The Oil Drum

This is a guest post by DoDo, a frontpager over at the European Tribune (and best known for his great Train Blogging series). This is an updated and adapted version of Oil prices in Euros, a story initially posted last October. In the past half-year, we often saw simultaneous crude oil and Euro/dollar rallies. The question emerges, how would oil prices look in Euros?

(Click to enlarge)

Below the fold, I'll explain what data is displayed on the diagram, and show a few more diagrams.

Another guest post from Hans Noeldner.

Somewhere along the way, we-the-people seem to have reached a consensus that when it comes to allocating natural resources, money should do the talking. In fact many true believers contend money is the only legitimate communicator.

“How much oil should I be able to burn? Every barrel I can afford.”

“How big a house – how many houses – should I be able to buy? Just as many as I can afford.”

“How much CO2 should I be able to emit? Not one damned molecule less than I can afford.”

“And if I want to burn and buy and emit more, then acquiring more money naturally gives me the right to do so.”
If our economy fails to charge us the “true cost” of denying future generations the fossil energy they might need to feed themselves 50 years hence; if our economy suffocates vast swathes of bio-productive land beneath highways and parking lots for our Happy Motoring convenience, if our economy fails to extract “flood money” from us to recompense millions of coastal dwellers for the loss of their ancestral homelands beneath rising oceans; well…perhaps the solution is to internalize those costs somehow.

Nope, That’s Not Money

Prudent Bear’s Doug Noland has for years been pointing out that one of the drivers of the credit bubble has been the ever-broadening definition of money. As the global economy expanded without a hic-up, more and more instruments came to be used as a store of value or medium of exchange or even a standard against which to value other things—in other words, as money.

Thus mortgage-backed bonds and even more exotic things came to be seen as nearly risk-free and infinitely liquid. In Noland’s terms, credit gained “moneyness,” which sent the effective global money supply through the roof. This in turn allowed the U.S. and its trading partners to keep adding jobs and appearing to grow, despite debt levels that were rising into the stratosphere. For a while there, borrowing actually made the world richer, because both the cash received and the debt created functioned as money.

With a few months of hindsight, it’s now clear that debt-as-money was not one of humanity’s better ideas. When the U.S. housing market—the source of all that mortgage-backed pseudo money—began to tank, hedge funds found out that an asset-backed bond wasn’t exactly the same thing as a stack of hundred dollar bills. The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that’s not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me?

No longer able to function as money, these instruments are being “repriced” (a slick little euphemism for “dumped for whatever anyone will pay”), which is causing a cascade failure of the many business models that depend on infinite liquidity. The effective global money supply is contracting at a double-digit rate, reversing out much of the past decade’s growth.