For a while now I’ve studied Oil and how the Saudi’s might be pushing the world into a monetary collapse by flatlining the oil markets it controls. Jeff Gundlach recently suggested that if Oil prices dropped to $40 dollars a barrel there would be dire consequences. “I hope it does not go to $40,” Gundlach said in a presentation, “because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.” (Business Insider) NY Post reported back in 2014 that the price plunge in oil has been driven by Saudi Arabia, OPEC’s dominant power. While it’s true that part of Riyadh’s actions respond to the energy renaissance in North America, the greater motivation is breaking Iran’s will. The Saudis believe they can no longer rely on the US to contain Tehran’s imminent nuclear threat, so they’re out to do what our lukewarm sanctions couldn’t. There’s no love lost between the Saudis and the Russians, either. The Saudis want the Assad regime in Syria to go. Moscow props it up.
Today on CNBC the stock indexes show that Oil is expected to do just that to fall at or below $40 dollars a barrel. (CNBC) “U.S. crude threatened to break below $40 per barrel for the first time since early 2009 this week, raising fresh fears about the cost of producing crude in America’s oil patch—or perhaps “patches” is the better term.” That’s exactly where prices are heading, according to Citibank, which recently revised downward its outlook for oil to an average of $39 per barrel for the fourth quarter of 2015 and first quarter of 2016. And all this as the Federal Reserve makes noise about raising interest rates, having some in the market asking whether these external factors — what the Fed would call “exogenous” factors — will stop the Fed from changing its interest-rate policy for the first time in over almost seven years.
As the Guardian reported Saudi Arabia is sitting on a “war chest” of money it stockpiled when prices were high, Deshpande said. Citi analysts said Saudi Arabia has about $800bn in cash reserves. Venezuela, on the other hand, is a prime example of a country squandering its riches. Citi said for every $10 drop in oil prices Venezuela loses about $7.5bn in revenues. Many smaller countries will go into default economists predict. It will also mean lower wages, a credit crunch with less borrowing power, and many of the sectors in a countries system being either curtailed or ended (i.e., all welfare and subsidiary functions supporting it). Many companies like Schlumberger (Oil Field Services Giant) are laying off large numbers of employees.
Russel Gold traces the history of this to overproduction. The roots of the price collapse go back to 2008 near Cotulla, Texas, a tiny town between San Antonio and the Mexican border. This was where the first well was drilled into the Eagle Ford Shale. At the time, the U.S. pumped about 4.7 million barrels a day of crude oil. “There was, for lack of a better term, an arms race for oil, and we found a ton of oil,” says Dean Hazelcorn, an oil trader at Coquest in Dallas. Because of this ongoing production and oversupply OPEC controlled by Saudi Arabia began a movement to hem in its own members. Saudi Arabia didn’t want Nigeria to develop long-term relationships with refinery buyers in Asia. In late September, the kingdom decided to shore up its hold on them by, effectively, holding a sale. The Saudis cut their official crude price in Asia by $1 a barrel; within a week, Iran and Kuwait did the same.
On Wednesday, Mr. al-Naimi, the Saudi Arabian oil minister, was asked whether OPEC would soon act to cut exports. “Why should we cut production?” he asked. “Why?” (Gold) As reported by Matthew Boesler back in 2013 Deutsche Bank strategists Rocky Fishman, Salil Aggarwal, and Lon Parisi are out with a note warning clients that a “perfect storm” of structural, demand, and supply-driven factors could conspire to cause a “major pullback” in oil prices, with the potential to derail the rally in the U.S. stock market as well. As another analyst tells us “If Saudi Arabia continues to maintain their current market share by further dropping their export oil prices other OPEC members’ economies will increasingly suffer, which could lead to an eventual breakup of the Cartel.”
What does all this mean for us? Gail Tverberg gives us nine reasons that we are we are heading into a deflationary depression:
1. We have been forcing economic growth upward since 1981 through the use of falling interest rates. Interest rates are now so low that it is hard to force rates down further, in order to encourage further economic growth.
2. The cost of oil extraction tends to rise over time because the cheapest to extract oil is removed first. In fact, this is true for nearly all commodities, including metals.
3. Using more inputs to create the same or smaller output pushes the world economy toward contraction.
4. The way workers afford higher commodity costs is primarily through higher wages. At times, higher debt can also be a workaround. If neither of these is available, commodity prices can fall below the cost of production.
5. Part of the problem that we are experiencing is a slow-down in wage growth.
6. We are headed in slow motion toward major defaults among commodity producers, including oil producers.
7. Because many “baby boomers” are retiring now, we are at the beginning of a demographic crunch that has the tendency to push demand down further.
8. We are running short of options for fixing our low commodity price problem.
9. It is doubtful that the prices of energy products and metals can be raised again without causing recession.
Read her article on Our Finite World: Nine Reasons Why Low Oil Prices May “Morph” Into Something Much Worse
So are we moving into a deflationary depression? With the current Oil wars between the Saudi’s and its enemies in Iran/Russia, and its own members beginning to rumble toward a break up of OPEC, and the slow down in production for BP (UK), and US Oil companies and subsidiary industries and layoffs etc.. It seems a good thing for short term consumers, but a bad thing for employment, credit, cash flow, cut backs, etc. which some predict is all part of the deflationary downward spiral we see happening around us.
Is this just the tip of the ice-berg? With China’s current economic issues and calls for currency wars and changes in the monetary system, and Russia rumbling about the oil, the Iran deal and six point plan being made by Obama looking like a concession by the Saudi’s black mail system:
Saudi Crown Prince, Salman Bin Abdulaziz, said the world had “betrayed” the Syrian opposition and that more needed to be done to change the “balance of power” on the ground in Syria. “We are doing more and we will continue to do more,” the Saudi official told the Guardian. “We are going this alone as difficult as it is for us.”
The flaws in the Iran deal seemingly defend Obama’s legacy as a peacemaker, but in fact shows certain flaws in the administrations policies and its support by the UN Security Council. As James Phillips puts it:
The bottom line is that the Obama administration now has signed an agreement that will expand Iran’s power and influence, strain U.S. relations with its regional friends, weaken long-standing non-proliferation goals on restricting access to sensitive nuclear technologies and contribute to the evolution of a multi-polar nuclear Middle East.
Economists look at figures, statesmen and analysts look at politics, does anyone have the larger picture? “Mr. Obama will also have to manage the breach with Mr. Netanyahu and the leaders of Saudi Arabia and other Arab states who have warned against the deal, saying the relief of sanctions will ultimately empower the Iranians throughout the Middle East.” (NY Times)
Is Gail Tverberg correct in her estimation that this is pushing us over the edge and into a period of deflationary depression? Sometimes there is a fine line between critical appraisal and conspiracy, but when one sees the major trends and analyses the facticity of the statements and their history without seeking nefarious powers behind the scenes then it moves out of conspiracy and into the larger frame of global capitalism. Global Capitalism and its current state of affairs is undergoing major restructuration’s and challenges across all nations. This is having a major impact on the Third World as their economic systems falter due to these more powerful entities playing out their black mail politics. With such twisted logics one can only guess at what is going to happen in the coming years.
Conspiracy is bullshit, but the actual workings of global capitalists is bullshit, too. It’s as if we are living in that moment of pure farce that Marx once spoke about: “history repeats itself first as tragedy, then as farce”. If history repeat itself as farce I guess will soon find out… problem is this is no stage event, and real world people and their lives will be not only affected but plunged into chaos, war, and economic disaster that predictably will offer nothing but a new Great Depression on a Global Scale that as some predict may last 25 years or more. One wonders about Jim Rickards but even if his CIA paranoia is even a smidgen correct we’re in for trouble. Even Forbes asks if Rickards is right and sees his credentials and the possible outcome. Yet, Forbes also points out that Rickards, in The Death of Money, is less interested in the death of Federal Reserve Notes than in the resurrection of the dollar as Gold Certificates. So is this just a gambit to move investors out of the stock market and to gold? A return to the Bretton Wood’s Gold Standard? A move to realign our currency on gold rather than fiat money? A CIA disinformation or asymmetric warfare tactic? A conspiracy? A fact? Or a combination of it all? I’ll let the reader decide. Rikards on the coming Depression says:
Today you rarely hear the government talk about the Misery Index with the public. The reason is they may not want you to know the truth. And the truth is, the Misery Index has reached more dangerous levels than we saw prior to the Great Depression. This is a signal of a complex system that’s about to collapse.
I expect the first phase will appear as a nearly instantaneous 70% stock market crash. From the outside, nobody will see it coming. Once it becomes clear that it’s not a flash crash – it’s a systemic meltdown in the economy itself, that’s when the gravity of the situation will sink in. And there will be no digging out from it. $100 trillion is a conservative estimate for the damage. A lot can happen over 25-years as our country struggles to recover from this.
Will this happen? I sure hope not. Dam the leaders of these first world nations if they cause us to plunge…. and dam us for allowing it!