So, I went to Yahoo to check my email and I saw this story on their main page. The gist of the story goes something like, “now is a terrible time to take your money out of equities because the market is down.” This is wise investment advice informed by decades of careful observation. But, is there anything missing.
As a point of full disclosure, I liquidated my equity position in late 2003 (I had 6 shares of stock in a railroad company). So I am ‘bullish’ on the markets.
To get back to the idea in the article, I believe that they are missing three fundamental differences between all past recessions and today.
1.
The US no longer has a significant natural resource base to exploit. Without this, there is not enough domestic surplus available to provide raw materials and energy for economic recovery. We will call this the lack of fuel to start the economic fire.
2.
The United States is losing hundreds of billions from the economy every year due to the fact that the US is a net importer. This means that we are not selling to the rest of the world, we are buying from them. This was a major source of wealth creation in the past, and it is gone.
3.
The United States government likely will not be able to buy our way out of this mess. They are trying, but no matter how much debt they take on, without a prospect for growth on the other side the economy has no where to turn.
The problem is that financial advice is the interpretation of the past. The economic rules have changed, there essentially are no rules. The financial advisors either don’t want to admit that, or they want you to keep your money in the market which they hope will prevent an all out crash from unfolding. Or to be more cynical, they want you to keep your money in the market, thereby keeping it inflated, until after they get their money out. But that would mean they actually know what is coming, and I am not convinced of that. I think they are still true believers.
Time will tell. I will say that these modern supercapitalists kept this ride going for two years longer than I figured it would last. They are not to be underestimated, for that reason if no other.
More fucked than they think we are,
Mike
Sunday, October 3, 2010
What Domestic Oil?
This is a response to William Balgord’s guest column in Sunday’s (10/12/08) Wisconsin State Journal. In the column, Mr. Balgord more-or-less takes the “Drill Baby Drill” chant from the GOP’s convention and stretches it out for 800 words or so.
The article makes the following points, to which I will respond:
1. The “windfall profits” tax the congressional Democrats have been touting will hurt the average American investor.
To some extent, this may be true. However, it is not a good argument against corporate taxes proposed to address a specific situation. I don’t like the idea of corporate taxes at all – I think that the people who profit should be taxed, not entities – but this sort of populist propaganda (he specifically mentions “retirees, union workers and other hard-working individuals”) misses the mark. Any investor making income on stock should pay the same tax that any “other hard-working individual” does on payroll income. If there is a decent argument against these tax proposals it should be that it takes money away from exploration.
2. There are billions of extractable barrels of reserves around the world that are currently not being exploited (the author includes the Arctic, Oil Shale and off-shore deposits).
The problem with the three sources mentioned is the price point of oil at which these reserves are profitable. If oil is $150-200/barrel, many of the reserves the author mentioned would be worth it financially to exploit. There are two problems there, the first is the infrastructure necessary to exploit these deposits does not currently exist. It can be built, but when? Who pays? The second problem is that these price points are not affordable economically as was demonstrated over the summer.
The author states that “these are available and their use will be necessary to make an orderly transition to the future.” The problem is that they are still available because they are not affordable. There are some regions that can and should be explored including ANWAR and the continental shelf. I contend that any environmental cost that may be felt would be offset by the economic benefit of not exporting our collective wealth to any state willing to sell us their oil. The exploitation of the North Sea has shown that offshore drilling can be done relatively responsibly as well.
3. Stagnating oil production is all OPEC’s fault.
This is 20th century thinking at its worst. You can look at hard numbers to find out that exploration worldwide has boomed since the spike in oil prices in the past 5 years. The problem with OPEC is that they have very little excess capacity to bring online at current production levels.
4. Stagnating oil production is because of poor deployment of technology.
Mr. Balgord states that “Russia and Mexico are lagging behind in modernizing their oil fields.” So, the problem is a lack of technology improvements on existing fields. The problem with his argument here is two-fold as well. First, the modernized infrastructure is not readily available for deployment. Second, again as North Sea exploitation shows, the implementation of the most modern extraction techniques cause earlier well peaks, and higher decline rates. In other words, the aging fields in Russia and Mexico would only benefit for a short while from the introduction of such technology, with higher post-peak decline rates.
5. More areas need to be opened to exploration.
The author clearly doesn’t understand what is important in energy economics. Reserves are essentially meaningless. The only thing that matters is flow rates. Barrels produced per day are the measure of success, and of survival. Finding new oil in up-to-now unexplored regions mean nothing until they produce. The exploration really can’t even get underway in a serious way because the exploratory rigs and expertise required to run them do not exist. It will take years, and billions of dollars, to build and staff these rigs. In case Mr. Balgord hasn’t noticed, these are two resources America is short of at the moment.
6. Recently high oil prices are a result of speculation and the OPEC cartel.
This is absolutely false. Recently high oil prices were the result of market mechanisms (high demand and limited spare production capacity), a weak dollar and geopolitical instability. Speculation is integral to finding price points in a market. Without these free market principles, prices would not react and shortages would soon follow.
7. “Access to the outer continental shelf would ultimately increase our domestic reserves by more than 500%.”
Whether or not this number is accurate, as I stated before “reserves” mean absolutely nothing. For example, you can have a million dollars buried in your back yard (you might want to check), but if you don’t have the tools to dig it up and start pulling it out, it serves absolutely no purpose.
Conclusion
Mr. Balgord’s proposals regarding oil merit little place in a serious discussion about America’s energy future. His solutions are not feasible at reasonable price points or they are unrealistic all together. The United States will likely never produce much more oil than it does today due to the fact that the best reserves have already been exploited beyond their peak production levels. This means that just to keep up with current levels of production we need to bring more and more oil online, but the new production would only be temporary. The newer sources of production will also be an order of magnitude lower than previous projects. Easing environmental regulations and opening the most promising regions up to exploration is a great idea if energy is the only metric. It is still reasonable, but not quite so appealing, even when environmental degradation is taken into account. However, any supply side solution should be accompanied by ambitious conservation measures, which is something that Republican or Democratic politicians will likely be unable to accomplish until the problem is past a point of reasonable resolution. It is also my opinion that we are already well past that point, by the way.
Sincerely Fucked,
mike
The article makes the following points, to which I will respond:
1. The “windfall profits” tax the congressional Democrats have been touting will hurt the average American investor.
To some extent, this may be true. However, it is not a good argument against corporate taxes proposed to address a specific situation. I don’t like the idea of corporate taxes at all – I think that the people who profit should be taxed, not entities – but this sort of populist propaganda (he specifically mentions “retirees, union workers and other hard-working individuals”) misses the mark. Any investor making income on stock should pay the same tax that any “other hard-working individual” does on payroll income. If there is a decent argument against these tax proposals it should be that it takes money away from exploration.
2. There are billions of extractable barrels of reserves around the world that are currently not being exploited (the author includes the Arctic, Oil Shale and off-shore deposits).
The problem with the three sources mentioned is the price point of oil at which these reserves are profitable. If oil is $150-200/barrel, many of the reserves the author mentioned would be worth it financially to exploit. There are two problems there, the first is the infrastructure necessary to exploit these deposits does not currently exist. It can be built, but when? Who pays? The second problem is that these price points are not affordable economically as was demonstrated over the summer.
The author states that “these are available and their use will be necessary to make an orderly transition to the future.” The problem is that they are still available because they are not affordable. There are some regions that can and should be explored including ANWAR and the continental shelf. I contend that any environmental cost that may be felt would be offset by the economic benefit of not exporting our collective wealth to any state willing to sell us their oil. The exploitation of the North Sea has shown that offshore drilling can be done relatively responsibly as well.
3. Stagnating oil production is all OPEC’s fault.
This is 20th century thinking at its worst. You can look at hard numbers to find out that exploration worldwide has boomed since the spike in oil prices in the past 5 years. The problem with OPEC is that they have very little excess capacity to bring online at current production levels.
4. Stagnating oil production is because of poor deployment of technology.
Mr. Balgord states that “Russia and Mexico are lagging behind in modernizing their oil fields.” So, the problem is a lack of technology improvements on existing fields. The problem with his argument here is two-fold as well. First, the modernized infrastructure is not readily available for deployment. Second, again as North Sea exploitation shows, the implementation of the most modern extraction techniques cause earlier well peaks, and higher decline rates. In other words, the aging fields in Russia and Mexico would only benefit for a short while from the introduction of such technology, with higher post-peak decline rates.
5. More areas need to be opened to exploration.
The author clearly doesn’t understand what is important in energy economics. Reserves are essentially meaningless. The only thing that matters is flow rates. Barrels produced per day are the measure of success, and of survival. Finding new oil in up-to-now unexplored regions mean nothing until they produce. The exploration really can’t even get underway in a serious way because the exploratory rigs and expertise required to run them do not exist. It will take years, and billions of dollars, to build and staff these rigs. In case Mr. Balgord hasn’t noticed, these are two resources America is short of at the moment.
6. Recently high oil prices are a result of speculation and the OPEC cartel.
This is absolutely false. Recently high oil prices were the result of market mechanisms (high demand and limited spare production capacity), a weak dollar and geopolitical instability. Speculation is integral to finding price points in a market. Without these free market principles, prices would not react and shortages would soon follow.
7. “Access to the outer continental shelf would ultimately increase our domestic reserves by more than 500%.”
Whether or not this number is accurate, as I stated before “reserves” mean absolutely nothing. For example, you can have a million dollars buried in your back yard (you might want to check), but if you don’t have the tools to dig it up and start pulling it out, it serves absolutely no purpose.
Conclusion
Mr. Balgord’s proposals regarding oil merit little place in a serious discussion about America’s energy future. His solutions are not feasible at reasonable price points or they are unrealistic all together. The United States will likely never produce much more oil than it does today due to the fact that the best reserves have already been exploited beyond their peak production levels. This means that just to keep up with current levels of production we need to bring more and more oil online, but the new production would only be temporary. The newer sources of production will also be an order of magnitude lower than previous projects. Easing environmental regulations and opening the most promising regions up to exploration is a great idea if energy is the only metric. It is still reasonable, but not quite so appealing, even when environmental degradation is taken into account. However, any supply side solution should be accompanied by ambitious conservation measures, which is something that Republican or Democratic politicians will likely be unable to accomplish until the problem is past a point of reasonable resolution. It is also my opinion that we are already well past that point, by the way.
Sincerely Fucked,
mike
the Black Hole of Political Action
Here in Madison, it is difficult to make the commute home after work without seeing at least one person on the corner picketing for Obama. Now given, this is Madison, so it makes plenty of sense. And I like their passion, you can tell that a lot of people here are genuinely excited about the prospect of his victory. The same is likely true of McCain supporters, but I am not sure – as I said, I am in Madison. Anyway, I see these guys on the street corner with homemade signs hawking Obama and it just seems like a huge waste of resources to me. These people have allocated their time to stand around so that someone they don’t know, and will likely never meet, will get a job. I get this sinking feeling every time I see them.
It is part of the American Psyche, I guess. If we have problems with something, we address these problems to our political leaders. We also (some of us) go out of our way to elect political leaders that we think get it right. There are a lot of problems with the assumption that political leaders will solve our problems in any meaningful way. This in turn means that if our assumption of a functional political system is flawed, then so is any political action.
You may be thinking, “what the fuck are you getting at?” Well, my thesis is pretty simple. There is a limited spectrum of ideas and possible actions that acts as a framework for politicians. This spectrum is somewhat fluid in that different ideas can come in and out of reasonability – slavery, civil rights for women and minorities, gay rights, nuclear power, government ownership of corporations, etc. The spectrum fluctuates, but within a very limited range and the introduction of new ideas is only allowed after a certain level of acceptance in mainstream non-political thought brings an idea from unthinkable to controversial. This introduction takes time and money, or in absence of money a shit load of leg work.
Now that you know where I am coming from, let me get back to my primary point about the futility of political action, why it doesn’t adequately solve problems, and what we should be doing instead.
I do not see political action as being a valuable use of time or money – in this case holding a sign on the corner is not likely to sway anyone to vote a particular way. For a moment, lets assume I am wrong about that thought – because there is something to be said for herd behavior. Now, if this type of political action is effective, what is the result of successful activity in this case. Success would be that enough people mobilized on street corners to get the word out that for Madison, the best thing to do is to vote for Barack Obama. So, they have achieved success, but what does that success mean for the guy holding the sign on the street corner? Likely, his life will be unchanged whether or not Obama or McCain is the next president. Regardless of who wins, that guy will be in basically the same boat economically (the president doesn’t control the economy in a free country). So the difference is really only emotional. If Obama wins, regardless of what he does or does not do (he won’t do much) the picketer will only derive some sort of emotional satisfaction from knowing that his guy won. It is like being a fan of a particular sports team. If they win, you feel good even though your life is just as shitty as when they lose. If you find my position that there is little difference between Obama and McCain, look at some issues and you will see that either they are the same, or the difference is nuanced.
So what if this guy (and all the other political campaign volunteers) actually spent that time and money addressing a problem facing their community. Madison has plenty of uphill battles ahead of them so why not make a sign that actually says something about your town? Even better, why not just fucking do something instead of standing around with a sign on a street corner? This is the essence of my beef with political action in America’s national political system. I just don’t see the point.
This may also reflect my general distaste for Madison. Instead of doing something, it seems that people here would much rather go to a meeting and talk about doing something. Or better yet, tell someone else that they need to do something about their problems. To me, direct action (actually taking an active role in bringing about some sort of change) is the solution necessary.
Political action is the byproduct of a brainwashed mass of people that are doing as they were taught. Under this type of thinking, if you want something to change, the best way to go about changing it is to publicize your position. That way, the people that you allow to make decisions for you might catch on and take your advice. This is fine under different circumstances, but if you understand the problems that we face in the future then you should understand that minds are not going to be changed enough to actually make things better. Society is broken. Government is broken. We can’t change it from within. There is no time and there is not enough support. The establishment is too strong in this country. Take the bailout bill as an example, it was extremely unpopular with the American people based on their gut reaction. They knew it stunk. But the people that we they selected to make decisions for them were under the influence of the true power in this country. That is why so few stood up to protest. The Iraq war was another good example as well. There was no way to make a rational case against the war to the politicians. They were briefed on top secret stuff (lies and distortions) that the public didn’t know about at the time. But the public could have easily listened to the likes of Scott Ritter and others who were speaking up and saying that there is no threat there.
The bulk of the American people don’t want to think about the future. It is an inconvenience. It gets in their way and bums them out. They also probably “don’t have the time” to think about it. They want it easy, clean and well-groomed. The problem is that the future isn’t making concessions for the ignorant.
It is only worth helping those that are willing to help themselves. I would add that they should also want to help you back.
If the people standing on the corner are any indication, we are fucked.
-Mike
It is part of the American Psyche, I guess. If we have problems with something, we address these problems to our political leaders. We also (some of us) go out of our way to elect political leaders that we think get it right. There are a lot of problems with the assumption that political leaders will solve our problems in any meaningful way. This in turn means that if our assumption of a functional political system is flawed, then so is any political action.
You may be thinking, “what the fuck are you getting at?” Well, my thesis is pretty simple. There is a limited spectrum of ideas and possible actions that acts as a framework for politicians. This spectrum is somewhat fluid in that different ideas can come in and out of reasonability – slavery, civil rights for women and minorities, gay rights, nuclear power, government ownership of corporations, etc. The spectrum fluctuates, but within a very limited range and the introduction of new ideas is only allowed after a certain level of acceptance in mainstream non-political thought brings an idea from unthinkable to controversial. This introduction takes time and money, or in absence of money a shit load of leg work.
Now that you know where I am coming from, let me get back to my primary point about the futility of political action, why it doesn’t adequately solve problems, and what we should be doing instead.
I do not see political action as being a valuable use of time or money – in this case holding a sign on the corner is not likely to sway anyone to vote a particular way. For a moment, lets assume I am wrong about that thought – because there is something to be said for herd behavior. Now, if this type of political action is effective, what is the result of successful activity in this case. Success would be that enough people mobilized on street corners to get the word out that for Madison, the best thing to do is to vote for Barack Obama. So, they have achieved success, but what does that success mean for the guy holding the sign on the street corner? Likely, his life will be unchanged whether or not Obama or McCain is the next president. Regardless of who wins, that guy will be in basically the same boat economically (the president doesn’t control the economy in a free country). So the difference is really only emotional. If Obama wins, regardless of what he does or does not do (he won’t do much) the picketer will only derive some sort of emotional satisfaction from knowing that his guy won. It is like being a fan of a particular sports team. If they win, you feel good even though your life is just as shitty as when they lose. If you find my position that there is little difference between Obama and McCain, look at some issues and you will see that either they are the same, or the difference is nuanced.
So what if this guy (and all the other political campaign volunteers) actually spent that time and money addressing a problem facing their community. Madison has plenty of uphill battles ahead of them so why not make a sign that actually says something about your town? Even better, why not just fucking do something instead of standing around with a sign on a street corner? This is the essence of my beef with political action in America’s national political system. I just don’t see the point.
This may also reflect my general distaste for Madison. Instead of doing something, it seems that people here would much rather go to a meeting and talk about doing something. Or better yet, tell someone else that they need to do something about their problems. To me, direct action (actually taking an active role in bringing about some sort of change) is the solution necessary.
Political action is the byproduct of a brainwashed mass of people that are doing as they were taught. Under this type of thinking, if you want something to change, the best way to go about changing it is to publicize your position. That way, the people that you allow to make decisions for you might catch on and take your advice. This is fine under different circumstances, but if you understand the problems that we face in the future then you should understand that minds are not going to be changed enough to actually make things better. Society is broken. Government is broken. We can’t change it from within. There is no time and there is not enough support. The establishment is too strong in this country. Take the bailout bill as an example, it was extremely unpopular with the American people based on their gut reaction. They knew it stunk. But the people that we they selected to make decisions for them were under the influence of the true power in this country. That is why so few stood up to protest. The Iraq war was another good example as well. There was no way to make a rational case against the war to the politicians. They were briefed on top secret stuff (lies and distortions) that the public didn’t know about at the time. But the public could have easily listened to the likes of Scott Ritter and others who were speaking up and saying that there is no threat there.
The bulk of the American people don’t want to think about the future. It is an inconvenience. It gets in their way and bums them out. They also probably “don’t have the time” to think about it. They want it easy, clean and well-groomed. The problem is that the future isn’t making concessions for the ignorant.
It is only worth helping those that are willing to help themselves. I would add that they should also want to help you back.
If the people standing on the corner are any indication, we are fucked.
-Mike
Techno-fuckery
As far as I am concerned, there are two types of people in the world. It may or may not be their fault that they are the way they are, but the psyche of the American citizen is disturbing to me. I am becoming increasingly disinterested in communicating with these people beyond pleasantries. They are not interested in any point of view that may challenge their own comfortable futures they have mapped out for themselves.
No matter how much you want a future of space travel, floating skateboards and cars that run on garbage, it is not going to happen because even technology has limits…
1. Cornucopian Techno-Fuckers
These are people who – mostly ignorantly – look at the future and see some technology (battery, hydrogen or biofuel-ed cars) that will be developed to maintain the status quo. What they do not take into account is that there are no realistic alternatives. Even Boone Pickens’ natural gas wet dream requires an overhaul of 40-60% of the American vehicle fleet in 5 years. Given the spectre of dire economic times over the next few years, this seems all but impossible.
Instead, they kneel down in front of technology and start sucking. Periodically, they come up for air and mention that there is hope in whatever they have read about most recently. When challenged, they inevitably fall back on some anecdote from history to prove that the sky won’t fall because it hasn’t before. The problem, of course, is that the future isn’t history. Whether it rhymes or not, it won’t necessarily rhyme with the happy times they want it to sound like.
2. Pessimistic Reality-Fuckers
People like me will tell you that your way of life is fucked and there is not some shiny new technology waiting on the other side of the global oil peak. Sure, some of these technologies may produce some decent products. But there is no reason to believe that the government or the private sector will somehow conjure up a cure for our impending lack of liquid fuels. In the best possible circumstances, they might be able to buy you some time. But they are interested in only short term profits or superficial results they can campaign on for the next election, respectively. As investors and voters, we have made them that way.
Given that the first section of the population is the vast (+90%) majority, we are in a lot of trouble. The biggest hurdle to any serious risk mitigation strategy on any level is the mentality of this majority. They consume optimistic conjecture relayed to them from press releases (AKA Mainstream Journalism) and assume it is true. They have also developed a sort of expectation of future returns for themselves. From business they assume continued flow of cheap goods and services that will enrich their lives. From government they expect both continuation and expansion of government programs to support them and their extended families without feeling a burden (read paying for it all). Both business and government continue to oblige because they don’t want to upset their current standing. If anything, they promise you even more in the future.
At a time when real leaders should be standing up to tell you that your life will most likely not be as easy as your parents’ generation, we elected a President that wants to prop up a failed system with resources that don’t exist. Needless to say, this will not work. All of you techno-fuckers need to either educate yourself about how the world actually works and wake up or just give up now. You will be taking up valuable space and resources in the future, and you are expendable.
No matter how much you want a future of space travel, floating skateboards and cars that run on garbage, it is not going to happen because even technology has limits…
1. Cornucopian Techno-Fuckers
These are people who – mostly ignorantly – look at the future and see some technology (battery, hydrogen or biofuel-ed cars) that will be developed to maintain the status quo. What they do not take into account is that there are no realistic alternatives. Even Boone Pickens’ natural gas wet dream requires an overhaul of 40-60% of the American vehicle fleet in 5 years. Given the spectre of dire economic times over the next few years, this seems all but impossible.
Instead, they kneel down in front of technology and start sucking. Periodically, they come up for air and mention that there is hope in whatever they have read about most recently. When challenged, they inevitably fall back on some anecdote from history to prove that the sky won’t fall because it hasn’t before. The problem, of course, is that the future isn’t history. Whether it rhymes or not, it won’t necessarily rhyme with the happy times they want it to sound like.
2. Pessimistic Reality-Fuckers
People like me will tell you that your way of life is fucked and there is not some shiny new technology waiting on the other side of the global oil peak. Sure, some of these technologies may produce some decent products. But there is no reason to believe that the government or the private sector will somehow conjure up a cure for our impending lack of liquid fuels. In the best possible circumstances, they might be able to buy you some time. But they are interested in only short term profits or superficial results they can campaign on for the next election, respectively. As investors and voters, we have made them that way.
Given that the first section of the population is the vast (+90%) majority, we are in a lot of trouble. The biggest hurdle to any serious risk mitigation strategy on any level is the mentality of this majority. They consume optimistic conjecture relayed to them from press releases (AKA Mainstream Journalism) and assume it is true. They have also developed a sort of expectation of future returns for themselves. From business they assume continued flow of cheap goods and services that will enrich their lives. From government they expect both continuation and expansion of government programs to support them and their extended families without feeling a burden (read paying for it all). Both business and government continue to oblige because they don’t want to upset their current standing. If anything, they promise you even more in the future.
At a time when real leaders should be standing up to tell you that your life will most likely not be as easy as your parents’ generation, we elected a President that wants to prop up a failed system with resources that don’t exist. Needless to say, this will not work. All of you techno-fuckers need to either educate yourself about how the world actually works and wake up or just give up now. You will be taking up valuable space and resources in the future, and you are expendable.
The Lack of a Future of Education
This may seem a little off of the beaten path I have laid out for myself since starting this site, but I wanted to write about education. Personally speaking, I have no children. The little interaction I have with my niece and nephew is the extent of my own experience with the educational system. I am 13 years removed from my own state-funded indoctrination, so it is not fresh for me from a student’s point of view either. But, I have absolutely no problem assuming a position of knowledge in spite of my ignorance on the issue. So, enjoy, as I do my damnedest to destroy any hope you may have harbored about the future of our education culture – class is in session.
the state of the public education system
Instead of pointing fingers at those responsible for the problem of education in America, I will skip that part and move right into the meat of the matter. Besides, they are too numerous to name, and I only have so many fingers…
A Brief History of State-Funded Indoctrination
From the beginning of history up to around WWII, the vast majority of Americans (rich people don’t count) were limited in education to the three R’s – if this is any indication of how well that was going, two of the three R’s are spelled wrong. After WWII, some well intentioned people decided that Americans would be better off if we were all educated. The logic was that rich people were well educated, and they were rich – so it should work about the same for the rest of us. And so it was, the Education Industrial Complex developed from humble beginnings and good intentions. As time went by it became clear that large swaths of the country were not as enthusiastic about this whole education thing as others. So in order to try to equalize the system to some degree, some basic requirements were instituted. The federal government, under President Carter in 1979, decided that there should be a chunk of executive branch bureaucracy dedicated to running this system. The indoctrination of youth has since been federalized and runs an annual tab of about $70 billion/year.
The Idea and the Product
Today we have a system that does next to nothing to educate students. The purpose of education in America today is two fold.
1. Churn out product for the market (the market is funded, monitored, micro-managed and generally cluster-fucked into oblivion by government).
2. Introduce and reinforce the idea.
First let me talk a little bit about what I mean when I say product. A child enters elementary school and from that point until completion of high school it is taught basic information and tested to verify a minimal level of understanding. Context of information, intellectual curiousity, independent thinking and individual mental freedom is discouraged. Creativity and contrary opinions on matters is likewise discouraged or not tolerated. The low-level government bureaucrat in charge of developing the product is under-trained, under-paid and often continuing their own education so they don’t have to teach anymore, so they are basically indifferent.It is therefore no surprise that the product of such a system is an insecure, standardized, de-individualized, chemically balanced empty soul otherwise known as a “graduate.”
After 13 years of indoctrination the product is now ready for either further systematic validation in college or a case study in failure centered on one of the following; early pregnancy, drug abuse, anti-social behavior, sexual deviancy or military service.
Assuming some relative value, at this point in the process, the product chooses its profession and is indoctrinated not only into that profession, but also into the universal idea that being a product of the education system is not only necessary but should be sought after by all. This is reinforced to all product at different points in time by various authority figures in both the public and private sector. The idea can dually be used as an explanation of failure – you are a fry cook because you didn’t go to college – or as a means to reinforce cooperation on the part of the product – you are able to get this high paying job testing new fry grease because you have been extensively indoctrinated.
The idea is also instilled in all product that all of this pointless nonsense somehow entitles them to a higher standard of living than the lesser-indoctrinated product that did not progress so far. You will notice this superiority complex in a lot of product as they look down upon the mere working class – from which they are separated by a piece of paper and a couple of lucky breaks. Anyone in a profession involving manual labor is generally discounted by the product, particularly if the trade is one that pays a decent wage. Product can’t stand this sort of information. No plumber or electrician should ever make as much as them. After all, they have a piece of paper…
So after 4-10 years of additional indoctrination, the product is now ready for the “real world.” Here they take a position and most of them spend their first few weeks learning all of the information that they need to do their job. Even though they likely did not possess any experience or specific knowledge to perform properly, the idea is reinforced by the product’s employer that all of that “education” was necessary and somehow qualified them for the job. The truth is that the vast majority of professions require no “higher” education at all to perform them. The point is to indoctrinate you into the idea and to provide a level of job protection for those that have access to education. Simply allowing anyone off the street to apply for a job would level the playing field out for all potential employees.
I don’t want to sound conspiratorial about this. I honestly don’t think that the powers that be consciously think about it this way at all. They are true believers in the system and since the system has done so much for them, it is beyond questioning. To them, education is necessary. They believe in that idea. Never mind the fact that it is all a waste of time and resources to get through the system.
I digress. There you have the three levels of the education system. They disguise it all under the veil of meritocracy, but in reality that is simply not the case. Those with a natural advantage that are predisposed to conformity and structured learning will excel along with birthright products that had it handed to them every step of the way. The idea teaches you to worship the overly ambitious product. They are the embodiment of the American dream. The latter type of product is more of a product of what I would call the American reality.
Enough Already, Onto the Future
Today there are millions of units of product at various stages of development. These units are being instilled with the same bullshit as their predecessors, but they do not face the same future. Unfortunately, the lies being told to the next generation of product will not be so easily maintained. The facade will begin to come unraveled. In the face of this slow unraveling, the next generation of finished product will be produced and spit out into reality without a clue as to how they will survive. They were educated in abstractions and distractions in the name of bettering themselves when all they have really done is dumb themselves into a trap of specialization. They can’t think beyond their professions, they feel entitled to the high standard of living they have been teased with as a “reward” for “success” and they will refuse to accept that their reality is anything but what they invisioned.
I don’t blame the product completely. They were doing as they were told. They were following the path of least resistance and they were never encouraged to know better. They were washed clean of any remnants of their possible salt of the earth origin.
Seriously Though, What about the Future?
As resource depletion and its ramifications become more apparent, the fraud of education will be exposed and hopefully treated reasonably as a waste of time and money in many cases. Increasingly, the populations of the United States and other countries of the global north will be separated into two camps. In one camp, rich people and a few hangers on that have made themselves indispensable to the rich will continue on in some version of society that vaguely resembles today with decreased financial incentives. They will educate one another and keep the education industrial complex going on a scaled down level. In the other camp, the vast majority of the rest of us will continue on in the reality of how education was before the brief period from 1948-2008. We will learn what is necessary and I imagine will pick up some extras as knowledge is so much more readily available due to 60 years of educational and informational expansion.
the state of the public education system
Instead of pointing fingers at those responsible for the problem of education in America, I will skip that part and move right into the meat of the matter. Besides, they are too numerous to name, and I only have so many fingers…
A Brief History of State-Funded Indoctrination
From the beginning of history up to around WWII, the vast majority of Americans (rich people don’t count) were limited in education to the three R’s – if this is any indication of how well that was going, two of the three R’s are spelled wrong. After WWII, some well intentioned people decided that Americans would be better off if we were all educated. The logic was that rich people were well educated, and they were rich – so it should work about the same for the rest of us. And so it was, the Education Industrial Complex developed from humble beginnings and good intentions. As time went by it became clear that large swaths of the country were not as enthusiastic about this whole education thing as others. So in order to try to equalize the system to some degree, some basic requirements were instituted. The federal government, under President Carter in 1979, decided that there should be a chunk of executive branch bureaucracy dedicated to running this system. The indoctrination of youth has since been federalized and runs an annual tab of about $70 billion/year.
The Idea and the Product
Today we have a system that does next to nothing to educate students. The purpose of education in America today is two fold.
1. Churn out product for the market (the market is funded, monitored, micro-managed and generally cluster-fucked into oblivion by government).
2. Introduce and reinforce the idea.
First let me talk a little bit about what I mean when I say product. A child enters elementary school and from that point until completion of high school it is taught basic information and tested to verify a minimal level of understanding. Context of information, intellectual curiousity, independent thinking and individual mental freedom is discouraged. Creativity and contrary opinions on matters is likewise discouraged or not tolerated. The low-level government bureaucrat in charge of developing the product is under-trained, under-paid and often continuing their own education so they don’t have to teach anymore, so they are basically indifferent.It is therefore no surprise that the product of such a system is an insecure, standardized, de-individualized, chemically balanced empty soul otherwise known as a “graduate.”
After 13 years of indoctrination the product is now ready for either further systematic validation in college or a case study in failure centered on one of the following; early pregnancy, drug abuse, anti-social behavior, sexual deviancy or military service.
Assuming some relative value, at this point in the process, the product chooses its profession and is indoctrinated not only into that profession, but also into the universal idea that being a product of the education system is not only necessary but should be sought after by all. This is reinforced to all product at different points in time by various authority figures in both the public and private sector. The idea can dually be used as an explanation of failure – you are a fry cook because you didn’t go to college – or as a means to reinforce cooperation on the part of the product – you are able to get this high paying job testing new fry grease because you have been extensively indoctrinated.
The idea is also instilled in all product that all of this pointless nonsense somehow entitles them to a higher standard of living than the lesser-indoctrinated product that did not progress so far. You will notice this superiority complex in a lot of product as they look down upon the mere working class – from which they are separated by a piece of paper and a couple of lucky breaks. Anyone in a profession involving manual labor is generally discounted by the product, particularly if the trade is one that pays a decent wage. Product can’t stand this sort of information. No plumber or electrician should ever make as much as them. After all, they have a piece of paper…
So after 4-10 years of additional indoctrination, the product is now ready for the “real world.” Here they take a position and most of them spend their first few weeks learning all of the information that they need to do their job. Even though they likely did not possess any experience or specific knowledge to perform properly, the idea is reinforced by the product’s employer that all of that “education” was necessary and somehow qualified them for the job. The truth is that the vast majority of professions require no “higher” education at all to perform them. The point is to indoctrinate you into the idea and to provide a level of job protection for those that have access to education. Simply allowing anyone off the street to apply for a job would level the playing field out for all potential employees.
I don’t want to sound conspiratorial about this. I honestly don’t think that the powers that be consciously think about it this way at all. They are true believers in the system and since the system has done so much for them, it is beyond questioning. To them, education is necessary. They believe in that idea. Never mind the fact that it is all a waste of time and resources to get through the system.
I digress. There you have the three levels of the education system. They disguise it all under the veil of meritocracy, but in reality that is simply not the case. Those with a natural advantage that are predisposed to conformity and structured learning will excel along with birthright products that had it handed to them every step of the way. The idea teaches you to worship the overly ambitious product. They are the embodiment of the American dream. The latter type of product is more of a product of what I would call the American reality.
Enough Already, Onto the Future
Today there are millions of units of product at various stages of development. These units are being instilled with the same bullshit as their predecessors, but they do not face the same future. Unfortunately, the lies being told to the next generation of product will not be so easily maintained. The facade will begin to come unraveled. In the face of this slow unraveling, the next generation of finished product will be produced and spit out into reality without a clue as to how they will survive. They were educated in abstractions and distractions in the name of bettering themselves when all they have really done is dumb themselves into a trap of specialization. They can’t think beyond their professions, they feel entitled to the high standard of living they have been teased with as a “reward” for “success” and they will refuse to accept that their reality is anything but what they invisioned.
I don’t blame the product completely. They were doing as they were told. They were following the path of least resistance and they were never encouraged to know better. They were washed clean of any remnants of their possible salt of the earth origin.
Seriously Though, What about the Future?
As resource depletion and its ramifications become more apparent, the fraud of education will be exposed and hopefully treated reasonably as a waste of time and money in many cases. Increasingly, the populations of the United States and other countries of the global north will be separated into two camps. In one camp, rich people and a few hangers on that have made themselves indispensable to the rich will continue on in some version of society that vaguely resembles today with decreased financial incentives. They will educate one another and keep the education industrial complex going on a scaled down level. In the other camp, the vast majority of the rest of us will continue on in the reality of how education was before the brief period from 1948-2008. We will learn what is necessary and I imagine will pick up some extras as knowledge is so much more readily available due to 60 years of educational and informational expansion.
Fuck Rachel Maddow
I listened to Rachel Maddow on the way home from work today and her take on the loans to the Big 3 really got under my skin.
Specifically, she said:
1. Southern politicians not supporting domestic auto makers while fawning over foreign auto makers is tantamount to treason.
2. She inferred that the only opposition to this idea is coming from “the plantation caucus” which consists of southern republicans (when did Maddow get so bawdy? Making up a pejorative for these pols that conjures visions of slavery…).
3. She compared state and local tax incentives received by foreign automakers to a bail out loan.
4. She also stated that incentivization is counter to free market principles.
Bullshit, bullshit, bullshit.
1. It is not treasonous to withhold monetary support for failing businesses. It makes sense. I doubt some of the opponents have such a pristine position – I believe the union-busting jive being played up is accurate since republicans don’t like unions. Maddow, and many other lefty commentators, have the whole situation twisted. Giving a $XX billion loan to companies that are not functional (GM and Chrysler) now that SUV and truck demand has dropped off does nothing to save any union jobs. GM and Chrysler have been slowly dismantling and undermining their unionized workforce for 30 years.
2. I don’t know why an otherwise sharp and reasonable person would reduce herself to something as juvenile as “the plantation caucus.” Olbermann would do it, but Maddow isn’t Olbermann. At least she wasn’t before.
3. When state and local governments make deals with companies that limit their tax exposure, they are trying to create an environment that will be beneficial for the rich people behind the corporation as well as people in the area that need work. It isn’t ‘corporate welfare’ to not tax a business, it is fair. A business does not benefit from the existence of government and its services, the owners of the business do. Corporate taxation is ridiculous because corporations are not people, they simply treat taxes as a portion of their overhead and pass their cost along to consumers. Corporate taxes are just a way for politicians to make it look like they are making companies ‘pay their fair share.’ They don’t pay anything, the end user does. Here is a simple example:
Company A wants to make a profit of $5 after all of their costs to produce a unit are factored in to the price of the product. It costs them $10 to design, build and market the product. The government(s) charge a tax of $1 per unit. Company A does not say “OK, we will sell it for $15 and just cut our profit by 20%.” They sell the product for $16, treat the tax as a cost and still make their $5 profit per unit.
Taxes shouldn’t be levied on a construct (a figment of our collective imagination) that passes costs onto consumers. Taxes should be levied (if at all) on the people that benefit from the profits (in this case the employees, owners and stockholders of Company A). This will never happen because then democrats wouldn’t have anything to show they were working hard to make corporate America pay, and all of the corporate machinery in place to deal with corporate taxes (accountants, attorneys, etc) would be out of a job. And republicans would have to allow the American investor to pay the same taxes on their investment income that people that work for a living pay on their wages.
4. When a government offers tax breaks to companies to do business in their area, it is not against the free market. In a truly free market, the government would not tax companies at all. If anything, tax breaks actually create a more free market.
No, Really. Fuck Rachel Maddow
Of course, Rachel Maddow doesn’t care about any of this. She wants to make a childish political point and carry water for the democratic party. In doing so, she has shown she will stoop to using words that stir up America’s racist history as well as twist the information available to make it look like the republicans that oppose the bail out are all hypocrites. Hypocrites and politicians are basically the same beast to me and I will show you an example which is regularly talked about by Maddow and her ilk, socialized medicine. The left claims that socialized medicine will free the corporations from the burden of providing health care for their employees. This is a perfect example of a government incentive, the only difference between it and tax breaks for Honda in Alabama is that Alabama gets jobs out of it, with government-sponsored health care, the people get the same thing they get now, but the corporation gets free from the equation…
It is also depressing that they think these loans will somehow save Detroit and all the jobs associated with GM, Ford and Chrysler. However, a loan isn’t going to save them any more than a loan would save a consulting firm offering Y2K compliance services. The Big 3 are a part of American history, they are not a part of the future – and they shouldn’t be after the way that they have turned their back on the American worker. And don’t give me that shit about the 250,000 union jobs associated with the Big 3. In 20 years if they are still around those “union” jobs won’t be any better than the non-union jobs because the UAW, just like the railroad unions and countless others, have sold away their future members to better their workers today. A union used to stand for something, now it is just a way to protect the interests of senior members and screwing anyone that comes along in the future.
As long as people like Maddow get tapped to have prime-time TV talk shows, we are fucked. And it sucks to say that because I used to like her a lot. My like just dropped a rung today.
Specifically, she said:
1. Southern politicians not supporting domestic auto makers while fawning over foreign auto makers is tantamount to treason.
2. She inferred that the only opposition to this idea is coming from “the plantation caucus” which consists of southern republicans (when did Maddow get so bawdy? Making up a pejorative for these pols that conjures visions of slavery…).
3. She compared state and local tax incentives received by foreign automakers to a bail out loan.
4. She also stated that incentivization is counter to free market principles.
Bullshit, bullshit, bullshit.
1. It is not treasonous to withhold monetary support for failing businesses. It makes sense. I doubt some of the opponents have such a pristine position – I believe the union-busting jive being played up is accurate since republicans don’t like unions. Maddow, and many other lefty commentators, have the whole situation twisted. Giving a $XX billion loan to companies that are not functional (GM and Chrysler) now that SUV and truck demand has dropped off does nothing to save any union jobs. GM and Chrysler have been slowly dismantling and undermining their unionized workforce for 30 years.
2. I don’t know why an otherwise sharp and reasonable person would reduce herself to something as juvenile as “the plantation caucus.” Olbermann would do it, but Maddow isn’t Olbermann. At least she wasn’t before.
3. When state and local governments make deals with companies that limit their tax exposure, they are trying to create an environment that will be beneficial for the rich people behind the corporation as well as people in the area that need work. It isn’t ‘corporate welfare’ to not tax a business, it is fair. A business does not benefit from the existence of government and its services, the owners of the business do. Corporate taxation is ridiculous because corporations are not people, they simply treat taxes as a portion of their overhead and pass their cost along to consumers. Corporate taxes are just a way for politicians to make it look like they are making companies ‘pay their fair share.’ They don’t pay anything, the end user does. Here is a simple example:
Company A wants to make a profit of $5 after all of their costs to produce a unit are factored in to the price of the product. It costs them $10 to design, build and market the product. The government(s) charge a tax of $1 per unit. Company A does not say “OK, we will sell it for $15 and just cut our profit by 20%.” They sell the product for $16, treat the tax as a cost and still make their $5 profit per unit.
Taxes shouldn’t be levied on a construct (a figment of our collective imagination) that passes costs onto consumers. Taxes should be levied (if at all) on the people that benefit from the profits (in this case the employees, owners and stockholders of Company A). This will never happen because then democrats wouldn’t have anything to show they were working hard to make corporate America pay, and all of the corporate machinery in place to deal with corporate taxes (accountants, attorneys, etc) would be out of a job. And republicans would have to allow the American investor to pay the same taxes on their investment income that people that work for a living pay on their wages.
4. When a government offers tax breaks to companies to do business in their area, it is not against the free market. In a truly free market, the government would not tax companies at all. If anything, tax breaks actually create a more free market.
No, Really. Fuck Rachel Maddow
Of course, Rachel Maddow doesn’t care about any of this. She wants to make a childish political point and carry water for the democratic party. In doing so, she has shown she will stoop to using words that stir up America’s racist history as well as twist the information available to make it look like the republicans that oppose the bail out are all hypocrites. Hypocrites and politicians are basically the same beast to me and I will show you an example which is regularly talked about by Maddow and her ilk, socialized medicine. The left claims that socialized medicine will free the corporations from the burden of providing health care for their employees. This is a perfect example of a government incentive, the only difference between it and tax breaks for Honda in Alabama is that Alabama gets jobs out of it, with government-sponsored health care, the people get the same thing they get now, but the corporation gets free from the equation…
It is also depressing that they think these loans will somehow save Detroit and all the jobs associated with GM, Ford and Chrysler. However, a loan isn’t going to save them any more than a loan would save a consulting firm offering Y2K compliance services. The Big 3 are a part of American history, they are not a part of the future – and they shouldn’t be after the way that they have turned their back on the American worker. And don’t give me that shit about the 250,000 union jobs associated with the Big 3. In 20 years if they are still around those “union” jobs won’t be any better than the non-union jobs because the UAW, just like the railroad unions and countless others, have sold away their future members to better their workers today. A union used to stand for something, now it is just a way to protect the interests of senior members and screwing anyone that comes along in the future.
As long as people like Maddow get tapped to have prime-time TV talk shows, we are fucked. And it sucks to say that because I used to like her a lot. My like just dropped a rung today.
The price of oil
here is plenty of noise out there that since oil prices have gone down, the threat of peak oil has went the way of Y2K, Planet X, Sinbad, and all other threats to society as we know it. Of course, there is a fundamental misunderstanding about what peak oil is, and what it has to do with price.
I will admit that up until recently, I thought that there was really no where for oil to go but up. Sure there would be price volatility, but I had read plenty of peak oil proponents talk about how the price would fluctuate within a range and with a general upward trend – notably Matt Simmons said that oil would see higher highs and higher lows. That was until it didn’t. Oil at around $40/barrel does not fit in any particular up trend I can fathom. So clearly, this was one point that the peak oil community got wrong, or did not explain clearly enough. We were so obsessed with chattering up the price that we didn’t stop to think about a few issues, and we still are not, largely because its drop has been so stunning. I decided that now is as good a time as any to take a look at several different ideas I have read about before and after the price spike.
Awareness and the “peak oil premium”
Earlier in the year, it was fairly common to find mention of a peak oil premium being priced into the oil price. That is, journalists and pundits began to seize on the idea that peak oil was a real concern and that a portion of the oil price could be explained because of it. I credit this much to websites like Energy Bulletin and The Oil Drum for providing a strong technical background for more mainstream journalists to go to when formulating stories about the rise in oil price. These sites and many others also acted as an echo chamber for any peak oil news of note. In fact, recognition of peak oil by the mainstream media was something that was regularly celebrated on peak oil oriented websites.
But the peak oil crowd missed something, and so did I. No matter how strongly I believe peak oil to be either taking place or on the verge of taking place, I do not trade oil. Even some players in the oil game that believe peak oil is a reality are not listened to by the rest of the market. In other words, oil is priced by a huge number of traders and very few of them believe peak oil is a reality now. They also don’t think that the idea of peak oil is one which they should take into consideration regarding the oil price. Without traders believing peak oil is an important issue and factoring it into their bids, there will not be a “peak oil premium” priced into the market. I also have my doubts about whether traders have the long term vision to think beyond factors they are trained to consider when bidding oil prices up and down.
So, 2008 was the year that awareness of the notion of peak oil increased, it was not the year that the awareness translated into a premium in the oil price.
Dollar fluctuation
The value of the dollar has changed dramatically in the past few months, along with the price of oil. Here is a graph of the exchange rate between the Canadian Dollar and the US Dollar, June 25th to present:
graph copied from xrates.com
You can see that as recently as September 24th, the exchange rate was about one to one (CAD to USD). On September 24th, the price of oil was $105.73 (found here) and the price on 12/12 $42.07 which is a change of $63.66 or about 60%. There has been an increase of about 25% in the value of the US dollar in this same time span. So, a part of the change in the oil price has been the rally in the dollar – it can also be said that a big part of the high oil price earlier in the year was the result of a weaker dollar. If we were to value oil in Canadian Dollars instead of US dollars, the price on 12/12 would have about $52.50 which would be a change of 53.23 or about 50% from September 24th.
So, even though the changing value of the dollar can provide some explanation, it does not adequately explain the huge fluctuation.
Oil, the equity markets and other commodities
Whether it should be treated this way or not, oil futures contracts are treated as an investment by some large investors. Given that the whole financial system took a hit in 2008, oil’s price drop does make some sense in connection to the broader market. But in looking at the changes in the short run (as seen below) it does not show a clear indication of movement along with the stock market.
I am not the best at making sexy graphs but here are few of oil’s price decline in relation to the S&P and other commodities (I awe at the skill of CR and several contributors at TOD).
Here is the S&P 500 closing price (the red line) and NYMEX oil price (the blue shaded area) from Sept 24th to December 19th.
S&P 500 and Oil price graphs, Sept 24 to December 19
You can see that both have experienced a devaluation, and there is far more noise in the S&P graph than the oil price graph. In this span, the S&P lost about 25% of its value while oil lost 59%. Sorry I couldn’t make the difference more pronounced, I mainly wanted to show that movement was generally similar, but not directly related.
To give broader perspective of the two, here is the S&P 500 closing price (the red line) and NYMEX oil price (the green line) from 1982 to present.
You can clearly see the two bubbles in the S&P 500. You can also see that early on that the two prices have historically responded independently of one another, but they have shared upward and downward trends in the past. That is, different inputs go into the pricing of equities in the S&P 500 than do in oil.
So again, the overall deflation of the economy should be a component, but it isn’t a full explanation.
Demand Destruction
The idea of demand destruction is one which is regularly talked about in peak oil circles. The idea is basically that once oil reaches a certain price – assuming that the free market is allowed to function – marginal consumption will become too expensive and some demand will be curtailed. Unfortunately, finding numbers for consumption of oil is not easy to do. Instead, I will use this graph from Rembrandt at theoildrum.com for production.
Keeping in mind that production does not take oil stocks (oil already purchased and in storage awaiting resale or refinement) which are high right now. Even with that in mind, you can see a drop in production starting just around July or August 2008. Although this could be a demonstration of a lack of supply, it is more likely showing the reaction of producers to lower demand forecasts. For the record, I do not think this is demand destruction as outlined above. What we are seeing instead is external realities in the greater economy driving down demand through lower economic activity. Although oil was outrageous over the summer, I don’t think it was high enough to effectively destroy any significant portion of existing demand. I do believe that it did play some role in curtailing future demand as both individuals and organizations had to start thinking differently about their petroleum consumption at higher prices. Again, this is another unfortunate side effect of the price crash in the second half of 2008. The economic incentive to consume less oil has been removed for the vast majority of the world.
Conclusion
Taking all of the information into account shows that thereare a number of different inputs that impact the trading price for oil contracts. In looking at everything, there is not one clear explanation to explain it all away.
As oil price was on its way up, traditional indicators (stocks, forecast production, forecast demand and “above ground issues) all pushed the price higher. The spike in price over the summer at least partially had to do (given what we know now) with people looking at the economic trends and taking investment positions in the market based on their assumptions about future economic activity.
I think the most interesting thing about all of it is that it unraveled so quickly and so dramatically. Given the present circumstances, I am sure that I will no longer look to oil price for an indication of the status of peak oil. I also think that it is unfortunate, given that I believe in the immediacy of peak oil, that the people involved in the market are still using yesterday’s analysis methods to determine the fair market price.
Share on Facebook
I will admit that up until recently, I thought that there was really no where for oil to go but up. Sure there would be price volatility, but I had read plenty of peak oil proponents talk about how the price would fluctuate within a range and with a general upward trend – notably Matt Simmons said that oil would see higher highs and higher lows. That was until it didn’t. Oil at around $40/barrel does not fit in any particular up trend I can fathom. So clearly, this was one point that the peak oil community got wrong, or did not explain clearly enough. We were so obsessed with chattering up the price that we didn’t stop to think about a few issues, and we still are not, largely because its drop has been so stunning. I decided that now is as good a time as any to take a look at several different ideas I have read about before and after the price spike.
Awareness and the “peak oil premium”
Earlier in the year, it was fairly common to find mention of a peak oil premium being priced into the oil price. That is, journalists and pundits began to seize on the idea that peak oil was a real concern and that a portion of the oil price could be explained because of it. I credit this much to websites like Energy Bulletin and The Oil Drum for providing a strong technical background for more mainstream journalists to go to when formulating stories about the rise in oil price. These sites and many others also acted as an echo chamber for any peak oil news of note. In fact, recognition of peak oil by the mainstream media was something that was regularly celebrated on peak oil oriented websites.
But the peak oil crowd missed something, and so did I. No matter how strongly I believe peak oil to be either taking place or on the verge of taking place, I do not trade oil. Even some players in the oil game that believe peak oil is a reality are not listened to by the rest of the market. In other words, oil is priced by a huge number of traders and very few of them believe peak oil is a reality now. They also don’t think that the idea of peak oil is one which they should take into consideration regarding the oil price. Without traders believing peak oil is an important issue and factoring it into their bids, there will not be a “peak oil premium” priced into the market. I also have my doubts about whether traders have the long term vision to think beyond factors they are trained to consider when bidding oil prices up and down.
So, 2008 was the year that awareness of the notion of peak oil increased, it was not the year that the awareness translated into a premium in the oil price.
Dollar fluctuation
The value of the dollar has changed dramatically in the past few months, along with the price of oil. Here is a graph of the exchange rate between the Canadian Dollar and the US Dollar, June 25th to present:
graph copied from xrates.com
You can see that as recently as September 24th, the exchange rate was about one to one (CAD to USD). On September 24th, the price of oil was $105.73 (found here) and the price on 12/12 $42.07 which is a change of $63.66 or about 60%. There has been an increase of about 25% in the value of the US dollar in this same time span. So, a part of the change in the oil price has been the rally in the dollar – it can also be said that a big part of the high oil price earlier in the year was the result of a weaker dollar. If we were to value oil in Canadian Dollars instead of US dollars, the price on 12/12 would have about $52.50 which would be a change of 53.23 or about 50% from September 24th.
So, even though the changing value of the dollar can provide some explanation, it does not adequately explain the huge fluctuation.
Oil, the equity markets and other commodities
Whether it should be treated this way or not, oil futures contracts are treated as an investment by some large investors. Given that the whole financial system took a hit in 2008, oil’s price drop does make some sense in connection to the broader market. But in looking at the changes in the short run (as seen below) it does not show a clear indication of movement along with the stock market.
I am not the best at making sexy graphs but here are few of oil’s price decline in relation to the S&P and other commodities (I awe at the skill of CR and several contributors at TOD).
Here is the S&P 500 closing price (the red line) and NYMEX oil price (the blue shaded area) from Sept 24th to December 19th.
S&P 500 and Oil price graphs, Sept 24 to December 19
You can see that both have experienced a devaluation, and there is far more noise in the S&P graph than the oil price graph. In this span, the S&P lost about 25% of its value while oil lost 59%. Sorry I couldn’t make the difference more pronounced, I mainly wanted to show that movement was generally similar, but not directly related.
To give broader perspective of the two, here is the S&P 500 closing price (the red line) and NYMEX oil price (the green line) from 1982 to present.
You can clearly see the two bubbles in the S&P 500. You can also see that early on that the two prices have historically responded independently of one another, but they have shared upward and downward trends in the past. That is, different inputs go into the pricing of equities in the S&P 500 than do in oil.
So again, the overall deflation of the economy should be a component, but it isn’t a full explanation.
Demand Destruction
The idea of demand destruction is one which is regularly talked about in peak oil circles. The idea is basically that once oil reaches a certain price – assuming that the free market is allowed to function – marginal consumption will become too expensive and some demand will be curtailed. Unfortunately, finding numbers for consumption of oil is not easy to do. Instead, I will use this graph from Rembrandt at theoildrum.com for production.
Keeping in mind that production does not take oil stocks (oil already purchased and in storage awaiting resale or refinement) which are high right now. Even with that in mind, you can see a drop in production starting just around July or August 2008. Although this could be a demonstration of a lack of supply, it is more likely showing the reaction of producers to lower demand forecasts. For the record, I do not think this is demand destruction as outlined above. What we are seeing instead is external realities in the greater economy driving down demand through lower economic activity. Although oil was outrageous over the summer, I don’t think it was high enough to effectively destroy any significant portion of existing demand. I do believe that it did play some role in curtailing future demand as both individuals and organizations had to start thinking differently about their petroleum consumption at higher prices. Again, this is another unfortunate side effect of the price crash in the second half of 2008. The economic incentive to consume less oil has been removed for the vast majority of the world.
Conclusion
Taking all of the information into account shows that thereare a number of different inputs that impact the trading price for oil contracts. In looking at everything, there is not one clear explanation to explain it all away.
As oil price was on its way up, traditional indicators (stocks, forecast production, forecast demand and “above ground issues) all pushed the price higher. The spike in price over the summer at least partially had to do (given what we know now) with people looking at the economic trends and taking investment positions in the market based on their assumptions about future economic activity.
I think the most interesting thing about all of it is that it unraveled so quickly and so dramatically. Given the present circumstances, I am sure that I will no longer look to oil price for an indication of the status of peak oil. I also think that it is unfortunate, given that I believe in the immediacy of peak oil, that the people involved in the market are still using yesterday’s analysis methods to determine the fair market price.
Share on Facebook
Subscribe to:
Posts (Atom)