Oil and the economy

So what happens here? Do some of the healthier companies with sufficient cash flow will absorb some of the unhealthy ones? Do some will reorganize under Chapter 13? Do Bain Capital and other investment firms swoop in? Do some go bankrupt? Maybe the new GOP Congress will want to bail them out?

 

I suggested nothing of the sort. Indeed, I said enjoy cheap gas while it lasts. But be aware of not-so-obvious costs that will show up elsewhere on what I call the "universal ledger," but not on your credit card statement.

What I did was explain the other effects so people would understand likely events, a number of which are already playing out just as I said they would: Putin's NATO is a threat to Russia speech, fracking rigs shutting down because they are unprofitable with $60 per barrel or cheaper oil, highly indebted drilling companies seeing their stock price collapse, oil field and oil office workers losing their jobs.

See the vile comments elsewhere in this thread directed at me because of your mischaracterizing my column, which facts since are showing was spot on.

 

STARMAN,
Please see my post about the completely wrong characterization of my column by JayFarrar. Nothing I wrote deserves the kind of comment you posted.

 

Thanks for for taking the time to clarify David.

 

FWIW, he's been making that speech for several years since we surrounded his country with military bases --- and when oil was $140 a barrel, too.

 

Get rid of the gas tax and replace it with a "miles driven" fee, say a penny per mile to the states and a penny per mile to the feds. That way those pompous Prius drivers have to pay their fair share, too.

 

I'd love to see how you manage to tie together these two "facts":

1) oil prices increase because of speculators

2) oil prices decrease because of supply and demand

 

I don't give a single iota of a shit about anyone losing money now that the price of oil is down. Bastards sucked on the tits of inflated prices for years. Now they can all go f**k themselves. Each and every one of them. I hope the price never goes up. They can all eat sh*t.

 

A Congressional investigation showed that the oil price spike, which stands out quite clearly in the graphic for my column at http://alj.am/1B13x1P was due to manipulating prices through trading strategies. If you look at the graphic, in inflation-adjusted prices, you will see a price curve that other data shows tracks global demand except for the spike. We know from subpoenaed documents, thanks to then-Senator Carl Levin's permanent investigations subcommittee staff, that prices of aluminum ingots and other commodities were manipulated by Goldman Sachs and some other traders.

The development of new technology, primarily fracking but also some others, has made what were thought to be unrecoverable deposits available, but at great expense. Those technologies require in many places $60 to $80 per barrel to justify new investment. But those techniques have already expanded supply far more than demand, putting downward pressure on prices. (My column explains what the Chinese are doing, which is very smart financially.)

Why is demand soft? Global economic weakness combined with more efficient use of oil as fuel and as feedstock for chemicals, as well as some expansion of alternative energy sources.

So, for a period of time speculators gamed the markets, which had very weak rules, artificially driving up prices. Since then supply has grown thanks to new technology increasing supply significantly in a period of soft demand, pushing down prices.

One can argue that the decline is a form of manipulation by the Saudis, who have not cut production in response to lower prices. My column details just how much capacity the Saudis have to sustain more production than demand warrants because of their (relative to the US) enormous reserves of foreign currency, primarily US dollars. The lower prices achieve Saudi goals also mentioned in my column and that have been written about at length in the NYTimes, WSJ, etc.

 

The gas tax is really a user fee, but not a perfect one. Roads flex as wheels pass over them. A 90,000 pound gross weight truck does a lot more damage than a Chevy Impala which does more than a Prius. Until recently we had no practical way to impose a miles-driven fee (odometers can be turned back and collecting data and then the tax would be administratively expensive). A per-gallon gas tax is the least expensive, most efficient way to achieve the result you favor, but it is not perfect -- no system is.

 

Informative DCJ. It's been an ongoing debate on the board as to whether oil prices can be manipulated.
To me the evidence is clear that the Goldman Sachs and Morgan Stanley's of the world artificially
drove up oil futures prices.

Some of our board economists would disagree and say that it's impossible to manipulate the free market

 

Markets have rules. The Senate PSI has shown how easy the commodity markets rules are to manipulate. The Germans believe markets will best sort out the use of capital, but they also know that players are always seeking to game the rules so their policy is to quickly adapt the rules to stop gaming once identified. They call it "ordoliberalism" after the name of the magazine, Ordo, that articulated this.

Anyone who thinks markets cannot be manipulated is living in a textbook world, not the real one.

I have shown that the electricity "markets" raise prices by design. Both experiments and actual trading records show this, as detailed in my book FREE LUNCH. But the then-chairman of the Federal Energy Regulatory Commission told me eight years ago that once FERC declares a market then whatever price it produces is a market price. I asked him about what to do if the rules of that market produce higher prices that push the price point to the right (up) further than the demand curve and his response was "whatever price a market produces is the market price." So if I call my house a mansion....

BTW, the guy went to work for a utility which profits handsomely from his actions, including a regulation forcing you to pay grossed up corporate income taxes that do not exist for its pipelines (like all petroleum pipelines) because since 1987 they have been exempt from the corporate income tax. Grossed up is 54% instead of 35%. How nice to collect profits plus 54%, which means inflated "market" prices are even worse than the price-gouging suggests.

That is another form of price manipulation -- capturing regulatory agencies and then getting government regulations that tilt the playing field.

Oh, did I mention that these electric market grading rules were written by a company called Enron?