The Oil Conundrum Explained

The Oil Conun­drum Explained

Oil as a com­mod­ity has always been a highly valu­able early warn­ing indi­ca­tor of eco­nomic insta­bil­ity. Every con­ceiv­able ele­ment of our finan­cial sys­tem depends on the price of energy, from fab­ri­ca­tion, to pro­duc­tion, to ship­ping, to the consumer’s very abil­ity to travel and make pur­chases. High energy prices derail healthy economies and com­pletely dec­i­mate sys­tems already on the verge of col­lapse. Oil affects everything.

This is why oil mar­kets also tend to be the most mis­rep­re­sented in the main­stream finan­cial media. With so much at stake over the price of petro­leum, and the cost steadily climb­ing over the past year return­ing to dis­as­trous lev­els last seen in 2008, the Amer­i­can pub­lic will soon be look­ing for some­one to blame, and you can bet the MSM will do its utmost to ensure that blame is focused in the wrong direc­tion. While there are, indeed, mul­ti­ple rea­sons for the cur­rent high costs of oil, the pri­mary cul­prits are obscured by con­sid­er­able disinformation…

The most promi­nent but false con­clu­sions on the expand­ing value of oil are cen­tered on asser­tions that sup­ply is decreas­ing dra­mat­i­cally, while demand is increas­ing dra­mat­i­cally. Nei­ther of these claims is true…

The sup­ply side of the oil equa­tion is the absolute last fac­tor that we should be wor­ried about at this point. In fact, global oil use since the credit cri­sis of 2008 has tum­bled dra­mat­i­cally. This decline accel­er­ated at the end of 2011 and the begin­ning of 2012 all while oil prices rose:

http://www.energyasia.com/public-stories/markets-world-oil-demand-fell-3...

In its Feb­ru­ary Oil Mar­ket Report, the Inter­na­tional Energy Agency (IEA) fore­cast a reduc­tion in the growth of demand into the Spring of 2012, despite reports from the main­stream media that oil prices were spik­ing due to “recov­ery” and “high demand”. Simul­ta­ne­ously, the IEA reported that petro­leum inven­to­ries rose to the high­est lev­els since Octo­ber, 2008:

http://omrpublic.iea.org/currentissues/full.pdf

The Baltic Dry Index, which mea­sures global ship­ping rates and the demand for freight in gen­eral, has fallen off a cliff in recent months, hov­er­ing near his­toric lows and sig­nal­ing a sharp decline in world demand for raw mate­ri­als used in pro­duc­tion. A fall in the BDI has on mul­ti­ple occa­sions in the past been a pre­dic­tive indi­ca­tor of stock mar­ket chaos, includ­ing that which struck in 2008 and 2009. A sharply lower BDI means low global demand, which should, tra­di­tion­ally, mean decreas­ing prices:

http://investmenttools.com/futures/bdi_baltic_dry_index.htm

So, sup­ply is high across the board, inven­to­ries are stocked, and demand is weak. By all com­mon mar­ket logic, gaso­line prices should be plum­met­ing, and far more Amer­i­cans should be smil­ing at the pump. Of course, this is not the case. Prices con­tinue to rise despite defla­tion­ary ele­ments, mean­ing, there must be some other fac­tors at work here caus­ing infla­tion in prices.

Iron­i­cally, stock mar­ket activ­ity in the Dow has now come under threat from this infla­tion­ary trend in oil. Ris­ing energy costs have essen­tially put a cap on the epic explo­sion of equi­ties, and many main­stream ana­lysts now lament over this Catch-22. The prob­lem is that these investors and pun­dits are oper­at­ing on the assump­tion that the Dow bull mar­ket is legit­i­mate, and that the rally in oil is some­how an exten­sion of a “health­ier econ­omy”. This ver­sion of real­ity, I’m afraid, is about as far from the truth as one can stretch…

In the candy coated world of Oba­ma­nomics, high priced stocks are a valid sig­nal of eco­nomic growth, and oil is ris­ing due to demand which extends from this growth. In the real world, stock val­ues are com­pletely fab­ri­cated, espe­cially in light of record low trade vol­ume over the past sev­eral months:

http://money.cnn.com/2012/01/19/markets/trading_volume/index.htm

Low trade vol­ume means very few investors are cur­rently par­tic­i­pat­ing in active trade. This lack of invest­ment inter­est in the mar­kets allows big play­ers (such as inter­na­tional bankers) to use their mas­sive cap­i­tal to swing stocks whichever way they choose, even to the point of cre­at­ing false mar­ket ral­lies. Throw in the fact that the pri­vate Fed­eral Reserve (along with help­ful hands-off approach by our gov­ern­ment) has been con­stantly infus­ing these banks with fiat printed from thin air, and one can hardly take the cur­rent ascen­sion of the Dow or the S&P very seriously.

Another issue which should be stressed is the renewed ten­sions in the Mid­dle East, namely, the very dis­tinct pos­si­bil­ity of an Israeli or U.S. strike in Iran, and the pos­si­bil­ity of NATO involve­ment in Syria (which has exten­sive ties to Rus­sia and Iran). Cer­tainly, this is a tan­gi­ble dan­ger that would have unimag­in­able con­se­quences in global oil mar­kets. How­ever, the threat of grow­ing war in the Mid­dle East is in no way a new one, and has been ever present for the past decade. It hardly explains why despite hol­low demand and extreme sup­ply, the price per bar­rel of oil has been an unstop­pable ris­ing tide. Attempts by Saudi Ara­bia to reverse infla­tion­ary trends by promis­ing increased pro­duc­tion in the wake of Iran tur­moil has so far been ineffective.

Simul­ta­ne­ously, large oil reserves have been dis­cov­ered off the coast of Greece:

http://www.balkanalysis.com/greece/2010/12/08/greek-companies-step-up-offshore-oil-exploration-large-reserves-possible/

Off the coast of Ireland:

http://www.independent.ie/national-news/ireland-on-the-verge-of-an-oil-and-gas-bonanza-679889.html

Mas­sive fields in Mon­go­lia have been uncovered:

http://www.chinadaily.com.cn/bizchina/2009–08/08/content_8544985.htm

And of course, the vast shale oil fields in North Dakota and Mon­tana are finally being tapped:

http://www.mtpioneer.com/archive-July-oil-reserves.htm

Oil sup­ply has been ample and large oil reserves are being dis­cov­ered yearly. Spec­u­la­tion would be the next obvi­ous assumed cul­prit, and there are cer­tainly some sig­nals of such activ­ity. Oil spec­u­la­tors tra­di­tion­ally use the forced accu­mu­la­tion of oil inven­to­ries to reduce mar­ket sup­ply and arti­fi­cially increase prices. Inven­to­ries have indeed been high. How­ever, as pre­vi­ously stated, demand for oil has been sta­tic or fallen in most coun­tries around the world since 2008, and there has been NO petro­leum short­ages due to manip­u­lated mar­kets. In fact, there have been no petro­leum short­ages period. Spec­u­la­tion has the poten­tial to cause sharp but short term shifts in mar­kets, but one must take into account the long term trend of a par­tic­u­lar com­mod­ity to under­stand the root cause of its increas­ing or decreas­ing value. Again, inad­e­quate sup­ply is NOT the trig­ger for the ongo­ing oil price prob­lem, whether by threat of war, or by reduc­tion through speculation.

This schiz­o­phrenic dis­con­nec­tion between the stock mar­ket, and oil, and true sup­ply and demand, is, though, a symp­tom of one very dis­turb­ing ill­ness lurk­ing in the back­wa­ters of the U.S. fis­cal blood­stream; dol­lar devaluation.

We all under­stand that the Fed­eral Reserve has been engaged in non-stop quan­ti­ta­tive eas­ing mea­sures in one form or another since 2008. We don’t know exactly how much fiat the Fed has printed in that time, and won’t know until a full and com­pre­hen­sive audit is finally enacted, but we do know that the amount is at the very least in the tens of tril­lions (be sure to check out page 131 of the GAO report below to find their break­down of Fed QE activ­i­ties. This is just the money print­ing that has been ADMITTED TO, in excess of $16 trillion):

http://www.gao.gov/assets/330/321506.pdf

The dol­lar is being thor­oughly squashed. Why is this not show­ing in the dol­lar forex index? The dol­lar index is yet another exam­ple of a use­less mar­ket indi­ca­tor, being that it mea­sures dol­lar value rel­a­tive to a bas­ket of world fiat cur­ren­cies, ALL of which also hap­pen to be in decline. That is to say, the dol­lar appears to be vibrant, as long as you com­pare it to sim­i­larly worth­less paper cur­ren­cies that are being degraded in tan­dem with the green­back. Once you begin to com­pare the dol­lar to com­modi­ties, how­ever, it soon shows its inher­ent weakness.

The dollar’s only sav­ing grace has long been its sta­tus as the world reserve cur­rency and its use as the pri­mary trade mech­a­nism for oil. This, how­ever, is changing.

Bilat­eral trade agree­ments between China, Rus­sia, Japan, India, and other coun­tries, espe­cially those within the ASEAN trad­ing bloc, are slowly but surely remov­ing the dol­lar from the game as these nations begin to replace trade using other cur­ren­cies, includ­ing the Yuan. I believe com­modi­ties, espe­cially oil, have been reflect­ing this trend for quite some time. The con­se­quences of the dollar’s ties to oil are detri­men­tal to all nations that con­sume petro­leum, and they are clearly mov­ing to insu­late them­selves from fur­ther devaluation.

Even after the release of strate­gic oil reserves back in the sum­mer of 2011 in an effort to dilute prices, and the announce­ment of an even larger pos­si­ble release of reserves this month, oil has not strayed far from the $100 per bar­rel mark. High Brent crude price have held for years, even after numer­ous promises from gov­ern­ment and media enti­ties admon­ish­ing what they called “spec­u­la­tion”, and promises of a return to lower energy costs. Not long ago, $100 per bar­rel oil was an out­landish premise. Today, it is com­mon­place, and some even con­sider it “afford­able” com­pared to what we may be fac­ing in the near future, all thanks to the steady decon­struc­tion of the last pil­lar of the U.S. econ­omy; the dol­lar, and its world reserve label.

Ulti­mately, no mat­ter how manip­u­lated and overindulged the stock mar­ket becomes, no mat­ter how many fiat dol­lars are injected to prop up our fail­ing sys­tem, the price of oil is the great game changer. As infla­tion is reflected in its price, and energy costs burn out of con­trol, the Dow will begin to fall, regard­less of any low vol­ume or quan­ti­ta­tive eas­ing. In all like­li­hood, this conun­drum will be blamed on as many scape­goats as are avail­able at the moment, includ­ing Iran, or China, or Rus­sia, or Japan, etc. Each and every Amer­i­can, and espe­cially those involved in track­ing the econ­omy, will have to remind them­selves and the pub­lic that at bot­tom, it was the Fed­eral Reserve that cre­ated the con­di­tions by which we suf­fer, includ­ing cur­rency deval­u­a­tion and high oil prices, NOT some for­eign enemy.

The one pos­i­tive ele­ment of this entire dis­as­ter (if one can call any­thing “pos­i­tive” in this mess), is the man­ner in which the high price of oil tends to dash away the illu­sions of the com­mon cit­i­zen. It is an issue they sim­ply can­not ignore, because it affects every aspect of their lives in minute detail. Costly energy awak­ens the oth­er­wise igno­rant, and forces them to see the many dan­gers lurk­ing on the hori­zon. Hope­fully, this awak­en­ing will not be too lit­tle too late…