPEC governments whenever these governments make a squeak about wanting to sell their oil in another currency. The US is not after their oil, there were no giant oil tankers going to Iraq to steal the oil and give it to middle America for free. The point is just to ensure that middle America and the rest of the world continue to only buy USD-denominated oil.

    And this arrangement has also meant that oil is the first bubble to be inflated by the Fed’s magic money machine. As inflation increases, oil becomes a good hedge for producers and consumers, and so its price rises a lot, as has happened with every inflationary bubble since 1971. As soon as inflation subsides a little bit, the price comes crashing down. This is happening now thanks to the end of QE; it happened in 2007-8 when interest rates were raised, it happened in 1980 when Volcker came and provided some adult supervision to the Keynesian retards, and many more times. Oil, it seems, is the canary in the mine of Mises and Hayek’s business cycle story.

    There is no such a thing as a coherent US policy, so it makes no sense to ever talk about what the “US wants” since “the US” is a constellation of millions of politicians, bureaucrats and countless other parasites each with their own agenda and misunderstanding of how the world works. So the US does not want a low price or a high price, various groups want various different things and the price itself really doesn’t matter in the grand scheme of things; what does matter, and matters a lot, is that oil is priced in Dollars. Otherwise… America will then need to actually get a job doing something useful. The horror.

  4. Mircea Popescu`s avatar
    Mircea Popescu 
    Wednesday, 7 January 2015

    This means that any country that wants to import oil will need USDs to pay for it, which means governments the world over need to stockpile tons of USD for their foreign transactions and pray that it doesn’t devalue too much, and once you’ve given the USD that large amount of demand, it makes sense for most other transactions to be denominated in USDs, and so most countries still hold large reserves of USD, even though it’s lost about 95% of its real value since 1971.

    This is another perfectly valid avenue to consider the same problem discussed in the article re derivatives. So : if the price of oil drops, and the demand drops as well, the total impact of oil purchasing in those budgets is cut both ways. And so it doubly makes less sense to either hold USD reserves or denominate other txn in USD. Which, especially when coupled with a constant USD devaluation, means it is in the process of flushing itself out of world trade.

    I have great faith in prostitution. Most of America would make excellent Max Hardcore films. Cheap make-up & vomit y compris.

  5. "Which, especially when coupled with a constant USD devaluation, means it is in the process of flushing itself out of world trade."

    Good point, and as more and more people shift away from the American dream of owning your own car and living in the middle of nowhere and driving everywhere; as sprawl dies and less oil is needed to move things; oil is going to become far less important a part of people's expenditure.

    Yes, and the interesting bit concerns what you will denominate your transactions with, and how? A simple move from USD to other paper currencies is meaningless and unworkable since all these other currencies are simply derivatives of the dollar. But more importantly, calculating prices will create an infinite loop as absurd as America's comic attempts at calculating CPI. If trade between China and Russia is denominated in Yuan, and the value of the Yuan itself is determined by the volume of trade between China and Russia, making the thing a futile exercise in price central planning . Such a system can't work and will trudge along for a period of time until one new global standard emerges and everybody denominates their trade in it. While bitcoin will be this standard in the longterm, perhaps gold will be resuscitated as the global money before that. But for that to happen, central banks need to realize it's the end game, and stop selling their gold reserves to keep the price down, and instead switch to accumulating it.

    As for prostitution, I'm afraid too much High Fructose Corn Syrup has been spilt for this to be a viable and attractive option... but hey... there's a fetish for everything!!

  6. Mircea Popescu`s avatar
    Mircea Popescu 
    Wednesday, 7 January 2015

    The Chinese may build a different fiat out of the Shanghai Co-op. But by and large, currency as a thing may well go away altogether. Consider : why do most people need to touch currency ? They work for the government. They get their daily ratios in government-run canteens (McDonalds/we). They dress in government run shops, by government designs. Everything they do is government, why give them money at all ? Let them have scrip, will be good enough for them (that's where things are going anyway, with the ever increasing restrictions on derp-in-the-street banking, and general handling of currency).

    Meanwhile actual people will use whatever they find convenient, and to a large degree this will be barter implemented as "currency" in the way stuff like the yuan-ruble thing works, but to a significant degree they'll also be Bitcoins. Already Chinese partners are showing a clear preference for clearing trade in BTC over the traditional "wire to HK bank" route. In any case, it's unlikely this will be known to anyone outside of the people directly involved in any trade. The days where random armchair derps could talk about "the economy" are fading fast. Already most of the important parts (say, derivatives) are completely opaque. In another decade, something as banal as a balance of trade will be impossible to put together. And this, of course, for the benefit of the free world, and to the detriment of the various tribes of cattle.

    CBs do so realise. Romania's been buying at every turn. So has India. So has everyone. That scramble is on. Irrespective, I do not believe gold will be it. Gold has major issues which make it a poor fit for a monetary basis, and they've not since gone away.

    Mind that looks never price one out of the whore market (if you don't believe me, go to the ghetto and look around). It's only price that does, and desperate mothers / junkies looking for a fix have no fixed lower price. They'll work hard for very little money doing disgusting things that absolutely kill their life expectancy. Like losers should, like losers always have.

  7. lol, very well said.

    I agree with your points in general, but I disagree that currency as a thing may well go away altogether. Even if the role of currency as a store of value and medium of exchange is eliminated to a large degree by the cattle-ification of citizens and the automation of exchange, the role of money as a unit of measure, to allow humans to carry out economic calculation, will never go away unless we completely destroy any semblance of a civilized economy and the division of labor. It will always be essential for people (and I don't include the cattle who have it all worked out for them) to be able to think thoughts like "If I sell 3 extra shirts I can afford a good steak, or two burgers and a salad" and for that to happen, there has got to be a medium of exchange in which shoes, steaks, salads, burgers and everything else has a liquid market where they can quickly be traded for it. Unless all goods are traded constantly in that medium, there cannot be any meaningful prices, and economic calculation will not be possible. And that, in short, is why a money must emerge on the market, and why it can only be one, or very few. It is better to think of money here as the unit of measure, like a meter or inch. Even if you will never actually use a measuring stick physically, you still need to rely on the reference of the meter as a unit throughout your life.

    The abomination of multiple national currencies is a destructive artifice of 20th century socialism precisely because it makes economic calculation so difficult. It's like having 100 different measures of length, each of which is elastic; good luck trying to build a house with that. The world economy today is a giant workshop where engineers are working with ever-shifting elastic units of measure—unsurprisingly, so much fail happens everywhere.

    Gold has historically been this unit of measure precisely because its quantity does not increase a lot; because annual production is always a tiny fraction of existing stockpiles. This is so because gold does not ruin, and so all the gold ever produced is still piled up as part of the stockpile somewhere out there, which isn't true for any other metal. And because gold cannot be synthetically manufactured, and is very hard to find and produce. This means that global production of gold, every year, only adds about 1.5% to existing stockpiles, and even if by virtue of some miracle production were to double, it would only go up to around 3%. This isn't true for any other metal or asset; everything else is easier to manufacture, and by virtue of ruining and being consumed, its stockpiles are small compared to annual production. For most other things, annual production is around the same order of magnitude as global stockpiles.

    This is what has made gold always serve as the best metric for measurement of transactions. Even for a barter transaction that does not involve gold, the exchange terms of the barter are determined by the exchange rate of the two goods against gold. It is this monetary role which gold is still best suited to serve today, because of its predictable quantity and the assurance that its supply can’t be inflated unexpectedly by somebody else. Which brings us to Bitcoin.

    Bitcoin today has an annual stockpile growth rate of around 12%, which makes it pretty inflationary for a currency, even worse than trash like the USD and EUR. But this growth rate is fast-dropping, and by 2025 it will drop below that of gold and continue to drop further. But in order for bitcoin to become THE metric for value measurement, everything will have to have a liquid market in bitcoin, which is going to take some time. The old yellow fellow may not be dead quite yet, as it’s had a 10,000 year headstart on bitcoin in setting up liquid markets for things.

  8. Mircea Popescu`s avatar
    Mircea Popescu 
    Thursday, 8 January 2015

    It's not that currency as a thing will go away. It's the automatic assumption that "anyone" may interact with currency that will go away. For most of history this was the case, the Southern gentleman, be he in the south of England or in the south of the US could scarcely imagine what the girl rubbing the floors on her knees would want or need with currency. Currency generally is in the hands of a selected few, this situation where every man woman and child holds some is an exception, and I suspect coming to an end.

    "Humans" don't need and shouldn't find themselves in the position where they make judgements, principally because humans by and large are horrible at using the noggin. Reddit is good enough for them, they have the infinite supply of ups and downs and likes and whatnot to spend to their heart's content, let them have that and no more. It's what's adequate and proper.

    The notion that gold supply does not increase a lot is predicated on obsolete technology. Gold supply would increase quite a lot, and in really harmful ways involving cyanide, if it seriously became monetized. But that's really a tiny point, there's worse problems with gold.

    As to Bitcoin, you will notice that exactly as predicted, the shitgnomes are already attacking its noninflationary nature (for now, trying to inflate the blocksize, just) and as you well observe (as have I for that matter), Bitcoin is pretty inflationary. The notion that the honest network will survive in 2025, once deflation is raping the reddit horde bloody left and right is perhaps far fetched. According to the same self-delusion horde, the side that is going to murder thewm in the current bitcoin fork war is "small but disproportionately vocal". Think about what "putin is a psychopath"-isms will be on the table by 2025, when "evil racist people" refuse to even consider the "inflation is good for everyone" mantra.

  9. saifedean`s avatar
    Thursday, 8 January 2015

    " Gold supply would increase quite a lot, and in really harmful ways involving cyanide, if it seriously became monetized."

    So, hypothetically speaking, imagine gold goes to $10,000 an ounce, and suddenly every abandoned mine is now profitable again and production ramps up. So... we get a quadrupling of annual output, which increases the supply by... 6%. What's more, if that same quantity of output is maintained for next year, which isn't easy, the growth in the next year will be less than 6%, since it's now that same quantity divided by 106% of the initial supply. And as time goes on, the growth rate will inevitably decline, because the extra production is being added onto the stockpiles, and the damn yellow thing won't rust or ruin! Compare and contrast with government toilet paper, growing at around 5% only in a good year, and varying anywhere from -15% to +15%. Ideally you'd want your money supply fixed and growing at 0%, but in this classroom of rapidly expanding girls, gold is still the one getting fat slowest, by far.

    As to Bitcoin, I have no illusions about the accusations of evil racism and child-hatred that will be leveled at all of us who like its noninflationary nature. But I also don't give a shit, because I can't see this making a difference in the long-run. It isn't the propaganda and accusations of child-hatred that demonetized gold; it was the fascist regimes of FDR, Hitler, Stalin, and the international socialist brotherhood that physically took it from people at gunpoint, banned them from using it, and kept it in store for the service of international socialist criminality and the Dollar. The anti-gold pro-inflation propaganda was the apologia for that, to try to get the raped to think her violation was actually romantic and beautiful. Bitcoin is not gold, and it's not 1934 anymore and nobody is going to collect bitcoin at gunpoint, and criminalizing it won't work. I can't see any inflationary fork surviving for long, and I can't see the blockchain going anywhere. Whatever propaganda comes out, the blockchain will still continue to record transactions and people will still want to use it.

    Are you suggesting bitcoin isn't likely to survive till 2025? Why?

  10. Mircea Popescu`s avatar
    Mircea Popescu 
    Thursday, 8 January 2015

    That's not exactly what I had in mind on that side. Imagine this : there's currently 100 competent engineers (using the term as a generic symbol) in the state of New York (might be an overstatement). Everyone that needs engineering done in there is stuck queing for their time, wait lists run about a year long.

    Gold (the monetized variety) is discovered. 60 engineers will now employ themselves at digging trenches through the earth, leaving plumbing and doors actually closing to the remaining 40, of which 10 get depressed and die. Queing now runs for 5 years, and people just start shooting each other in line.

    Meanwhile, if this magical gold dust is worth the time of 40 of the 100 engineers (really, the only people worth the mention in all of NY) plus the untimely demise of another 10, then it definitely is worth stealing. Currently Fort Knox is not being raided because it's not worth it, not because it's not possible. It's plenty possible, and anyone who can't make it as an engineer would be out there with a rifle, overwhelming what's left of the police (those guys that didn't go to Youkon anyway - speaking of which, "Contempt of court. However, I'm not going to punish you, because we're so short of judges at the moment, what with all of them emigrating to South Africa. I'm going tomorrow; I've got my ticket. Get out there and get some decent sentencing done. Ooh, England makes you sick. Best I can manage here is life imprisonment. It's hardly worth coming in in the morning. Now, South Africa? You've got your cat of nine tails, you've got four death sentences a week, you've got cheap drinks, slave labour and a booming stock market. I'm off, I tell you. Yes, I'm up to here with probation and bleeding psychiatric reports. That's it, I'm off. That's it. Right. But I'm going to have one final fling before I leave, so I sentence you to be burnt at the stake.").

    None of which are actually the problem. The main problem is that the virgin's slightly pregnant : once gold market has been manipulated with the worthless government-backed paper "gold" issuances, one can never seriously trust any sort of gold "receipt". Thus the only way to trade gold is physically, at least for a few decades, which absolutely requires the individual use of force (and makes a terrible use of most men's time, patroling their basement with rifle in hand), which arrangmeent makes the state that caused the proiblem an impossibility in the first place anyway.

    So in short, gold would be a solution for a problem we have but only in an alternative world where that problem didn't exist. Which...

    Note that the gold stuff did make a difference in the long term, which is why a ton of gold today is worth significantly less than a grain in the 1500s. I'm not suggesting it's not likely to survive, I'm merely pointing at the sharks already forming brigades.

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