Tuesday, January 20, 2015

Whiplash!

[Audiobook version. Thanks, Timothy!]
[In italiano. Grazie, Massimiliano!]
[По-русски]
[En français]

Over the course of 2014 the prices the world pays for crude oil have tumbled from over $125 per barrel to around $45 per barrel now, and could easily drop further before heading much higher before collapsing again before spiking again. You get the idea. In the end, the wild whipsawing of the oil market, and the even wilder whipsawing of financial markets, currencies and the rolling bankruptcies of energy companies, then the entities that financed them, then national defaults of the countries that backed these entities, will in due course cause industrial economies to collapse. And without a functioning industrial economy crude oil would be reclassified as toxic waste. But that is still two or three decades off in the future.

In the meantime, the much lower prices of oil have priced most of the producers of unconventional oil out of the market. Recall that conventional oil (the cheap-to-produce kind that comes gushing out of vertical wells drilled not too deep down into dry ground) peaked in 2005 and has been declining ever since. The production of unconventional oil, including offshore drilling, tar sands, hydrofracturing to produce shale oil and other expensive techniques, was lavishly financed in order to make up for the shortfall. But at the moment most unconventional oil costs more to produce than it can be sold for. This means that entire countries, including Venezuela's heavy oil (which requires upgrading before it will flow), offshore production in the Gulf of Mexico (Mexico and US), Norway and Nigeria, Canadian tar sands and, of course, shale oil in the US. All of these producers are now burning money as well as much of the oil they produce, and if the low oil prices persist, will be forced to shut down.

An additional problem is the very high depletion rate of “fracked” shale oil wells in the US. Currently, the shale oil producers are pumping flat out and setting new production records, but the drilling rate is collapsing fast. Shale oil wells deplete very fast: flow rates go down by half in just a few months, and are negligible after a couple of years. Production can only be maintained through relentless drilling, and that relentless drilling has now stopped. Thus, we have just a few months of glut left. After that, the whole shale oil revolution, which some bobbleheads thought would refashion the US into a new Saudi Arabia, will be over. It won't help that most of the shale oil producers, who speculated wildly on drilling leases, will be going bankrupt, along with exploration and production companies and oil field service companies. The entire economy that popped up in recent years around the shale oil patch in the US, which was responsible for most of the growth in high-paying jobs, will collapse, causing the unemployment rate to spike.

It bears pointing out that the excess inventory of oil that has precipitated this price collapse is not particularly large. It all started with a concerted effort by Saudi Arabia and the US to dump oil on the international market, to drive down the price. The leadership in the US knows full well that their days as the world's largest oil producer are numbered in days or months, not years. They realize what a major economic hangover will result from the collapse of shale oil production. The Canadians, realizing that their tar sands adventure is likewise nearing its end, want to play along.

The game they are playing is basically a game of chicken. If everybody pumps all the oil they can regardless of the price, then at some point one of two things will happen: shale oil production will collapse, or other producers will run out of money, and their production will collapse. The question is, Which one of these will happen first? The US is betting that the low oil prices will destroy the governments of the three major oil producers that are not under their political and/or military control. These are Venezuela, Iran and, of course, Russia. These are long shots, but, having no other cards to play, the US is desperate. Is Venezuela enough of a prize? Previous attempts at regime change in Venezuela failed; why would this one succeed? Iran has learned to survive in spite of western sanctions, and maintains trade links with China, Russia and quite a few other countries to work around them. In the case of Russia, it is as yet unclear what fruit, if any, western policies against it will bear. For example, if Greece decides to opt out of the European Union in order to get around Russia's retaliatory sanctions against the EU, then it will become entirely unclear who has actually sanctioned whom.

Of course, toppling the governments of all three of these petro-states, destroying them economically, “privatizing” their oil resources and pumping them dry free of charge using foreign labor would be just the shot in the arm the US needs. But, if you've been following along, it appears that the US doesn't always get what it wants, and of late hardly at all. Which recent US foreign policy gambit has actually paid off the way it was supposed to? Hmm...

And so, for now, all the oil producers are continuing to pump flat out. Some producers have the financial cushion to produce at a loss, and will do so to protect their market share. Other producers have already sunk the money into drilling the wells and have paid back enough of the loans while the oil price was high to continue producing profitably even at the lower price. Lastly, a number of producers (with Russia in the lead) can make a small profit even at $25-30 per barrel (if it weren't for taxes and tariffs).

Each producer has a slightly different reason to continue pumping flat out. A lot has been said about the US and Saudi Arabia colluding to drive down the price of oil. But the collusion theory can be sliced away with Occam's Razor, since they would be expected to behave exactly the same even without colluding.

The US is making a desperate attempt to knock over a petro-state or two or three before its shale oil runs out, with the Canadians, their tar sands now unprofitable, hitching a ride on its coat-tails, because if this attempt doesn't work, then it's lights out for the empire. But none of their recent gambits have worked. This is the winter of imperial discontent, and the empire is has been reduced to pulling pathetic little stunts that would be quite funny if they weren't also sinister and sad. Take, for instance, the words spoken by the US State Department's remote-controlled Ukrainian prime minister Yatsenyuk in Berlin recently: it turns out that the USSR invaded Nazi Germany, not the other way around! We are coming up on the 70th anniversary of the Soviet victory over Nazi Germany; and so there is no better time to do—what exactly? The Russians are confused. But the Germans took this howler on board and stayed mum, so score one for the empire!

Or take the Charlie Hebdo psy-ops in Paris, which, for anyone paying attention, was eerily reminiscent of the Boston Marathon bombing almost two years ago. Boston still hasn't got rid of all of the idiotic “Boston strong” stickers (no, Boston was not destroyed by a few firecrackers and a few amputee actors bursting bags of fake blood to pretend that they just had a leg blown off). And now Paris is festooned with eerily similar "I am Charlie" stickers. Killing a handful of innocents is, of course, standard procedure: few real atrocities help render the “conspiracy theory” version of the events unthinkable for anyone under imperial mind control because, you see “They are the good guys” and “good guys” don't do such things. But that mind control is slipping away, and even some national leaders—such as Turkey's Erdogan—publicly declared that the event had been staged. Also similarly, the supposed perpetrators were summarily executed by the police before anyone could find out anything about them. It's become quite clear by now that such events are being cooked up by the same bunch of not-terribly-creative hacks. They seem to be recycling the PowerPoints: delete Boston; insert Paris. But the French have defended their right to insult Moslems (and Christians) with impunity (but these rights are sure to be taken away when nobody is looking)—but not the inexplicably important Jews or gays, mind you, because that will get you a prison term. Score another one for the empire!

Or take last year's shoot-down of Malaysia's flight MH17 over Eastern Ukraine. The western public officials and press instantaneously blamed "Putin-supported rebels" with the shoot-down. When the results of the ensuing investigation lead to a different conclusion, they were made secret. But now the Russians have a Ukrainian defector in witness protection who has identified the Ukrainian pilot who shot down the airliner, using an air-to-air missile fired from a fighter jet. Since the rebels have no air force, an air-to-air missile was an unusual bit of ordnance for the Ukrainians, and was clearly loaded up just for this occasion. So we know who, how, and why; the only remaining question is, for whom; bets are, the hit was ordered from Washington. This was big news in Russia, but western media has self-censored the story out of existence and, whenever the topic is mentioned, continues to repeat the "Putin did it" mantra, so... score another one for empire!

But a bunch of deluded people muttering to themselves in a dark corner, while the rest of the world points at them and laughs, does not an empire make. With this level of performance, I would venture to guess that nothing the empire tries from here on will work to its satisfaction.

Saudi Arabia is generally displeased with the US, because the US has been failing at its job of policing the neighborhood and generally keeping a lid on things. Afghanistan is reverting to Talebanistan, Iraq has ceded territory to ISIS and now only controls the territory of the bronze age kingdoms of Akkad and Sumer, Libya is in a state of civil war, Egypt has been “democratized” into a military dictatorship, Turkey (a NATO member and a EU candidate member) is now trading primarily with Russia, the mission to topple Syria's Assad is in shambles, the US “partners” in Yemen have just been overthrown by Shiite militiamen, and now there is ISIS, initially organized and trained by the US, threatening to destroy the House of Saud. Add to that that the US-Saudi joint venture to destabilize Russia by formenting terrorism in Northern Caucasus has completely failed. It couldn't organize even a single terrorist action to disrupt the Sochi Olympics. (Saudi Arabia's Prince Bandar bin Sultan lost his job over that fiasco.) And so the Saudis are pumping flat out not so much to help the US as for other, more obvious reasons: to drive out high-priced producers (US included) and to maintain their market share. They are also sitting on a stockpile of US dollars, which they want to put to good use while they are still worth something.

Russia is pumping the usual amount because there is really no reason to stop and plenty of reasons to continue. Russia is a low-price producer, and can wait out the US. It is also sitting on a large stockpile of dollars, which might as well get used up while they are still worth something. Russia's greatest asset is not its oil but the patience of its people: they understand that they will go through a difficult patch as they scramble to replace imports (from the west especially) with domestic production and other sources. They can afford to take a loss; they will make it all back once the price of oil recovers.

Because it will recover. The fix for low oil prices is... low oil prices. Past some point high-priced producers will naturally stop producing, the excess inventory will get burned up, and the price will recover. Not only will it recover, but it will probably spike, because a country littered with the corpses of bankrupt oil companies is not one that is likely to jump right back into producing lots of oil while, on the other hand, beyond a few uses of fossil fuels that are discretionary, demand is quite inelastic. And an oil price spike will cause another round of demand destruction, because the consumers, devastated by the bankruptcies and the job losses from the collapse of the oil patch, will soon be bankrupted by the higher price. And that will cause the price of oil to collapse again.

And so on until the last industrialist dies. His cause of death will be listed as “whiplash”: the “shaken industrialist syndrome,” if you will. Oil prices too high/low in rapid alternation will have caused his neck to snap. Some artisans will collect a bit of oil from some slowly oozing old wells, refine it using clay pots heated with wood, and use it to power an antique hearse that will take the planet's last industrialist to the industrialist boneyard.

32 comments :

Cass Hewitt said...

Gas. Shell I know is drilling for gas off the North West Shelf of Western Aus. And sees this as the way of future. So - how will large reserves of tapped gas affect your scenario?

nmblr said...

Very crisp analysis.

Jamey Hecht said...

I'd be grateful for some links to the best evidence that supports your claim about the Boston incident as a staged event. It seems to me a very reasonable claim, but I am looking for a well organized body of evidence, if there is one. Thank you.

Judy said...

Thanks Dmitry. A brilliant post. I just wish the empire would hurry up and crumble and let us get on with cleaning up the mess!

. josé . said...

Thanks, Dmitry.

I was waiting for Tuesday to roll around so that I could read your analysis of the situation, and as usual you didn't disappoint.

I'm still amazed that "respectable" pundits can run around whining that "no one could have predicted" the drop in the price of oil, where every analyst I actually respect has been predicting it for years, as have system models dating back to the World Dynamics model. I managed to get that model up and running on MSU's IBM 360 back in 1972-73, and my inability to get it to a plausible steady state was a bit of a blow.

The catch is that the system reacts. The authors of The Limits to Growth made clear that when the graphs start getting really wacky (like around now - 2015 through 2025) the model stops being predictive. Which is why I also discounted the prediction of increased births. I got to play directly with that formula, and in the process to see its limits. (It's tuned to predict increases well, not decreases.)

In the long run, of course you are right: "In the end, the wild whipsawing of the oil market, and the even wilder whipsawing of financial markets, currencies and the rolling bankruptcies of energy companies, then the entities that financed them, then national defaults of the countries that backed these entities, will in due course cause industrial economies to collapse."

But in the meantime, I expect a major international conference sometime this year to set a fixed price for oil. Even countries that aren't official members (OPEC+USA+Canada as official?) will play along. For exactly the reason you point out in your use of Occam's Razor: it will be in their interest to accept a fixed (high) price.

And we then get to the next crisis: derivatives.

Sixbears said...

Can fracking die fast enough? It's destroyed water resources in agricultural areas, which in the long run is much more valuable. Unfortunately, the empire is focused on the short term to the grief of all else.

Every time prices spike, fewer people are in the game. On a personal level I've gone from heating my house with oil to not using a drop. Last year my house was mostly heated with wood harvested within walking distance of my house.

I'm down to one car, and that mostly runs on waste vegetable oil. (yes, it's not a long term solution, but what is?) Okay, I also have a good bicycle.

On the world stage this looks a lot like the way Peak Oil is supposed to play out. I know it's no longer politically correct to even mention Peak Oil, but here it is.

Empires die. A very few die gracefully. I don't see much grace in the way the US empire is winding down. Could get even uglier.

Russia has a lot of systemic problems itself. Right now it basically hangs on one man. Should Putin go, possible replacements appear to lack the necessary vision. Short term problems are inciting oppertunists.

China has kept the lid on unrest, but there are enough potential problems in their economy to cause plenty of domestic problems. One only has to look at the number of new empty cities to see something's out of balance. It doesn't help that they are destroying affordable housing to replace it with apartments no one lives in.

What amazes me is the number of people who are acting like low oil prices are going to be here forever -and acting accordingly. Now is not the time to buy a big SUV on credit.

Anyway, good luck! Hope we all can avoid getting squashed by falling elephants.

Rhisiart Gwilym said...

Splendid stuff! I'm spreading it about with the headline: 'Club Orlov dealing out dynamite sticks + LOLz just wonderfully today. Don't miss!'

stihlhead1 said...

Dmitry, Again congrats on your eight millionth viewer count. I have felt for a while now that what you are describing is the likely outcome for industrial society as regards energy and finance. Unfortunately patience is definitely not an American trait and I fear the possibilities of this in a more austere environment. Most people in this country live a climate controlled,over electronically stimulated, instant gratification based existence that does not lend itself to a life where scarcity of goods and interruption of services on a regular, ongoing basis is the norm.

tom said...

The people - if that is the right word for them - who are in charge seem to be playing a private game of "Monopoly". This charming board game is distinguished by its abstraction from the real world to a vastly simplified game world of just one dimension: money. The "Monopoly" players in Washington and Wall Street seem to have lost all connection with reality - human beings, food, drink, clothing, society, art, literature, music - and care only about their competing balance sheets. "The one who dies with the most dollars wins", even if EVERYONE dies as a result.

k-dog said...

"Charlie Hebdo psy-ops in Paris, which, for anyone paying attention, was eerily reminiscent of the Boston Marathon bombing almost two years ago. Boston still hasn't got rid of all of the idiotic “Boston strong” stickers (no, Boston was not destroyed by a few firecrackers and a few amputee actors bursting bags of fake blood to pretend that they just had a leg blown off."

Thank you for having the courage to say what some of us know to be the truth. And now that you have I hope your electronic devices continue to work the way you expect them to.

As you say Boston was not destroyed by a few amputee actors and uniformed actors behind keyboards won't be able to keep up when the going gets tough. Another whiplash effect military intelligence hasn't thought through.

Ed-M said...

I have three comments.

1) Good analysis on the Russians' ability to wait out this oil price slump. All Putin needs to do is waive the taxes and tariffs on oil, and voila! Russia will come out of this intact.

2) Here's what I think is the *real* reason Saudi Arabia is pumping oil flat out: It needs the money to build a 600 mile long barrier fence to keep out ISIS. The price tag will be in the hundreds of billions of dollars.

http://www.dailymail.co.uk/news/article-2912334/The-great-wall-of-Saudi-Arabia-Kingdom-plans-build-600-mile-barrier-Jordan-Kuwait-response-threat-invasion-ISIS.html

What happens if and when ISIS makes an end run-around of the fence, or tunnels underneath? HAHAHA.

3) Boston Patriot's Day explosions: sorry, but I don't believe in the firecrackers, amputee actors and theatrical blood theory for one New York second. Why should the DC powers that be make it happen on purpose when they could more easily *let* it happen on purpose?

Justin Kase said...

I'm willing to contemplate the idea that the Boston bombing was a staged event; on Patriot's Day no less. Perhaps demonstrating the submissiveness of the "cradle" of the American Revolution to unconstitutional police state tactics was the point? It's certainly plausible, I'd just like a bit of proof.

Diogenes Shrugged said...

Jamey Hecht: As you know, it's unlikely that anybody will ever be able to provide a comprehensive, peer-reviewed scientific article showing that the Boston incident was staged. But were such an article to be written, I would certainly hope to see this entertaining video in the footnotes:

https://www.youtube.com/watch?v=eHWkRj5JfMc

Long video, but I've already watched it twice. Give it five and decide for yourself.

One verifiable exception is all it takes to discredit a scientific hypothesis. How many exceptions does it take for you to discredit a flimsy MSM narrative?

Jake said...

@Jamey H.: I recommend some of the analysis done by Prof. James H. Fetzer, an award-winning professor/teacher of logic, philosophy of science, etc.
I won't add links, as you will have no trouble finding them.
Of course, the trouble for anyone who wants to escape brainwashing is to be willing to open their minds to the evidence and reasoning presented. Regardless, I think Fetzer is one of the best analysts if you want a very detailed look.

Patrick said...

Excellent post summarizing the volatile situation the whole world finds itself in.

With regards to whether the Boston bombings were staged or not, the bigger issue to me is the outrageous actions of the authorities afterwards. The city and surrounding towns were put into virtual lockdown, armored vehicles rumbled through the streets, robocops marched around, chasing after what they'd already acknowledged were the chief suspects: two guys barely out of their teens who made a half-assed bomb. And almost no one asked whether maybe this was an overreaction? The passivity of my fellow citizens scares me more than terrorists.

dax said...

In regards to the lockdown after the Boston Marathon bombing, what I alway found funniest was that my partner and I decided to drive to NH. For a city that was locked down, there was no police presence anywhere (they were all in Watertown).

I always joke that it would have been the perfect opportunity to rob a bank. Everyone stayed home because they were told to stay home. There was no enforcement, in Boston anyway.

Sergio I. Solórzano said...

Spot on, thanks for your writings.

Nathan said...

Dmitry,

Astute observation as always. One correction, if it's not too churlish of me.

You said:"Or take the shoot-down of Malaysia's flight MH17 over Eastern Ukraine earlier this year. "

This happened in July 2014, last year. It's an unbelievable buried smoking gun. I live in Australia and our leaders signed away any chance of answers when they agreed to the non-disclosure agreement without prior approval of ALL parties to the agreement, which includes one of the possible perpetrators, Ukraine. Who in their right mind would sign that?

chola3 said...

Boston proved to me the american man, especially white, is neutered vis-a-vis the "authorities". Some might say those in the south would be different. I.dont think so.

The americans are in a stage where they subconsiosly realise their imperial priviledges are at risk if they rock the boat.

They will drag their live out as long as possible. In 20 years they moght not have their wealth, freedom or safety.

Meantime we the rest of the world have to face the lashes of the mightiest army in the world lashing out.

Josef Kazantski said...

This is one of your bravest posts so far Dimitry. The winnowing continues. It seems to me that people would rather be duped continuously and square the circle, than call it for what it is: a circle.

@Jamey Hecht
I hope you're applying the same standard to any other media you subscribe to and to your government. The thing is, when a state goes rogue, and the US and it's puppet states are rogue in my estimation, it's almost impossible to get a straight story from any insider such is the climate of fear and intimidation. Those brave enough to blow the whistle, well we know how that works out for them.

So my question to you is: how the hell is anyone supposed to present a well organized body of evidence in such a circumstance? God knows there isn't much in the way of evidence, compelling or otherwise, to support most of these events that keep this utterly farcical 'war on terrror' bandwagon rolling--unless you count the uncannily, fortuitous appearance of identity cards and passports either left at the scene or miraculously raining down from the sky, of course.

Lugh said...

Yes, Jews are very powerful in the New World Order. What's their status now in Russia? Has everyone read Solzhenitsyn's book about them? Still not available in the West.

Augustine said...

Gas cannot be profitably exported through the sea. Only neighboring areas that can be reached by a pipeline benefit from gas reserves at low prices. Australia being an island means that most of its gas will stay there.

Augustine said...

Whether the attack in Boston was allowed to happen or orchestrated, the fact remains that, in violation of the law and the constitution, the military was used in domestic soil for policing and implementing marital law. Another point for the empire.

Tom Carberry said...

Beyond bankruptcy for frackiing companies lies the problem of another bubble.

How many hundreds of billions did the rich lose when the price collapsed? Banks make loans based on projections and assumptions, and I bet no one predicted such an enormous collapse in price.

At the same time, the 4 biggest banks -- JPMorgan, Citi, Wells, and BOA -- own about 10% or more in evry fortune 500 company in the US. So I don't see the big banks doing anything to hurt their own investments, but if "little" guys like the Koch Brothers take it in the shorts, the big players don't really care.

As to Jamey H.'s request for links, this nice short one by stormcloudsgathering does a nice quick job. Tons of videos and other material out there.

https://www.youtube.com/watch?v=Wpu6_kArb9U

Whyawannaknow said...

Natural gas export as LNG is happening world wide. Export of NG converted to "value added" solid products such as ammonium nitrate by NG powered factories near well head is equally feasible. Conversion of NG to dimethyl ether, (DME) an excellent liquid fuel for existing diesel power plants is a technology being implemented as well.

tinnitus said...

I would recommend David McGowan's analysis of the Boston bombings. Very thorough and convincing imo.
http://www.davesweb.cnchost.com/nwsltr114.html

michigan native said...

The media bias, lies, distortions, and media black outs in the western press are beyond hypocritical. The latest being the "rebels" from the east launching these horrible rocket attacks and "gong on the offensive" and after all the terrorist attacks from the neo Nazis and mercenaries against civilians in the Russian speaking republics went unreported, claiming thousands of lives and a humanitarian crisis for millions, the western media starts to cover this event, if indeed it actually happened.http://www.bbc.com/news/world-europe-30967949 Where were they before when scenes like this were happening? https://www.youtube.com/watch?v=RzHliHKIULs The hypocrisy is atrocious.

It really looks like the US wants to establish a permanent military presence there with boots on the ground. And Europe and their puppets Merkel, Cameron, etc remain silent while they sell their own countries down the drain, there is talk about sending in the US military to train the thugs in Kiev how to better attack apartments, schools, hospitals, and civilian areas. They seemed determined to draw Russia into this, but thus far Russia has not taken the bait.

Speaking of hypocrisy, did Obama actually have the audacity to say something about Russia "bullying" smaller countries? I refuse to listen to anything that son of a bitch or any other neocon liar/puppet/hypocrite has to say anymore, but that statement went unchallenged? Tell that to Vietnam, Nicaragua, Chile, Guatemala, El Salvador, Grenada, Panama, Venezuela, Somalia, Yemen, Libya, Iraq 3 times and counting, Syria, Afghanistan, etc etc. The last time I checked, Russian foreign policy did not result in over 1 million dead in Iraq alone, nor are they engaged in military operations in any country. The same cannot be said of the US. And this SOB actually said that with a straight face? I thought it was outrageous the last time I heard him state "America's never been closer to energy independence". Just when I did not think he could get any more outrageous.....Not let's see what other dirty tricks these folks have up their sleeves.

If Russia starts to run gas through other countries, expect some tragedy to happen there. Hungary supposedly did not join the sanctions, so I am surprised that some unfortunate incident has not happened there yet

Kevo Downunder said...

Like all ponzi schemes, fiat currencies and the shale oil boom will burst and unravel. The U.S. derivatives and futures market will topple into the mountain top mining abyss. 10 yrs after peak oil with the U.S. stalking Russia and the markets in pre-collapse chaos nothing makes sense except chaos. Keep it complex and chaotic, perhaps no one will notice the elephant in the room that is the 6th great extinction and the unraveling of the biosphere due to the very same product that just a few months ago was worth $100 and is now less than half.

Allen Hall said...

This is the first of your posts I have read and I am a fan. I have been telling everyone who will listen to take your spare cash from low oil prices and stash it because the price at the pump will probably whiplash up to $5.50 or more when it goes back up. Good insight into the entire Geo-political shenanigans...

Massimiliano Rupalti said...

In Italian:
http://ugobardi.blogspot.it/2015/01/colpo-di-frusta.html

Paul Kemp said...

Jamey Heche here is information on the Boston Bombing http://globalresearch.ca/search?q=Boston+Bombing+

Dee Garmon said...

Absolutely incredible, I can read it ten times and still get the same pleasure. Never in my sweet, short life
have I seen an engineer write so well!