-- Published: Friday, 12 December 2014 | Print | Disqus
By Dr. Jeffrey Lewis
The drop in commodity, and especially oil prices, has been spectacular. The price action has generated a wide range of commentary. Some say this is a reflection of the true state of the global economy. Like the Baltic dry goods index or electricity consumption.
Some will say the fall in oil is deflationary - priced in as the inevitable confluence of factors ranging from demographics to lack of real economic growth manifest. Or it is more evidence of failed monetary policy. And paradoxically, another excuse to double down and go the way of Japan in pursuit of a lost decade muddle thru.
Others will point to currency wars. The drop in commodity prices has a massive effect on the Russian economy in particular, and the Middle East to a certain extent. Some have pointed out that this marks the end of the “petro-dollar” - and a foreshadowing of the end of the dollar as the world’s reserve currency.
OPEC’s refusal toa adjust supply accordingly is viewed as strategic. We’ve been hearing of the gradual move away from the dollar for many years now and of new deals between China and her trading partners.
Quarterly, there is drama regarding the re-patriotization of central bank gold - from Venezuela to Germany to Holland. Ultimately the downturn began in the pits where, like every market, price discovery is always the pregnant moment giving rise to the beasts of volatility.
I believe the cause was simpler than all of that. It all starts with price discovery.
Trading is at the root of this. Someone or some entity benefited from this move down. A move that was initiated over six weeks ago in the same manner as the moves we see in the prices of every other commodity and precious metal. But this will remain buried beneath the speculative commentary.
The aftermath will more than likely be a doubling down of intervention. Too much interest remains in keeping the status flow the way it is — from the abstraction we call the “military industrial complex” down to the big investment banks nurture (and consume the poison).
Volatility is never good in a tightly wound market, as the entire financial web is threadbare. We are well beyond frayed ends unraveling, unmonitored and tangled to the point where evaluation of weakness can never result in pin point.
But this is a geometric web ultimately reaching into every crevice of the economy.
These are webs like no other -- electronic but multidimensional. The dimensions are outgrowths from confidence, faith, and questionable collateral; tied to a tiny real collateral infrastructure.
The probability of a black swan event has been statistically removed to keep the Ponzi alive. The long tail is no more.
Gail Tverberg’s points out “Ten Reasons Why a Severe Drop in Oil Prices is a Problem”.
Issue 1. If the price of oil is too low, it will simply be left in the ground.
Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.
Issue 3. Shale operations have a huge impact on U.S. employment.
Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade.
Issue 5. Low oil prices can lead to collapses of oil exporters and loss of virtually all of the oil they export.
Issue 6. The benefits to consumers of a drop in oil prices are likely to be much smaller than the adverse impact on consumers of an oil price rise.
Issue 7. Hoped for crude and LNG sales abroad are likely to disappear, with low oil prices.
Issue 8. Hoped for increases in renewables will become more difficult if oil prices are low.
Issue 9. A major drop in oil prices tends to lead to deflation and, because of this, difficulty in repaying debts.
Issue 10. The drop in oil prices seems to reflect a basic underlying problem: the world is reaching the limits of its debt expansion.
The business of oil is massive industry suffused with and inseparable from big finance. Big finance relies on the constant flow of credit. Price is key across the board.
Oil prices are tied to massive movements of liquidity. Violent moves like this are like continent size meteors landing in the middle of the ocean. The tsunami is preceded by an enormous recession; a massive drain of liquidity.
As the water recedes, we get to see who is swimming naked.
In the wake of the price downfall of oil we see volatility, defaults on the margins, and layoffs - as the tide goes out to reveal the finance gone wrong.
We see a tributary of this great unnatural hydroelectric dam built on hope and confidence and promises.
A butterfly flapping its wings a million miles away.
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-- Published: Friday, 12 December 2014 | E-Mail | Print | Source: GoldSeek.com