$100 a Bungle for Oil

Technocrats are technocrats because they like measurable things. Thus there is a great deal of discussion of peak oil, because oil production is a measurable thing. As someone who has written about peak oil longer than most, and understood its implications better, I would be the last person to diminish the importance of physical scarcity and lessening bandwidth as a problem for the global economy. Particularly in the light of our dependence on petroleum and other carbon based forms of energy. However our present spike in oil has nothing to do with peak oil directly, but instead everything to do with a gush of dollars. Peak dollar capacity, not peak production capacity, is what is making $100/bbl the new “over/under” number among the oil traders I talk to. They freely admit that the worse the mistakes of Bush and Bernanke, the better it is for them. This is how to win the economic game: make it so that others pay if you win, and others pay if you lose. If Iraq had been won, Bush and his friends would be riding the tax cuts from the activity created. Now that it has failed, others pay the price in the form of plummeting land values and higher oil costs.

The present spike of oil is, to some extent, driven by offshoring and demand. This decade is really like the 1920’s not the 1930’s. While prosperity has not reached many in the developed world, this has been a boom time for the developing world. When America was a developing nation, we profited from similar consumption binges in the then core nations of France, Great Britain and Germany. We are making the same mistakes they did in their time in the sun.

The real reason for the spike in oil prices is the pouring of dollars into the global economy meant to bail out the banking sector without imposing any accountability on the people who run it.

The Over Under Number

All bets in markets are really 50/50 bets, there is the conventional wisdom of what something is worth, people bet over or under that number. Recently $90 was the over under number for oil, it smashed through that number. The decision was then “retrench? or go for the next peak.” The answer to this is simple: bet on the next peak. Why? Corporate profits, ex-banks, are still good, they have to spend on chasing the next round of profits. More money is coming as economic war boom stimulus, the moral cripples in Congress will vote to cut off someone else’s arm to keep that money flowing in corrupt defense spending. And that is, make no mistake, what they are doing. The surge was really a push to run back into our bunkers so that the flow of dead and wounded would be within politically bearable limits. No so much that the public would rebel.

So with this money flowing in, and the assurance that Bernanke, the galactic incompetent in charge of the Fudderal Reserve – Elmer Fudd might as well be in charge – will not raise interest rates any time soon, that means more economic activity and more demand for oil. It also means that the global expansion will continue as the developed world ships good jobs to other places, and replaces them with corrupt defense pork jobs and mowing people’s lawns.

Thus upside is the bet. So where is the next peak number? Is it based on global demand? Not really, it is based on pain tolerance. Pain tolerance is important here, because economic expansions stop when enough people can’t take the pain of continuing. That may not make sense, but think of it as a poker game. A poker game continues until the people losing the game can’t afford to lose any more. One by one they drop out, and the winners are left. Only in economics there is a hard limit, at a certain point the expansion is worse than a crash would be, and then at a later point the very chips themselves become meaningless, and endemic inflation, or even hyper-inflatio, sets in. As long as Americans are willing to sell their children into debt slavery to keep this expansion going, it can keep going. Until the people we are selling our children and grand children to don’t believe we have any more children to sell. As the line from 1776 goes, “cram them in the ships.” Now go back to watching the World Series, don’t worry, the young and the yet to be born will pay for your leisure time. Hope that keeps you warm at night, to know that some descendant of yours will take a bullet so that you can watch Curt Schilling pitch. He’s an all time great and eventual hall of famer, but is it really worth it?

When the pain tolerance ends, there is a demand to restrict inflation, even at the cost of economic contraction. But since the hard number is much much higher than most people are willing to tolerate, this usually means that economic expansions in the – now defunct – post-war order were ended before the winners and losers got too too egregious. Maybe I need another too there, because we are now at the greatest spread of rich to poor in recorded history.

Thus oil will keep going up until people who run things, and the people who live in nice houses who work for them, can’t take losing their autonomy. The revolt of ’06 of this second class of people is still misguided in thinking that the only problem with Bush is that he isn’t Hillary Clinton. Trust me, an ovary transplant into Bushism isn’t going to save the suburbs, but “Americans will do the right thing, only after they have done all of the wrong things.” Ruddy and Hillary represent the wrong thing. Mitt Romney a variation on the wrong thing. The problem with the global neo-conomy is not that it isn’t run by someone from the Northeast.

Thus while we are in the position that people hate what is going on, they don’t hate it enough to do something about it. Which means it will keep going because the people profiting from it are still very very happy. Maybe I need another very in there.

The over/under number bet on $100/bbl oil is now on the table, simply because the belief is that the public would rather have their war spending than not. The physical scarcity is the lever to make this happen, but the bet is really that that “traffic will bear” $3.50/gallon gasoline at next summer’s peak. Gasoline at the pump is already going up again.

The Bunkjamin Bunknanke Effect

Benjamin Bernanke is the most spineless moron who could have been found to run the Fed. Bush knows what he likes in house slaves. The praise for Bernanke from Paul Krugman is one of the most egregious idiocies every pronounced, and it shows that our leadership in intelligentsia likes the truth, but not more than they like having coffee with people. Every economic part of Paul Krugman’s career should have told him that Bernanke was a global disaster waiting to happen. But no, he’d had coffee with Cousin Ben, it couldn’t be that Ben would be another neo-conservative imbecile waiting to slave away for plutocracy, war and global economic turmoil.

Central bankers cannot do very much. They can’t invent new technology, they can’t invest in the future, they cannot reorganize society – though Greenspan admits he tried to do social engineering from the Fed Chair. But what they can do is take out a big large club and smack an overheated economy over the head repeatedly and say, in the words of Correntewire: “Stop it! You’re killing everything.” They can tell a political leadership filled with moral cripples, on both sides of the aisle, “You can have as much of your idiotic vainglorious wars as you can pay for.” They do this by raising interest rates so that the disutility of the war is manifested in the present. Greenspan and Bernanke both bought the line that this war is so important that the future, not the present, should pay for it. The catastrophe in Iraq is your tax cuts at play.

This Bernanke has refused to do. Economic expansions are not unquestionable goods, because in every economic expansion there are resources which are scarce, and the production of which is sloping up the curve of diminishing returns. The job of a central banker in such circumstances is to look at the real productivity growth in creating new supply for this scarcity, and if there is no new supply, constrict demand. Standard economic theory says that people’s wants are unlimited, they will strip the world bare if allowed to. This may not be true in the totality of cases, but there is some pretty good empirical evidence that there are always a few people willing to take up the slake and give it a go. When an economic expansion is spending more of the increase on GDP on paying rent than developing capital, a capitalist society constricts the flow of currency, makes labor and rent cheap again, and starts working on doing more with less. Capital is the economic word for figuring out how to do more with less.

The measurement that we have long since passed the point where capital development is the use of the surplus of this expansion – does the world really need a new global financial center in Dubai? Truly? – can be seen in the collapse in American home values. Now in 2002 I was very clear that we were creating a secondary bubble in mortgages and land to cover over the collapse of the primary bubble of the NASDAQ. Secondary bubbles are the way that societies that don’t have a clue deal with the popping of a bubble. They will do anything, except fire the morons who go them into trouble and do things for themselves. This secondary bubble is now popping.

With the popping of the secondary bubble – predictable because it was predicted – comes the end of the ability of local units to raise small scale capital. With the stagnation of the IPO market, the middle tier of capital development is also hobbled. Hence, this economic expansion should be allowed to die. The Fed chief can’t tell you want to do, but he can say that he isn’t giving you any free money until you figure it out.

In a liberal Keynesian order – you know, the people who won the second world war, and the cold war, quadrupled real standards of living and cut poverty by a factor of four – the pattern is that the central bank is used to slow economic activity, and then the fiscal authority – presuming it is populated by people who might be egregiously corrupt, venal and racist, but who are not rapaciously committed to selling the future in to debt slavery – will vote for a series of stimulus initiatives that will both get the economy moving, and lay the ground work for the future economic expansion by investing in capital which, while too expensive and risking for the private market place, is not too expensive for a government that has just proven its credibility by taking political pain rather than selling posterity out for their posteriors in office. Since this is exactly what our current political leadership – on both sides of the aisle – has declined to do, the people buying futures on America’s liberties know that they can keep doing it.

Instead in the neo-conservative order, the central bank keeps the expansion going as long as the rich are getting richer, stops it when the poor start to get richer, and then once the fiscal house in more in order, the fiscal authority, that’s the Congress plus the President in the US, bails out any rich people who were accidentally hurt by the recession. The Saving’s and Loan Bail out, the Bush and Reagan tax cuts are examples of thise exact process. Did you know you are still paying interest on the money used to bail out Neil Bush? Think on that. Your grand children will also being paying interest on that, and interest on the money used to bail out Jeff Bezos and Bill Gates. And probably a couple of other bailouts after that. If you aren’t angry, you aren’t paying attention, or you are getting checks from the man. Cash’em quick though, you thought you were getting dollars and really you are getting BushBucks.

Bernanke, by doing as he has done – anything is better than allowing an economic slide that would bring a liberal to power, it is in his academic work – assures not that we will avoid an economic collapse, but that it will come later and be larger, and have more consequences. While the arab world is far far behind the US now, a generation of sending them all our money can equalize things. There is no reason in genetics, society or science that the Arab world cannot become technically and economically capable of destroying the West, given enough money and time.

The coming World War

So Bernanke pumps dollars into the system, those dollars go elsewhere, and the difference – we stagnate while others advance – makes inevitable, and at this point I say inevitable – that there will come a point where military conflict will be used by those others to evict the United States from the privileged position of having 6% of the world’s population and using 25% of the world’s oil. That day is coming and the question now is how many millions of people will die when it arrives. Americans have declined, and will in 2008 decline again, to do anything to stop the arrival of a real world war, to replace this fake made for cable one. There aren’t many any chances left. This same was true in the 1840’s and 1920’s. The real instability is yet to arrive.

When it does arrive there will be several islamic states with atomic weapons and the means to deliver them. They will, as the underdogs in the conflict, have the ability politically to use these weapons, perhaps assymetrically, to bring down an order that they do not need. New York City and London are simply too tempting as targets, and the counter attack against the oil fields would destroy what we need. The arabs do not need our financial centers for much longer, we will need the oil in such a conflict.

There is at this point nothing that will be done about this. The current leadership of the US, and of Europe, is completely committed to a global conflict in the future in order to keep doing what they are doing in the present. The right that people are willing to kill for is the right to overconsume what is underpriced. The disutility of oil – in physical terms of war, pollution and scarcity – is well under priced. The price of oil will rise to just below the cost of solving the problems. It will always be a little bit cheaper to pay Saudi Arabia an oil tax not to solve the problem, than to pay ourselves to solve the problem. Just as it was always a little bit cheaper to let slavery continue than to buy it out. That is, until such time as it was clear that there were two mouths and one slice of pie. That day is inevitable, because right now many people are happily munching on the pie. Don’t exclude yourself.

What’s next, the short term

Short term, if you see a maniac running down the street randomly shooting people while the police look on, bet that he will keep shooting until he runs out of bullets. George Bush will keep fighting in Iraq until the second he leaves office. Congress will keep handing this maniac bullets, and the Central Bank will keep looking the other way. Don’t get too attached, to your kid’s left arm.

So short term bet on continued corporate profits, but relatively stagnant stock values. This means stocks that pay dividends should outperform as the pressure to profitize money while it is still low in taxation values grows. People will want this money to show up on 2008 tax returns, before the inevitable tax increases come.

The commodities market offers continued plays, except that these plays are running out of time – in the course of about five years. Remember that booming commodities markets will eventually sink the equities market, and contribute to global instability. However, until that time, corn is a great place to play the game, because while it is physically impossible to substitute corn for oil – Iowa and the corn belt are willing to do this, and Congress, any Congress, will vote to do it. More wrong things to try.

Coal. Bet on coal. Coal. Coal. Coal. Coal. Why? Because both China and the US have lots of it, and will want to use that to get out of dealing with their energy problems, or face economic contraction. What is the Free Trade agreement with columbia about? Do we put high tariffs on coffee? Are we liberalizing trade in Cocaine? No. It’s about coal.

However, this particular farce doesn’t have much longer to run, already the process of buying up the financial sector by arabs and chinese interests is proceding. That means that soon the bankers and the other elite are going to start hating this expansion as much as the rest of the country, because it is their big swinging dicks that are about to be put on the chopping block and chromed, no gold plated, to be a Dubai limo hood ornament. With their retrenchment comes a dramatic increase in credit scarcity, and with that, the end of the expansion. There will be no money for stimulus – partially because the people we would have to borrow it from are not interested in seeing us work our way out of this bind. Bet that the trough after the recession will be, as the last two have been, long, slow, and hard.

This is why I shout this now: get rid of debt, and work your butt off for every bit of money you can now, because this is the last year or so that it will be really easy to do. After that, we might have an expansion, but you won’t see any advantage from it.

What can our current political leadership do? Can? Lots of things. Are? Nothing.

They after all, are getting very well paid. 2004 was the most important election in your lifetime. 2008 is the least important election in your lifetime. Nothing is going to be decide. Nothing. After that? Change is possible, because the pain may well be enough. However, change requires agents of change, and it is just as likely that there will be a President Jindahl as a President Spitzer. Perhaps more so, because given a chance to choose between two evils, Americans often pick the bigger one.

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Stirling Newberry

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20 CommentsLeave a comment

  • “Until the people we are selling our children and grand children to don’t believe we have any more children to sell.”

    I like you commentry. I don’t like this canard. Fix it.

    Why DO YOU KEEP repeating this canard? WE WILL PAY THE INTEREST STARTING NOW. Certainly our children will pay, discounted for inflation, but WE WILL PAY INTEREST in today’s dollars.

    GET IT RIGHT and STOP REPEATING the “PROBLEM IS IN THE FUTURRE” bullshit. It’s today, as the fed has to pay interest on debt first, theon its other obligations. Guess where this is going.

  • The problem with the global neo-conomy is not that it isn’t run by someone from the Northeast.

    Bush is from the northeast. Unless you’re thinking of Cheney.

  • The wild card in this global game that the US is betting on its its status as sole superpower and its stated policy of not permitting anyone to challenge it either militarily or economically, for in the end they amount to the same thing. The US is operating on the premise that will dollar hegemony and superpower status that we can force others to take our fiat currency, no matter how much we print to sustain the US economy, which funds the military. I generally agree with Stirling’s analysis, but I think that push may come to shove before the system breaks down of its own weight. I have little doubt that the power structure thinks that they can just destroy anyone who thinks about getting in their way if they get to be a big enough POA — and folks like Chavez know that they can easily end up like Noriega, or Ché, if they go too far. The lock of Ché’s hair taken at the time of his execution and given to one of the CIA operatives, which was just sold at auction on eBay is a grisly warning.

  • is just, simply, wrong. Military power tracks economic power and the US is in a decline. It doesn’t have about 50% of the world’s GDP anymore. It will either not win the coming wars, or, if by some miracle it does so, it will do so like England did.

    And speaking as someone with English relatives, the post war period was not a good time to live in Britain.

  • being both presumptuous “I don’t like this canard. Fix it” and rude — CAPS, which I’m sure you know well enough indicate that you are YELLING at a contributor.

    Don’t do that.

  • Military power tracks economic power and the US is in a decline.

    This is what worries me. I suspect that the powers that be see the handwriting on the wall and are willing to move sooner than later to kneecap emerging competition. While attacking Iran may seem like a crazy thing to do, it’s just a logical step in their minds, and they’ve said as much. Then there will be the next logical step, and the next, while they are racing to militarize space and deploy total surveillance to solidify permanent control. Ringing Russia with a missile shield and positioning NATO on its borders is just a stop-gap measure until the Star Wars space program is in place with spy satellites and space weapons. China served notice by shooting down one of its own satellites that it will not stand by and just watch this. So the chess game is on.

  • He’s saying that the problem is happening today and that we’re burning away future prosperity by not solving it. “Selling our children and grandchildren” refers to what’s happening both now and in the future.

  • In Stirling’s writing…This is interesting.

    Writing as someone who *knows* he’s screwed six ways to sunday…So I enjoy as much of the present as possible.

  • At current interest rates, won’t paying back any debt in future with cheaper dollars make sense?

    Isn’t this what the US government going to do?

  • knowing this, why on earth would anyone with any sense buy this debt, at least without demanding much higher interest rates?

    Same with lowering interest rates to provide liquidity to buy up the securitized debt that the banks can’t unload. Who’s going to buy worthless crap just because rates are low? They’ll use the low rates to buy other things that are worthwhile, driving yet another bubble.

    This is taking voodoo economics to a new extreme.

  • have income then? High inflation means whatever assets you have will inflate away as fast as your debts. But your assets may not be that liquid (most people really can’t afford to sell their houses). And, worse, you’re likely to see a drop in the nominal value of your house as well as the real value (ie. after inflation).

    If you’re sure you’ll have plenty of money coming in it /might/ make sense to not pay off debts, but only then.

  • I feel like we’re on a train about to head out over a trestle across a vast chasm and nobody in a position of power wants to be the person to mention that the bridge is out up ahead. The CW is that things are proceeding OK, there’s just a few bumps in the road.

    I appreciate it that you’re saying it! I wish more people were paying attention.

  • great commentary as always. Grim stuff, but better discuss it now than bury our heads in the sand.

    So should I having gardening or gunsmithing as a hobby? Seems those would be the best bets right about now.

  • “When America was a developing nation, we profited from similar consumption binges in the then core nations of France, Great Britain and Germany. We are making the same mistakes they did in their time in the sun.”

    Best exposition of this I’ve found is from Kevin Phillips, in his book Arrogant Capital. Highly recommended.

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