Whole Lot of Whistling Going On

December 6, 2014    

After reading, this week, about how falling oil prices – and, thus, falling gasoline prices – will be such a boon to the global economy (and lord knows it could use a little boon, right now,) I’m trying to decide whether we’re being deliberately lied to or whether all this happy talk is just a form of whistling past the graveyard.

For example, this article from The Economist says¸ “Cheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers. The typical American motorist, who spent $3,000 in 2013 at the pumps, might be $800 a year better off—equivalent to a 2% pay rise. Big importing countries such as the euro area, India, Japan and Turkey are enjoying especially big windfalls. Since this money is likely to be spent rather than stashed in a sovereign-wealth fund, global GDP should rise.http://www.economist.com/news/leaders/21635472-economics-oil-have-changed-some-businesses-will-go-bust-market-will-be

But, as others have pointed out, this isn’t necessarily true. If you have $100 and you spend five dollars less on gas and then, spend that five dollars on food, you haven’t added an extra five dollars to the overall economy. You’ve only shifted that five dollars from the oil (gasoline) part of the economy to the food part of the economy. http://www.marketwatch.com/story/cheap-oils-economic-benefits-may-be-a-big-myth-2014-12-04 The only way to add that five dollars (or that $1.3 trillion) to the overall economy is to turn at least part of it into debt (take out a new loan or open a new credit card). That part of it would count as new money and be counted as global growth. Undoubtedly, some businesses will, but I hope none of us low-wage earners are silly enough to do that. http://www.zerohedge.com/news/2014-12-05/us-factory-orders-tumble-miss-most-january

The other problem with low oil prices, especially if they continue to drop or the  low prices continues for a while, is that we are mostly dependent on expensive-to-produce oil (shale oil, oil sands, deep-water oil) and, while many wells that are currently in production can continue to produce at low prices, future production projects may not. http://gcaptain.com/150-billion-oil-projects-face-axe-2015/ These projects are heavily dependent on debt, especially high yield (junk) bonds for financing, making up almost 20% of the junk bond market. Also, shale oil wells deplete rapidly and new wells must constantly be drilled. If low oil prices cause some of these companies to default on their loans, the loans may dry up. As current production dwindles, loans may dry up for new projects and so will much of the oil supply we count on. http://www.zerohedge.com/news/2014-12-05/energy-bond-crash-contagion-suggests-oil-will-stay-lower-longer

In addition, we may be overestimating how much shale oil can be produced. This article from Nature is about natural gas, but many who follow oil production carefully feel the same can be said for the oil plays.http://www.nature.com/news/natural-gas-the-fracking-fallacy-1.16430

The other area where we seem to be whistling past the graveyard is in the economic news. All I heard on the network news was how great the jobs report was this week and how the economy is really taking off. Hmmm, maybe we might want to re-examine that. Several news sources say it might not be so great, after all. http://www.nbcnews.com/business/economy/hold-jobs-report-wasnt-so-great-after-all-n262641
http://www.cnbc.com/id/102243878?trknav=homestack:topnews:7
http://www.zerohedge.com/news/2014-12-05/full-time-jobs-down-150k-participation-rate-remains-35-year-lows

So, my advice, for what it’s worth? Enjoy the break from high gasoline prices, but remember, all those silver linings have a cloud attached.  Just watch out for all that whistling going on.

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7 Responses to Whole Lot of Whistling Going On

  1. Aubrey Enoch says:

    OIL GLUT? 12/7/14
    What happened to “peak oil”?
    Gas was $2.45/gal. yesterday at the EZ Mart.
    I commute 200 miles to Dallas each week and work three days
    and then drive 200 miles back to the farm for four days,
    to try and maintain some sanity. I know it’s crazy to burn all that gas but at my age there’s not a lot of employment opportunities. At least I have a little car. If you had told me last Dec. that gas would be below $2.50/gal. in twelve months I would have bet my last dime that you are wrong. I’d have bet on $4.50/gal. for Dec. 2014.
    I guess that shows how much I know. The good news is that I don’t bet on that kind of stuff. I’m real smart. I just bet on the weather. I keep up these berry rows all year and then the blueberries get all frosted off or the blackberries get stripped off by hail.
    Real smart to work all year and get no income. Oh well.
    I must have a hundred hours reading about peak oil in the past ten years and now we have an “oil glut”. How’s that work?
    The drop in oil prices causes problems for Russia, Iran, Venezuela and other oil producing countries that are disobedient to the Empire. Maybe that’s part of it.
    And it refutes the doomers that were saying that we are running out of oil. I guess if you can believe that global warming is a hoax you can believe that we have an oil glut. And then there’s the possibility that the billionaire owners think that we’re going to have a big drop in demand. Like maybe there aren’t going to be as many consumers on Earth to gobble up all that oil in the near future. We really do have an oil glut.
    It’s all pretty crazy. The birds usually empty my bird feeder about every other day. It took 3 weeks for them to empty it this month. I haven’t seen a half dozen Cardinals in that time and in past years there have been dozens around every day. I just chalk it up to the Zombie Apocalypse and go on. I’m grateful that we have food and a roof over our head.

    • theozarker says:

      Hi Aubrey, yes the “glut” and drop in prices caught me by surprise, too. Getting too crazy for this little old lady out there. Too many games.
      Come to think of it, I haven’t seen my cardinals this winter. Usually, they hide out in my backyard bushes. Maybe not cold enough yet.
      The loss of diversity and species extinctions are heartbreaking. We are certainly taking some terrifying chances with this beautiful world. Like you, I’m just grateful to have food and a roof over my head.

  2. eugene says:

    Personally, I fully expected ups/downs with “peak oil”. My hunch, and it is a hunch, is the global economy is slowing dramatically. But since the US economy is dependent on the maximum number of people carrying the maximum debt, we have to be kept confident enough to keep on charging hence the never ending happy news.

    As a young man, doing as I was told, I believed the news and journalists were working hard to report facts. I haven’t believed that for a long time. I think the future is filled with uncertainty, insecurity and chaos. Most will desperately run for whatever escape we can in the midst of our fear. We already are.

    • theozarker says:

      Hey Eugene. Yeah, I read a lot over at Automatic Earth and think your hunch about the global economy is well founded. And I agree that the Empire and its allies are desperate to keep the consumers happy, dumb and consuming (taking on more debt). And, sadly,I agree about the future and our response to it.

  3. graveday says:

    Boon? Heh, must be short for boondoggle. As to your cardinal and the cold, maybe so. I read many geese just stay in the arctic as it is warm enough for them to do so. Weird.
    Here, in upstate California, we are having a stretch of normal rain amounts. Everything is getting a much needed drink, but reservoirs are still way low and snow is skimpy, again due to warmth. How warm? My tomatoes and peppers are still green and producing on December 8. Meager, but producing.
    This means the fruit and nut trees are not getting their required winter chill hours. Many trees still have their leaves, even if brown. It’s all a bit unsettling. No, actually, it’s way unsettling.

    • theozarker says:

      Hi Grave, yes it is unsettling. I’m never quite sure when to plant any more or when the plants should be done producing. I had jalopenas (small, also) until mid November. We have certainly messed things up for the plants and animals as well as ourselves.

  4. rjsigmund says:

    hi ozarker,
    seems you hit all the salient points here & i pretty much agee with your take…& i’m with you on being surprised by the price collapse & watch in amazement as it continues….

    i’ve been writing & linking on fracking for a few years, & just yesterday turned that into a public blog, which is still a work in progess: http://focusonfracking.blogspot.com/ hope you find it useful..
    rjs

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