<DrumBeat: February 16, 2007The Oil DrumDrumBeat: February 17, 2007>

242 comments on It's CERA Week -- Houston, we have a problem

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Dragonfly41 on February 16, 2007 - 12:13am Permalink | Subthread | Parent | Comments top

memmel...good commentary. I have asked Robert (where is he lately btw?) many times this simple question...if things are just dandy and oversupplied in the oil industry, why is crude still $60 a barrel....I don't think I've heard a simple answer yet.

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suyog on February 16, 2007 - 10:29am Permalink | Subthread | Parent | Comments top

I think I asked him that question a few months ago and his response was, "if we are past peak, why is crude not at $100?" or something to that effect.

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veganmaster on February 16, 2007 - 11:57am Permalink | Subthread | Parent | Comments top

But the price of oil is only an imaginary number created by human psychology. Even if for some insane reason the price drops as we peak (super demand destruction), it won't change the underlying geology, or the fact that the human population is still growing, while energy resources are dwindling.

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ET on February 16, 2007 - 2:38pm Permalink | Subthread | Parent | Comments top

This leads to the argument that $60 oil has not appreciably hurt the economy. Which in turn leads to a possible conjecture that $60 oil is not 'expensive' oil given all other economic metrics involved such as growth in GDP, inflation, etc. Which in turn gives credence to RR's answer on the price likely being 'painfully' higher if we really are/were at/past peak. As has been said, $60 (or $50) is the new $40 (or $30) price that we accept as... acceptable.

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memmel on February 16, 2007 - 3:19pm Permalink | Subthread | Parent | Comments top

60 is hurting our economies and so did 70+. I believe that last summers oil prices was the pin that pricked Americas housing bubble. The additional expense of gasoline caused enough people to pause in the migration to ever distant suburbia that the housing bubble collapsed. At that point in the bubble the last people buying houses could not afford the additional cost of gasoline and a crazy loan package. Things got that out of control. Thus people in the 25-35K a year income bracket did not buy 300K houses. The few hundred a month extra for gas stopped the ponzi scheme at the bottom.

The current price of oil is relentlessly sapping the real economy i.e. production of real goods and services. The only thing keeping the economy afloat now is the sloshing of all those petrodollars and china dollars back into the US as investments generally buying up US debt.

In our current whacked economy China/Japan/OPEC gets dollars that we print like crazy going into debt buying their goods then the nuts invest it back into the US. Allowing us to borrow more money. Sooner or later this game will end.

Core economic indicators housing manufacturing all started down when oil hit 70+. Most American companies are in reality Chinese /American with as many or more employees in China as in the US.
The current record profits simply reflect that these companies are playing both sides of the game.

Look at the P/E's of the stock market its been a speculative bubble for some time.

Whats amazing is how long the jugglers have managed to keep all the balls in the air not that the world economy has long since lost touch with reality.

If you look under the covers just a little bit you will see that the US economy is in the worst shape it has ever been in since the Great Depression. Now its just a matter of when it collapses and what the trigger will be.

Look at the trade deficits
Negative savings rate
Housing bubble crashing
The American consumer recklessly spending on credit.

Neither China nor Japan working to balance trade.

In short we are in for a long hard depression. The chance for a recession is gone.

My only question is what is the trigger.

Hedge Fund blow up
Yen carry trade unraveling
Oil hits 80+ a barrel
petrodollar collapse
Massive wave of BK's from the Housing bubble.

Thats the tough part. I'm just hopping to see if we last long enough to call KSA's bluff.

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tate423 on February 16, 2007 - 3:46pm Permalink | Subthread | Parent | Comments top

Dont be surprised if the catalyst is GMAC finance. I read an article this morning (can't find it now) that basically laid bare several facts about their "investment" portfolio. By investment I mean loans for homes. They are really out of whack in terms of risk management and their sub prime portfolio is blowing up in their face. Combine that with the purchase by Cerbrus....damn I need to find the article.....oh Mish had it.

http://globaleconomicanalysis.blogspot.com/

http://wallstreetexaminer.com/blogs/winter/?p=436#more-436

Guess how these banks are going to find the reserves to pay for the losses? Pull money out of their equity accounts of course.....

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elwoodelmore on February 17, 2007 - 7:32am Permalink | Subthread | Parent | Comments top

tate, interesting idea but wont the taxpayers ultimately "cover the losses" ?
as a side note gmac is offering online money market accounts paying in the range of 5% for basically a saving account. gmac states that the money market account if fdic insured ?????

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ET on February 16, 2007 - 5:16pm Permalink | Subthread | Parent | Comments top

"60 is hurting our economies and so did 70+. "

I agree that the high(er) oil price may be a 'stealth' drag on the economy. Along with all the other such drags, such as increasingly unservicable debt, spells hard times. Whether tomorrow or in 5 or 10 years who knows. I would bet on a within 2 years time frame. Hopefully in time for GW to get more of the blame he so richly deserves, even if his policies are not directly related to the long term problems.

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SonicTheHedgeFund on February 16, 2007 - 11:00pm Permalink | Subthread | Parent | Comments top

A few quick points to make.

"In short we are in for a long hard depression. The chance for a recession is gone." There are far too many variables in play at present to make such a conclusion. Notably the FED has a few arrows left in its quiver. Until the quiver is empty, count on the FED continuing to act so as to squish market volatility in every direction.

Don't bank on a hedge fund blow up causing a 1929-like event. LTCM didn't thanks largely to the FED organizing an orderly fire sale of positions. Amarath didn't, thanks to Citadel and JPM. Hedge funds are SWIMMING in cash at present. Any mess-up will likely be resolved just the way Amaranth was: large-scale buying of the portfolio by other hedge funds/banks at discounted prices. Some hedge fund investors lose, others win, and the market moves on.

The runup in oil pices the last few years was from demand growth via growing economies, not from a large drop in supply. Thus, when some talking head predicts a recession when oil hits $X, ignore them -- how we get to $X matters. A supply shock can easily cause a recession (like the Arab oil embargo of the 1970's), but not a rise in oil prices due to strong economic growth against roughly level oil production. The rise in oil in such a case simply reduces growth.

The aggregate American consumer still has several months left on the "credit card". The slowdown in housing should result in a drop in the home-as-an-ATM-machine (cash-out refis, etc.) driven spending. The best case scenario is for income gains to make-up for the drop in home-equity "bonus cash". Will income gains be this large? I doubt it, but the US economy is still chugging forward. The US economy may get a little lucky this time around.

The dumb-dumbs in the media babble on and on about the trade deficit, but they almost never discuss "cash flows": America earns as much on its foreign investments as foreignors do on their US dollar holdings. Prior to 2005, America was cash flow positive in spite of the "face value" of foreign investments in the US far exceeding the "face value" of US investments abroad. (Borrowing from the Asians at 4% to make equity investments abroad that return much more than 4% is not such a bad thing. Risky? Yes, but not necessarily stupid.) The US is roughly cash-flow neutral at present. Worry when America gets cash flow negative. Since the cash-flow situtation has been steadily deteriorating the last several years, it's almost time to start worrying. I strongly recommend immediately reducing, if not completely eliminating, the debt side of your personal balance sheet. No need to panic, but now is NOT time to lever up. Just my $0.02.

I'm off to Mexico for a holiday. Have a great weekend.

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Will on February 16, 2007 - 11:11pm Permalink | Subthread | Parent | Comments top

From what I read in the WSJ, JPM was directly involved with and facilitiated the Amaranth failure. They would not release Amaranth's margin funds and they were the clearing house of record. They made the most money (of all players) salvaging and reselling the remnant positions. It was an incredible conflict of interest.

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Seadragon on February 17, 2007 - 9:17am Permalink | Subthread | Parent | Comments top

Very interesting thoughts...would like to hear more when you return.

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