January 03, 2015 | Graham

Could oil’s price plunge be a conspiracy for growth?

Everyone is into geo-political conspiracies around the plunge in the price of oil, including Graham Lloyd in today’s Australian. His is a good article, not least because it has two useful graphs at the head of it.

The first graph is of US oil production over the last 30 years.

Source: The Australian

The second graph is of the West Texas Crude price over the last 15 years.

Source: The Australian

There are just two things that I want to point out.

You can’t have all that extra oil coming onto the market without it having a price effect. Not unless someone else voluntarily restricts production.

There is no conspiracy. We are seeing market forces at work. (Where are all those idiots – that’s a technical term – who just a few years ago were forecasting $300 barrels of oil¬†about now?)

My second point is to look at when the price of oil peaked last. It was around halfway through 2007, which was just before the GFC.

One of the unremarked causes of the GFC wasn’t derivatives or a housing boom, it was an oil price boom. The price of oil feeds into just about everything.

Since the GFC, after an initial dive, oil has stayed high, and economic activity has dived, and stayed fairly low.

We have a situation where 6 years of bastard Keynesian has delivered nothing.

And if you want to know how much it will deliver in the future, look at Japan, that adopted these “remedies” over 20 years ago – still nothing.

You can lower the price of money but that doesn’t necessarily feed into the real economy. Quantitative easing has just fed the shadow economy of asset markets.

But if you lower the price of oil you lower the costs for everyone, not just speculators and banks.

If there was a conspiracy, it would be to put the weight of economic stimulus onto input costs, and off money, allowing the QE to be less painfully reeled in and sustainable growth to start again.

But such a conspiracy would be beyond the stuffed shirts on Wall Street, or the current, or just about any previous, US President.

It is just markets at work. Which is why markets are such a wonderful thing. Dumb as they are they can achieve what the wise seldom can.

Posted by Graham at 6:47 pm | Comments (22) |
Filed under: Uncategorized


  1. Yes Graham and remarkably accurate; except where you say, bastard Keynesian hasn’t delivered anything.

    What hasn’t been actually tried is Keynesian economics; except here, in the school kids bonuses, the upwardly adjusted pensions and the cash splash.

    Keynesian economics only works when it delivers cash directly to the masses, rather than Banks and insurance companies grown to big to fail!

    And where they’ve simply used the money created from public debt to draw down their own debt or simply hoard it as a bulwark against further contractions.

    President Roosevelt’s (a conservative) new deal was operated on Keynesian principles, in as much as it created jobs by building thing, like myriad hydro electric dams, which had the additional benefit of creating massive cheap energy, and more reliable water!
    This created the stimulus of many additional pay packets.
    And that’s what’s missing in Japan, Ireland, Spain and elsewhere!

    Yes and without the shadow of a doubt, the war played a part and further stimulated the economy.
    Particularly after Pearl Harbor, when the US assembly lines were cranked up into overdrive.

    During the pre war period of Keynesian style stimulation, every dollar of debt created 2.4 dollars worth of economic growth, and due to the PROPERLY UNDERSTOOD (eventually) application of Keynesian economics!

    Well and to be fair, Keynesian economics went against everything conservatives just like a moderate conservative like Roosevelt believed in; and in many places where tea is terribly popular, still does!

    Currently, the cash injections, (Q.E.) which are currently and invariably being channeled through the banks; every dollar of debt just creates 0.03 dollars worth of growth; and nothing at all like Keynesian economics. [It’s like trying to prime a pump at the very top of the line!]

    Yes the war provided quite massive stimulus, and had no other choice; given the additional pay packets and consequent discretionary spending it also created.

    When you pump prime as the term is called, you need to inject the cash at the bottom not at the top.
    And that’s when it works and is applied Keynesian economic theory in inaction!
    Sorry mate, but I see none of that in Japan!

    People who have much more than they need and just shop to alleviate intense boredom, are hardly able to eat more or consume more.
    Even dear old Imelda Marcos, could only ever wear one pair of shoes at any one time!

    On the other hand, those who’ve been going without or making do, have few other choices than crack on with the repairs and replacements!
    And in so doing empty shop shelves, which in turn flows on to the warehouses and vast inventory reductions.
    Which in turn obliges the factories/assembly lines to crank up and start resupplying.

    Japan died in the economic arse by virtue of overvaluing and quite massively over-leveraging its real estate; coupled with the fact, it as an export reliant economy, saw massive run downs in its exports!
    And yes the oil shocks since and before just didn’t help!

    None of which and to reiterate, is bastard Keynesian economics at work.

    In fact the only time Keynesian principles could be said to be applied in Japan, was during the miraculous post war economic recovery?
    When social credit and cooperative capitalism were applied as a nation, all working for each other and the national economy!
    And a far cry from the insanity of individualism, debt funded speculation and extreme capitalism; that has since wrecked it.

    Simply put, no man is an island, nor is there anything remotely like a self made man; born in the log cabin cleverly hewn from the wilderness, with his own bare hands!

    Without exception, in any success success story there are many hands and minds cooperating for a common purpose, as was the indubitable case in post war Japan!

    And then later, when many export reliant Japanese firms ran at a marginal loss, just to keep industrial enterprises alive and functioning, and able to take full advantage of any international recovery, when it came.

    Having managerial smarts is simply not reliant on the size of the reward package, or the numbers; or indeed, the amount of testosterone affecting any of it!

    Of course and you’re correct, oil and its market price is a factor, and borne out by the growth stimulus of addition economic activity inherent in lower oil prices/increased supply.

    Simply put, when the public is not dipping as deeply into the pocket for fuel money, there’s more for other things; ditto when interest rates are held low, money formerly earmarked for mortgage payments etc, is able to be used elsewhere.

    As in increased savings, discretionary spending, or just drawing down debt.

    I can agree with you in one area, and that is tax reform.
    If all our tax were collected via a VAT model at the very end of the supply chain, that would be a very good thing; inasmuch as there would be no tax inputs at the bottom or the middle to account or adjust for; and therefore, no cascading up through the production or distribution chain!

    Which given everything and current practice, including profit margins; and passed on costs, [including all the various tax imposts,] amplifies or magnifies by as much as 100% or better each time.
    Without this quite massive cascading imputation effect; the overall costs to everyone and everything must come down!

    And if that then resulted in less actual administration and compliance and reconciliation costs?
    That would have to be a good thing.

    I think the economy has no choice but to work better and vastly more productively, when far fewer of us paid to dig hypothetical holes, others are then paid to fill!

    And there are other examples, where secret commissions etc, need to be thoroughly exposed and eliminated.
    No matter how cleverly disguised or camouflaged; the luckless consumer invariably pays for these things; and out of normally indispensable discretionary spending!

    A man should be worth his wages; and do something productive to earn them; as well as pay a fair share of tax.

    If management teaches just one thing Graham, it teaches that there is always a better way to do mostly everything.

    And that better way has to include less government/government imposts to carry around like lead in the economic saddlebags!
    You have a very nice day now y’hear.
    Alan B. Goulding.

    Comment by Alan B. Goulding — January 4, 2015 @ 11:23 am

  2. Chris Powell has evidence of futures price manipulation by the Central Banks but MSM won’t publish this evidence.http://usawatchdog.com/central-banks-secretly-controlling-all-futures-prices-chris-powell/

    Central Banks with the power of infinite money creation can and do influence our markets. This is not conspiracy but a reality.

    The reason for the drop in the price of oil was two fold. International demand did fall because our economies are shrinking but with QE (money printing) the share market is over inflated.

    The other reason for the fall of the oil price was the US oligarchs telling Saudi Arabia to put more oil on the market to hurt Russia. Thus the Ruble collapsed.

    We do not have fee markets Graham and Dr Paul Craig Roberts attests to this reality.

    Comment by Ross — January 4, 2015 @ 5:38 pm

  3. Hi Ross, actually the world economy is growing, but the supply of oil is growing even faster. The oil market is as free as they come. Being a free market doesn’t mean that people can’t manipulate the market to some extent – any player who is large enough in any market can do that. What it means is that the rules aren’t being rigged. Anyone can produce oil, and anyone can buy it, so the market is free.

    The US may have asked the Saudis to maintain oil supply, but so what? If it is not in the Saudi’s interest they wouldn’t do it.

    Alan, you’re up to your usual tricks again. I think we need a limit on post lengths because yours are so long they make it hard to have a sensible conversation. Suffice it to say that your intepretation of what worked in the Great Depression is categorically wrong. Australia followed a conventional prescription and the result is to be seen on page 2 of this document http://archive.treasury.gov.au/documents/110/PDF/round3.pdf. One year of -10% gdp growth more than recouped in the immediately following years. Can’t find a graph, but you’ll find these numbers indicate that the US results were not nearly so good http://socialdemocracy21stcentury.blogspot.com.au/2011/12/us-real-gdp-and-gnp-19291950.html.

    Comment by Graham — January 4, 2015 @ 5:54 pm

  4. Graham in the USA they call growth in the money supply an increase in GDP. How can they have growth when there are 50 million people on food stamps and real unemployment is 24% ? Many people have given up looking for work in the USA and Europe.

    Since 2006 Corporations in the USA have borrowed $4.3 trillion of cheap money to buy their own shares thus prop up prices and CEOs pay themselves huge bonuses. Is that growth?

    The underlying problem is that this inflationary money gets created as debt also. People are paying the banks to depreciate their wages, savings and pension funds. If they don’t own solid assets,that are not over valued,they are going backwards. Farmland and Commercial property are about the only land that is not over valued since their price are determined by real returns.

    When banks create inflationary money as debt, exponentially more money in future years must be created,to pay for the debt of today. QE is not going to stop because the present system will collapse.The West is hooked on the drug of money printing until hyper-inflation emerges and interest rates explode.

    Gambling in derivatives is the other huge flaw in our system. They conservatively are 10 times the GDP of the planet and are interwoven into all our markets and pension funds. A lot of this inflationary money is expanding derivatives at the cost of real production.

    The only real growth is happening in the BRICS nations. They now have the BRICS Development Bank which is building real infrastructure. We should join the BRICS nations to escape this insanity.

    Comment by Ross — January 5, 2015 @ 7:00 am

  5. Graham,Rob Kirby of Kirby Analytics is well worth listing to. He says shale oil needs to be $70 a barrel to justify production when the current oil price is $50 per barrel. The oil derivatives are also at risk of a big collapse. Most derivatives are denominated in $ US.

    Comment by Ross — January 5, 2015 @ 8:41 am

  6. Yes, the previous bubble in land prices (at the outset of the 1970s) was accompanied by an oil crisis, too, (the OPEC crisis). If we’ve freed up the supply of oil, what sort of a recovery might we have if we also freed up the land market? It has become an investor’s (read speculator’s) dream. The Henry Tax Review provided the remedy – an all-in land tax, accompanied by the elimination of 120 anti-productive taxes. That would certainly provide the other leg of the double to get the real economy happening again.

    Comment by Bryan Kavanagh — January 5, 2015 @ 8:57 am

  7. Oh that it were all that simple.
    European, Japan, india and China demand has either stopped
    increasing or has fallen.
    The US tight shale oil has filled the gap that appeared from
    around 2008. Now that demand has fallen the price has fallen
    and is below the breakeven price for the tight shale oil wells.
    As most companies have drilling contracts in place they will
    continue drilling and producing oil for most or all this year.
    However new drilling lease applications have collapsed.
    This means that as wells are completed and as wells
    production decline they will not be replaced.
    The peak you see at the end of that graph will disappear.

    As that happens the price will rise again.
    This oscillation was predicted at least 15 years ago by
    Campbell & Deffreyes and others.

    There will be a small number of cycles like this and it will
    then stop in a state that is uncertain.

    There is one other factor not normally taken into account.
    The companies drilling in the tiht oil fields are not the
    big international companies but small startups that are in
    debt up to their collective necks. They have not been making profits except by selling leases. They are on a financial tightrope.

    One other factor not mentioned, tight oil is not the same as
    crude oil, it is more volatile does not have the energy content of crude oil is is not sent through pipelines and
    the rail tankers used have been banned and a crash build
    of higher spec rail oil tankers is underway.

    The upshot is when prices recover the tight oil industry is
    unlikely to resemble its present image.

    Comment by BarRy — January 5, 2015 @ 9:58 am

  8. Thanks for the links and the “courtesy” Graham.

    Having perused both at some length, my view that the Great depression started out as a manageable recession made into the great depression by Conservative economics, is simply reinforced.

    And that we must become once again an economy that makes things. Which is when we and the US experienced our best periods of unprecedented growth!

    Moreover, the highest inflation numbers seem to come after we jettisoned the moderating gold standard; or that there is no business cycle, and that classical liberalism is just so much pie in the sky?
    To reiterate, thanks for the links!

    One also notes the comparisons between conservative low taxing small government failures, i.e., the Irish, Italian, and Spanish governments, and high taxing big government that remains inherently sound and successful. i.e., the Scandinavian countries; which managed to avoid the housing bubble/oversupply and the GFC?

    One also notes the quite massive deposits of Shale oil and gas in China, and the serious amount of help and technical expertise America is providing, (multiple pad and horizontal drilling) enabling China to become less and less dependent on non-indigenous/Russian sources!

    So I don’t see a demand driven increase in global prices prices anytime soon.

    Similarly, they are developing nearby Mongolian coal resources, which will no doubt ramp up productively, when the rail link is completed.

    And I seem to recall reading they are building one thorium reactor a week? So, who is the most likely to become the energy capital of the world?

    We would be better advised to use some of our more copious energy resources to underpin a return to an economy that makes things!

    [Rather than export most of it at fire sale prices; or like wood-chip, at a virtual or government subsidized loss!?]
    And doable with the right leadership, vision and unifying pragmatism!

    I also note that there is a strong prospect, that pragmatic Chinese are considering a return to the gold standard, particularly as you just can’t print any of that!

    Thanks again for the useful links and the “courtesy”.

    Comment by Alan B. Goulding — January 5, 2015 @ 11:25 am

  9. Graham,
    I suggest you get oilprice.com permission to publish this article.


    It puts all this into perspective and removes all the noise.

    Here is the Tinyurl

    Comment by BarRy — January 5, 2015 @ 12:49 pm

  10. Remember the lies of peak oil ? It was just a ploy to keep prices high. South Australia has reserves of shale oil worth $20 trillion.

    Why don’t we develop some of that for our own needs and stop importing oil? Problem though.I don’t think we refine our own oil in this country any more and we have just a few weeks in reserve.We are really the stupid country.

    Comment by Ross — January 5, 2015 @ 1:38 pm

  11. Don’t think there is anything in the OilPrice.com article that contradicts what I’ve said. Resource markets are always cyclical. You have to be prepared to look through near-term price declines and value them on the basis of long term averages, but who the hell knows what they are?

    Comment by Graham — January 5, 2015 @ 3:09 pm

  12. Let us not lose sight of the facts that:
    a) oil in even its fracked forms is finite
    b) the planet is cooking in CO2 and we must leave most of available reserves in the ground, at least until real alternatives are found
    c) growth is slowing in even the BRICs, or at least they cannot continue indefinitely (China knows that)
    d) Australia is 91% dependent on imported liquid fuels, and has NO plan for disruptions to this supply.

    Comment by Ronda Jambe — January 5, 2015 @ 4:02 pm

  13. Rhonda, wind power is useless and solar power is presently not technologically advanced. Also solar needs a far better battery system which presently does not exist.

    The BRICS are in far better situation than us. China,India has the productive capacity and Russia Brazial, South Africa has resources and technology. Russia and China have very little debt.

    I just heard that Indonesia is making noises about joining the BRICS. Germany also wants to join. If Germany joins, NATO and the EU are finished.

    Dr Paul Craig Roberts reckons that the rest of the world will eventually join the BRICS and Aust, Great Britian and Canada will be the only vassal states left to dwell in poverty with the USA.

    Comment by Ross — January 5, 2015 @ 4:26 pm

  14. Don’t agree on wind power, and solar is rapidly becoming more viable than coal.
    As for the BRICS, Venezuela, with all its oil, is appealing to China for bail outs. One would have thought them a candidate for the BRICS.
    Fact is, the fossil fuels are both running out and becoming too dear to harvest.

    Comment by Ronda Jambe — January 5, 2015 @ 5:07 pm

  15. PS Have a look at this and tell me why if you don’t think it is credible:

    Comment by Ronda Jambe — January 5, 2015 @ 5:17 pm

  16. Ross, Archaringa is a good prospect. I remember when it first appeared on the scene there was quite a bit of excitement in the US oil investment publications. Linc was not ready at that time to look at finance or partners.
    One of the problems, which I do not think has been solved is water, they would needs lots.
    3.5 billion is just 9.5 years supply at present usage.

    I have not heard much news of it for a while now.
    I agree it is criminal to let our refineries close.
    Then buy diesel submarines, hmmm.

    Comment by BarRy — January 5, 2015 @ 5:23 pm

  17. Rhonde Jambe,
    Have a read of the link I suggested to Graham;

    Berman goes into some detail about the financial stability of the tight oil companies. Many appear to be worth nothing.
    It looks like the next rise in oil prices will be too far away to save them.
    People who know say derivatives are pretty dodgy bits of paper and on oil, very very dodgy.

    Comment by BarRy — January 5, 2015 @ 5:33 pm

  18. Ronda, I seem to recall reading an article, which claimed GM was putting the finishing touches to a prototype battery with twice the capacity of lithium ion?

    Even so, we don’t need batteries in many cases, where we can store methane gas in compression chambers or bladders, and the use that to power up ceramic fuel cells for energy on demand!

    Simply put, one doesn’t need batteries to store energy.
    And capacitors will store and release regenerative energy much more rapidly than batteries?

    So why don’t we use what we have already invented here, in a combination that works for us and against the tyranny of distance; that makes batteries less desirable for many; except say, daily commuters?

    And CNG/ceramic fuel cell combination has twice the energy coefficient of any comparable hybrid, or four times that of reticulated coal-fired power.

    The advantages are many, one of which is the exhaust product is mostly water vapor!

    And because it takes just minutes to top up a gas tank, and because no discernible transmission leakage is created.

    Not the case for power-stations of any type, which suffer transmission line losses!
    Albeit, those small ones connected to very local micro grids suffer the least of all.
    So, recharging batteries via the grid, may make more (total) carbon, than just driving a very fuel efficient car?

    I can’t help noticing the huge price disparity between tight oil and shale gas.
    I mean, surely they’re extracted very similarly and at similar costs?

    Is it because shale gas is vastly more abundant and less costly/difficult to extract?
    And if that’s so, why aren’t we going hell for leather to extract it and use it to repower our manufacturing industry; or at least the high tech part of it?
    Which only needs very low cost energy to prosper right here!?

    Fuel cells don’t burn lighter than air methane per se, which atomically is mostly hydrogen; which is what makes cheap as chips and endlessly available methane (biogas, NG CSG) the endlessly sustainable fuel of choice.
    Think of it a electrolysis in reverse, rather than combustion.

    While coal seam gas (the purest naturally occurring methane) can have its share of environmental problems, including the massive release of saline water, it is water that can be used to reliably grow various cash crops.
    And by piping it around underground, in membrane wrapped ag pipes.

    And extracting CSG is, I believe, a far better low cost energy option, than simply mining the coal and allowing all that usable methane, or salt water to escape, I believe, where both do nothing but environmental harm!
    [As always there are the seeds of advantage in almost every disadvantage, but only if you’re looking for them!]

    This pumpless method (reverse osmosis) works because many plants have better pulling power than many pumps!
    And the leftover saline liqueur, has other profitable uses. i.e., heat sink?
    Alan B. Goulding

    Comment by Alan B. Goulding — January 6, 2015 @ 10:28 am

  19. Alan some points;
    Extensive testing in commercial conditions reveals that fuel cells suffer a cost disadvantage because of limited usable lifetime. One factor regarding petrol vs electric cars is the very high consumption of electricity by refineries. In making the comparison that electricity consumption is never considered.

    Perhaps converting the existing car & truck fleet to use
    coal seam gas might be an economic 15 year transition method.

    Comment by BarRy — January 6, 2015 @ 11:43 am

  20. Yes BarRy. However, the substitution with very cheap polymer for the formerly expensive noble metals, which routinely fouled or soured as you point out; has offset this use by factor.

    And CSG, (methane) works almost as well as hydrogen in the same locally invented ceramic fuel cell; meaning the national fleet will go twice as far, for the same cubic metres of gas, given the huge or doubled energy coefficient of the CNG>ceramic cell combination.
    And even then the exhaust product is mostly pristine water vapor.

    And the other advantage is the huge reduction in moving parts, which lowers maintenance costs quite dramatically.
    I mean, a few wheel mounted electric motors, and you immediately eliminate gear boxes and diffs?
    And ceramic fuel cells are whisper quiet, solid state technology!

    And if you doubt the sheer torque and puling power of electric motors; well they drive really big trains/move hundreds of thousands of tons and many mine trucks etc.

    And I don’t have a problem, if that then means a return to larger more comfortable cars, given the additional comfort levels needed to attack the tyranny of distance, that is traveling by any means in Oz.

    And think, even electric trains could be powered by inboard ceramic fuel cells/gas tanks, as could trams and trolley buses; meaning, we could eliminate those incredibly costly overhead wires; and their inevitable transmission line losses!

    I think having to replace the active (cheap as the polymers used in bank notes) polymer leafs in the cells every six month or so, would be more than a useful trade off!

    And that could be done in less time than takes to change the oil in conventional engines, if refurbished modules were zipped in, and the old one sent for refurbishment, like we do with some batteries now.

    It makes sense for us, with our copious gas reserves, to use it as a preferred power source, which simply has to make more sense than selling it at fire sale prices, then compounding that official stupidity, by importing vastly more expensive petrol.

    All we really need to be able to do, is pull in to the gas station and refuel the gas powered electric vehicle, in less time than we need to take a comfort stop!
    And that’s very doable with a compressed CSG, powering the aforementioned combination!

    And even if we start tomorrow, the (15 year) transition time, means no one need be made redundant, before they acquire the new skills needed to keep the national fleet moving!
    Cheers, Alan.

    Comment by Alan B. Goulding — January 6, 2015 @ 12:41 pm

  21. http://www.thrivemovement.com/the_code-new_energy_technology The spinning Earth with is soft iron core is a gigantic magneto that sends magnetic fields out into space protecting us from the Sun’s damaging rays.

    I’ve read from several sources that Nikola Tesla was on the way to creating free energy using these magnetic forces.JP Morgan was his investment backer and when he realised what Tesla was trying to do, crushed this study. JP Morgan was reported as saying “If I can’t put a meter on it,I don’t want to hear about it.”

    Multi nationals do not want to know about free energy since they cannot profit from it.

    Comment by Ross — January 6, 2015 @ 8:17 pm

  22. Yes Ross, as a boy I read many articles on magnetism and experiments with magnetism, which is far more powerful than the gravity that holds us to the earth.

    I can recall, if memory serves, reading an article, where gravity seems to have been defeated by electromagnetism and cup or bowl shaped non magnetic metals?
    Pure aluminum or bismuth?
    Which seem to have been able to channel or direct a magnetic beam.

    As memory serves, there were accompanying evidential photos, where such a device was made to levitate.

    One also notes, that a modern day spinning Top, clad around its widest point with multiple rare earth magnets, can be made to do the same thing, while spinning above a certain level of revolutions, on the end of a plastic ruler.

    Take one into a classroom, set it spinning and then take away the support leaving it spinning in midair; which is quite an eyeopener for many kids, and sure to foster an interest in science.

    One understands these little items can be purchased in some toy stores.

    The fastest train (900 klms) in the world are magnetron, and float on and are powered by electromagnets.

    Tesla reportedly developed this free energy, and was allegedly able to send it to and power up a stationary vehicle, using something very much like a micro dish.

    Interestingly, all the books freely available in our public libraries on the magnetic experiments; I read about as an interested schoolboy.
    Are now, as far as I’m able to ascertain, unavailable.
    Nor am I able to provide links.

    Moreover, being well read, and in possession of an unusually reliable memory, counts for very little these days!

    Even so, I believe we’ve just scratched the surface, with what is still achievable, utilizing directed and or focused magnetic force.

    Carbon based life forms also produce a weak but apparently discernible magnetic field.
    We have iron in our systems, and produce weak electric signals, each time we think a thought or move a limb.

    With this in mind, my hope is the development of a neural link affecting ray, that renders the (line of sight over several miles) target as useful and coordinated as a headless chook for a couple of hours, and without any actual harm or long term effects, or more than could be caused by a fainting incident.

    And become the battery powered (adjustable) stun gun weapon of choice for police personal, and peace keepers the world over; particularly, if they’re able to penetrate defensive positions?
    Cheers, Alan.

    Comment by Alan B. Goulding — January 7, 2015 @ 9:13 am

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