This space has not carried much about, nor commented at length on, the multitude of articles and essays on the ongoing drop in the price of petroleum; mainly because much, perhaps most, of this has been wrong in so many ways, starting with the misrepresentation of the supply and demand influences on the price.
The current favorite myth contends that the fall in the price of oil is due to the Saudis trying to punish Russia for supporting Assad and drive the frackers in the US out of business while also punishing the evil Shia controlling oil in Iran and Iraq. Drivel, starting with the simple observation that the Saudis are pumping about the same amount of oil they have for nearly a decade and OPEC as a whole is maybe 500,000 barrels a day over it's long set target.
The US, on the other hand, is suddenly pumping out an extra 4 or 5 million barrels a day from fracking operations – if there is a country that has upset the apple cart, it is the US. Telling the Saudis they have to stop pumping oil because we want to continue is a reasonable example of how silly most of this discussion is.
Another comment fairytale involves the US, with Saudi help, torpedoing oil prices so as to “punish” Putin for getting in the way of US plans for Ukraine. Yes, the Russians did upset our neat plans for Kiev, and the low prices are hurting Russia, but even if Vladimir was to suddenly withdraw his support for ethnic Russians in Ukraine and give back Crimea, how would that change the global supply and demand problem with oil?
Even those dwelling on the supply and demand equation mostly miss what's going on, the circular and long term nature of the situation. And the demand side is generally given the least discussion when it is the most important factor.
I don't need a barrel of oil in the backyard. I don't even – at base – need the 19 gallons of gasoline or the 11 gallons of diesel hidden in a barrel of crude. What I need is transportation – to get from there to there. Or to move stuff from a hole in the ground to a refinery to a factory to a store and ultimately to my house. What has diminished is not the need, specifically, for diesel or gasoline; what has shrunk and continues to shrink is our ability to pay to transport stuff, because the more money we divert to pay to get the fuel,the less of the stuff we can afford - and thus the diminished need for transport fuel. Viola! Surplus unaffordable oil!
The price of oil tells us that economies around the world are slowing down and nearly at a stall. [Here's where the chorus starts chanting “Be afraid. Be afraid.”]
It is all traceable to peak oil, back in late 2005, when the price of oil started rising, ending in the collapse of the housing bubble and the beginning of a desperate search for more oil – in the deep sea, in the arctic, in tar sands and oil shales. And more was found – at ever higher costs, both in money and energy. Note that the more energy it takes to produce the oil, the less oil there is for other purposes like transportation.
Years of increasing amounts of energy and money being shunted into producing petroleum has resulted in the world-wide malaise that is settling in. What has diminished is not the need, specifically, for diesel or JP4 or gasoline; what has shrunk and continues to shrink is our ability to pay to transport stuff and, because we divert ever more money to pay for the energy to transport the stuff, the stuff itself and thus the need to transport fuel. And suddenly we have a global surplus of unaffordable oil!
To counter the increase in the cost of the basic essential component of civilization, central banks (mostly the Fed) have created trillions of dollars – first as credit to continue the frenzy of buying stuff and then to pay for increasingly expensive petroleum and now to fight off the deflation and eventual depression that is surely coming our way. It will not be brought on solely by the oil debacle; nearly every primary extractive component of modern commerce is becoming scarcer and more expensive to produce with concomitant increases in debt funding.
All that debt will have to be paid back or rolled over – and most likely at higher interest rates once the central banks begin trying to deflate the asset bubbles they have built. And that is when the real fun will begin. And it has little to do with an oversupply of oil and a lot to do with a tremendous oversupply of central bank created inflationary cash which was (and is) pumped out to offset the simple reality that we cannot afford the ever expanding capitalist economy any more, if we ever could.
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