Tuesday, September 25, 2012

Crude Oil, Commodities And Peak Oil Mythology Update

It has been some time since I have put up a detailed post about crude oil.  Now seems a good time since the yapping carnival barkers in the financial community are now talking about what to expect from a falling dollar.  Of course, this view of a falling dollar is only because quantitative easing part three has been announced and people who don't either understand supply and demand or money are now expecting the dollar to implode right shortly.   With that there is an expectation that QE3 will unleash the oil kraken (oil prices rocket higher) while the dirty dollar goes to zero.  Whatever.  Does anyone else bore of these clowns being constantly wrong yet being invited back into the mainstream press time and again to share their endlessly faulty delusions?  The Fed wants the dollar to drop.  The strategy of currency devaluation and the race to the bottom is how every country in the global economy seeks to gain competitive advantage.   The rules have been set this way for forty years.  ie Trashing your own currency is how you gain comparative advantage.  How effed up is this system?  More than most people could possibly imagine.   If you think the Fed either knows what it is doing by trying to trash the dollar or its policies are going to save the economy, then you should be short the dollar with the announcement of QE3.  And you should be long oil.  Good luck with that.   Oil is down and the dollar is up since the day the Fed announced QE3.  Almost everything the financial community has told us is wrong.  Not because they are lying, although many in the system do plenty of that.  But because they are massively incompetent and that incompetence is protected by an Omerta "code of silence" culture in the two party political system  and on Wall Street.

For new readers, a commodities bust has always been in the cards on here.  Well before anyone else in the financial community ever considered such an outcome.  Back in 2008 when commodities were rocketing higher, we were writing that a bust was imminent.  There were never any delusions about the China story or the commodity supercycle or other nonsense on here.  If you really understand how the global economy works, you understand how these beliefs were nothing more than a self-reinforcing delusions.  Nothing more than beliefs that only exist in the minds of financial carnival barkers who control the microphone.  Make no doubt about it.  These people don't understand the mess they have made and they actually believe their own delusions.  And, they want you to believe them too.  Why?  Because it makes them self-important.   People who seek power are always attempting to find ways to remain in positions of authority or in control as Plato noted.

“When the tyrant has disposed of foreign enemies by conquest or treaty and there is nothing to fear from them, then he is always stirring up some war or other, in order that the people may require a leader.” -- Plato 

There is little knowledge to be gained from authority.  Their intent is always control rather than truth.  All authority outside of the rule of law is illegitimate.  No man should ever have dominion over another.  Ever.  Public service is not authority.  But it has been morphed into authority in our corporations, political institutions and religious hierarchies.   The rise of the bureaucrat as noted in a post titled those very words many moons ago.  Just like in the Soviet Union or Nazi Germany or the English Empire or La Cosa Nostra.  The dynamic and human behavior is no different. This dynamic is key to understanding what the world is dealing with.  And, no one in the mainstream media will ever address it.  They can't.  They are part and parcel to the illegitimacy.

At one time or another, this China story or the commodity supercycle nonsense has hoodwinked everyone in the financial community.  The only supercycle associated with commodities was the cycle that Wall Street encouraged pensions, retirement funds and the like to pour untold trillions of dollars into commodities to create the demand necessary to inflate commodity bubbles.   Traders love volatility and bubbles.  It's the only way they can really loot from society.  I mean thieve beyond imagination.  Bubbles where Wall Street commodity traders will mint tens and tens of billions in profits off of the backs of exploited people who have to pay the massive tax on their income these criminal bubbles create.  And, eventually society's pensions and retirement funds will be left holding the bag as that Wall Street-induced bubble collapses.  Just like all of their other crimes against humanity. 

The commodities and crude oil rhetoric pump out of Wall Street going into the 2008 crude oil/commodities top was just too impossible for many in the financial community to resist.  I lost a lot of professional respect for many when they threw in the towel and jumped in with both feet only to be butchered.  Or more aptly put, to watch those who followed their investment "advice" to be butchered.   (Btw, to digress a moment, I find ny long time positions regarding commodities to be very comforting given that Pimco is the largest public investment fund in commodities.  Not the largest player.  That would go to the leveraged hedge fund and Wall Street trading desks that dominate futures-leveraged markets.  It has been some time since I have seen Pimco's take on commodities but they were publicly bullish last year right before commodities tanked.  And their CEO was head of Harvard's endowment/investment group that tanked in 2008 due to risky bets, including commodities, as noted on here at the time.  For a while I shadowed Pimco on here for their Treasury bond market calls because they were so ridiculously wrong.  I took the exact opposite positions as they made public statements that Treasury rates were headed higher.  And, of course, just as I said, Treasury rates imploded for the exact reasons I said.  My point is that most people in the financial bubble truly have no special gift or knowledge.  This isn't rocket science.  It's simply a basic understanding of money and economics.  But our financial system is shielded from competence and competition in the way it is structured.  So, its competence looks more like the Soviet banking system or the OPEC oligopoly than a merit-based, democratic financial system our nation needs.   I have nothing against anyone at Pimco or any other financial firm.  They are just people.  I'm sure they are decent people.  But that's my point - just people.  My issue is with the system and the undue influence and authority that unqualified people have gained within it.  The system has to be structured to ameliorate or remove unsustainable dynamics.  Part of that is to democratize economics as much as possible.  ie. One example is 'one person, one vote' applied to economics as best possible.  Pimco, as an example, has gained an audience for their opinions (authority) regarding the economy and finance only because we have a debt-based monetary system and are swimming in a massive debt bubble.  So, that they buy massive amounts of Treasuries (debt bubble) for the investor class (also a bubble) somehow makes them financial geniuses. (finance is also a bubble)  lol.  Okay.  If we didn't have a monopoly on democracy's capital created by a private, debt-based monetary system and a private, for-profit banking system, these firms and their influence over society would disappear.  As Schumpeter noted long ago, society has to quit paying attention to those who helped create, or are invested in the continuation of, economic systems that don't work to be able to fix the messes that their faulty beliefs helped create.  How prescient he was. )

Back before the 2008 collapse I wrote that oil would drop to the $30s (per barrel) before starting another rise higher.  And, that was just lucky enough to happen.   Although I never honestly expected oil to rise to $150 a barrel beforehand.  You will notice that magical April/May of 2010 date in the chart above that has been talked about often on here.  That has been the high price for crude oil post the 2008 collapse, just as it has for banks, the unmanipulated advance-decline data I have posted and some other important data points.  Crude has made neither a higher high or a lower low on the monthly chart since as shown above. Volatility is compressing.  But, remember, one of our long term theses on here is that we are in a cycle of volatility.  In other words, something is going to give.   And it is likely to be soon in relative terms.

As I have noted many times on here, I like three wave patterns.   Above on the chart are clearly marked two waves from trough-to-peak or peak-to-trough.   This pattern is unresolved.  Regardless of whether it is three waves or five waves or whatever, this pattern has yet to resolve itself.   (Some time I'll show an incredibly disconcerting three wave pattern with nearly perfect time symmetry that started in 1932 and ended in 2000.  ie, An upward wave that is finished and now the Federal Reserve is trying to stop it from resolving to the down side.  They will fail.)

Remember, as noted on here many times, I have remarked that I wouldn't be surprised to see oil drop back to the last 1990s price of $10-12 a barrel.  (By the way, do you know why oil was $10 in 1998 under Clinton, a time when the economy was supposedly booming and thus demand for oil should have driven the price to well beyond $10 a barrel?  It was signalling the coming global economic collapse - something I wrote on here years ago.)  That means gasoline for less than $1 a gallon in the United States is a very plausible future possibility.

Obviously exogenous factors could affect that outcome.  But, don't be so sure they will.  Many of the large oil-producing nations rely very substantially, if not exclusively, on oil revenue to keep their dictatorships or repressive regimes from collapsing; something else discussed on here.   Countries like Saudi Arabia rely on small monetary bribes in the form of transfer payments to its citizens in order to maintain the House of Saud's corrupt control over that country's oil.   They hand out just enough money to citizens to appease their malcontent for living in poverty without economic opportunity or determinism.  If that dynamic is jeopardized by collapsing oil prices, the House of Saud's control over that country's resources will likely collapse.  (By the way, this exact dynamic exists in the United States. A small pittance is paid to the citizens of this country in the forms of welfare, food stamps, etc in order to buy some level of appeasement so the looters can continue to pillage our nation.)  If it comes down to charging higher oil prices that won't find enough buyers on international markets, or pumping furiously to get any ounce of revenue possible, even at collapsing prices, I would place a bet on the latter.  OPEC nations will scurry for money they need to appease the anger of people who won't be able to feed their children.  OPEC members have repeatedly and consistently cheated on agreed to production limits.  And, you can bet that if politicians of oil producing controls are threatened with a loss of control domestically, what other OPEC states may wish as far as production limits, will be completely irrelevant.  ie, It is a myth that OPEC sets and controls the price of oil.  They never have set prices.  Demand does.  And that demand isn't nearly as inelastic as one might believe.  Especially when capitalism's massive global overcapacity has no new consumers.  ie, Energy demand for crude could.... is probably going to collapse globally.  Forever.  A long time thesis on here.  Because by the time new demand might be necessary some decades or longer into the future, in whatever system rises to replace this economic Frankenstein we have today, viable energy alternatives will most certainly be in full play.

I want to pull some remarks I made back in May of 2008 in the grips of the massive crude oil blow upwards.  When people were losing their marbles and writing all kinds of nonsense regarding the price of oil, the end of the world because of high oil prices and other ridiculousness.  Something that you should read if you believe in the myth that we are currently experiencing what Lysenkoists, True Believers and those deluded by the corporatocracy's propaganda call Peak Oil -  I would bet my life that the world demand for oil and other carbon-based energy wains drastically well before we run out. Well, I'm not a gambler so maybe I wouldn't bet. The stone age didn't end because we ran out of stones. Remember that. A Saudi oil sheik said it. He sees the writing on the wall. He is concerned about the great technology engines of the U.S., Europe and Japan defeating demand for oil. Oil prices fell after the 1970s because of demand destruction, economic substitution and efficiency. Technology today has the ability to change the world far more drastically than the 1970s. If the U.S. had planned accordingly, our consumption of oil could easily have been 50% less than it is today. Right now. Not in fifty years. But, society is not going to agree to radical economic change when oil was $10-25 for decades. But now there are other drivers - ecological sustainability and economic independence. Cheap oil doesn't solve these problems. Technology does.

By the way, I read Hubbert's Peak book years ago.  Meh.  I know it sounds logical and reasoned and you want to believe it.  You want to believe it because deep down you hate hyper consumerism and the human condition defines itself through misery.  What could be more miserable than a future without oil?   How about a future where there is little demand for oil because the global economic system collapses?

Remember, Hubbert's views are just theory from many decades ago based on what he could see at that time.  Not what was fact but what he could see.  But, since he wrote that book, everything that was expected to come to pass has proven to be untrue.  Although many simply say his timing is wrong or there is a lag in his thesis coming to fruition.   You know, like the guy who took out billboards and full newspaper ads that the end of the world was going to happen a few years ago.  And, then when it didn't happen, he picked a new date in the future.  And, then when that didn't happen, he simply disappeared with all of the money he collected by instilling fear in people.  Or maybe some of the expected outcomes on here that have been pushed into the future. 

All joking aside, it is absolutely plausible that Hubbert's theory was just wrong in its timing.  But then there is the remark I made on here back in early 2007 that a NASA scientist's research implied that the world would never run out of carbon-based energy.  Those are two extremely opposite views and as noted on here before, there is ample evidence it will be closer to the latter.  At least for the next one thousand years.  Let me just say this about Hubbert's work.  All of humanity has never predicted its own future.  When all of humanity believes it knows the future, that is a social movement not a reasoned, scientific reality.  It is mob groupthink.  Nearly anyone who can spell oil believes we are living through the period of Peak Oil.  It's just like the social movement of human-caused global warming.  This is simply confirmation Peal Oil is a social movement.  And those who espouse it are its ideological preachers.  This is typical of the human condition.   It is a confirmation of how propaganda, the innate predisposition to believing authority and self-delusion determine our reality. 

In closing, I plan to whip up a post on abiotic oil at some point.  I mentioned it years ago and was mocked.  Not for saying that I said I believed it was a proven truth but because I considered it to be possible.  There is a lot of new science surrounding this topic that has been announced since.  A lot of very interesting science.

How much of what you believe is actually incontrovertible or even based on reason or fact?   Just about nothing.  And, society is finding more of this out every day. That's a good thing.

posted by TimingLogic at 9:27 AM