Post Traumatic Oil Price Disorder

You know you live in a decadent country when basic facts of life are greeted with jeers and calls for excommunication from the realm like Paul Krugman is getting pilloried for his recent NYT piece on oil price inflation. Here's the deal folks, oil is priced in dollars and to bail out the U.S. banking system America's central bank is flooding the market with record amounts of dollars. What happens when too many dollars chase too few barrels of oil? Well, believe it or not, the price of oil goes up. Now this is not a political statement. This is a statement of fact. Speculators in the oil market (and the agriculture market) are a mere subset of the irresponsible credit expansion crazy people who run the Fed. And yes, the world has hit 'peak oil.' All three of the biggest oil fields in the world are now in decline. Demand for oil is rising toward 100mn. barrels a day, while production has peaked at around 86 mn. barrels a day. Too much money chasing too few barrels means the price goes up. And the Chinese are happy to pay. Seems simple enough...

But does this stop America's pundits from trying to avoid this economic reality, that oil is probably going to $160 in the near term and $200 in the medium term? No, they love to pretend that economics has nothing to do with the price of oil going up and that it's the fault of speculators and OPEC. You see the same myopic, "What me, worry?" Alfred E. Newman thinking on display in almost every facet of American political and economic life.

For example, did you know that soldiers in Iraq are not as bad off as we thought. There's not that much Post Traumatic Stress Disorder because it's politically inconvenient and much cheaper for the Private Equity run White House if it goes away.

From the Washington Post:

A psychologist who helps lead the post-traumatic stress disorder program at a medical facility for veterans in Texas told staff members to refrain from diagnosing PTSD because so many veterans were seeking government disability payments for the condition. "Given that we are having more and more compensation seeking veterans, I'd like to suggest that you refrain from giving a diagnosis of PTSD straight out," Norma Perez wrote in a March 20 e-mail to mental-health specialists and social workers at the Department of Veterans Affairs' Olin E. Teague Veterans' Center in Temple, Tex. Instead, she recommended that they "consider a diagnosis of Adjustment Disorder.

See, the economic and societal problems go away if you just put your head in a bag labeled CBS, NBC, ABC, CNN, Fox and stomp your feet and cry "Mommy, mommy, make the bad people go away." Yes, it must be Osama's fault, Iran, Paul Krugman , the speculators, anybody and everybody but the real culprit; incompetent, decadent, dangerously out of touch crony capitalists undermining the system with trillions of worthless I.O.U.'s they choose to call, 'money.' It was great while all that fiat currency ersatz whip cream was boosting the 'value' of your house, until it's not, and now you're 'upside down' now that 'rat' of credit is appearing in the 'snake' of global finance in the form of runaway commodity price inflation. If you didn't sell your house at the top, like the guys at Toll Brothers housing who sold out of their stock at the top? Well, your continued participation is heroic and please accept this Purple Heart for suffering such equity loss.

Stressed? Eating too much? Please don't. Obese people are contributing to the global food crisis and climate change;

from the BBC:

Obese people are contributing to the world food crisis and climate change, experts say. The London School of Hygiene and Tropical Medicine calculated the obese consume 18% more calories than average. They are also responsible for using more fuel, which has an environmental impact and drives up food prices as transport and agriculture both use oil. The result is that the poor struggle to afford food and greenhouse gas emissions rise, the Lancet reported.

Since America's economy is over 70% consumption you don't hear this report mentioned much in the corporate controlled media outlets who are owned, or cross-owned, or influenced by the companies who treat Americans like ducks on afoie gras farm by stuffing them to death with worthless processed food and deadly mortgages.

Comments

[Sundialsvc4]

When you are a belligerent nation that is engaged in an aggressive war, i.e. a war crime... and when at the same time you are a "I wanna be a consumer nation" nation that is utterly dependent upon low oil prices... you cannot expect to be treated kindly.

I think that oil prices of $18 to $26 a gallon are entirely possible by the end of this year ... and of course, at anything even approaching those prices the capacity of the United States to function, let alone to wage war, would grind to a complete and ruinous stop. Elimination of the Dollar's status as a world reserve currency for oil transactions would become a practical necessity, and when this happens, the US's ability to print money endlessly would come to a screeching halt.

Ironically, if this stops World War Episode III in its tracks, that would not be a bad thing.

[maxkeiser]

You mean $180 - $260?

[boogieandjive]

Vippy says: he oil companies BOTTOM LINE (PROFIT) has increased. That tells me they don't pay a higher price for the oil (cost of goods), nor did they increase personnel costs.

But, if you look at Bloomberg today:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aB50jeKPl7gE

"Oil Producers Mask Decade's Worst S&P 500 Profit Drop"

"The industry is getting less profit from a barrel of oil than at any time since 2005, just as the rest of the U.S. economy is sputtering. "

So while profits are high in dollar amounts, this is only because oil prices are at all time high. Their per barrel profits are not rising on a percentage basis because their costs are going up as this other Bloomberg story, "Not Enough Oil Is Lament of BP, Exxon on Spending," points out:

http://www.bloomberg.com/apps/news?pid=20601087&sid=axUZLDnNnHgM

[maxkeiser]

May 19 (Bloomberg) -- Never have so many oil and gas companies spent so much to produce so little.

That's the challenge facing Exxon Mobil Corp., Royal Dutch Shell Plc, BP Plc, Chevron Corp., Total SA and ConocoPhillips, which will spend a record $98.7 billion this year on exploration and production, Lehman Brothers Holdings Inc. estimates. Costs more than quadrupled since 2000 as explorers targeted more challenging reservoirs and demand rose for labor and material.

http://tinyurl.com/4u2tof

[dadw5boys]

The title of your story does not help the Veterans as I see it.

You have ADDED INSULT TO INJURY BY COMPARING PTSD TO STICKER SHOCK!!!!!!!

People do not kill themsleves over high prices!!!!!!

[KillTheMessenger]

Here is an easy way to cut your effective oil price by more than half: buy a hybrid. Everything else is just crazy-talk.

[vippy]

The high cost is still not worth it. There are other cars that get almost as much. Or just import
one from Europe, those get 45 mpgs.

[KillTheMessenger]

I am getting 8% annual return on investment on mine. Closer to 10% actually with gas prices rising. If you think it's not worth it, you simply haven't done the math.

You would not want to drive a non-hybrid European car with 45mpg or above. It has very unfavorable driving characteristics and offers little storage when compared to an average US car. The Prius and Civic hybrids on the other hand drive like a charm and offer plenty of room.

[cylindar]

It is the speculators who are responsible for this round of stupidity.

[KillTheMessenger]

You said it. Now prove it.

[seawolf77]

Exactly. When a speculator "bets" that prices will rise there is another speculator somewhere that is "betting" the price will fall. A broker puts the 2 together and wallah, you have speculators. Speculators make money off of other speculators. Delivery is rarely taken. At the same time this is going on businesses are purchasing puts and calls to "smooth" out their business cycles, like airlines and railroads and anyone who uses energy in large amounts. The relative volume between speculators and "legitimate" users like busineses is unknown and impossible to determine. But in both cases supply and demand rule i.e. if price is low buyers move in, if too high sellers take profits, but in either case equilibrium must be reached. And in both cases the puts and calls are underwritten by people who hold the underlying asset. Then the puts and calls are sold like any other asset on the open market.

[argeec]

Why do the oil companies themselves say that the current equilibrium price is $50 to $60 per barrel?
They have no reason to want low prices.

[KillTheMessenger]

It does not matter what the oil companies say. The only thing that matters is that tomorrow you will drive to the gas station and fill up your SUV for $4/gallon. That will signal the market that you will also pay $8/gallon and $10/gallon.

And guess what... 500 million Europeans are already paying that much. They just don't drive SUVs.

[vippy]

Europeans also have a terrific transportation system and we don't. In fact, in my
24 years I never needed a car there and I could save the costs that go along with it.

[KillTheMessenger]

True, but not universally. There are many rural areas where there are two buses running every day: the one that brings the kids to school and the one that brings them home.

[freshnotbitter]

Current equilibrium price of $50/60 -

Suppose you sell apples for 10 cents and somebody tells you an army of 3 billion men from India and China are marching in your direction looking for food. Your customers suddenly show up and demand that you sell all your apples for 10 cents. You say no thanks, you'd rather wait and see what the army wants to pay for them. Eventually you figure out that you should sell some today for $100 each if somebody wants to pay that amount. Otherwise you'll just wait.

"Equilibrium" price refers to a specific point in time on a graph whereas in the real world the law of supply and demand operates on a third continuum which is "time".

In short, an equilibrium price is always "history".

[dadw5boys]

What is the equilibrium price of a Soldiers life in Iraq????

What is that replacement cost?

When do you realize a profit from the Soldiers hard work?

Sould you expect to profit from a Soldiers work? NO!!!!!!!!

[sophistwatch]

Good job.

There are some additional points to consider. The first is that Max's theory is based on dollars. It used to be that most all petroleum was purchased with dollars. Now a significant amount is purchased with Euros and other currencies.

Second. The Indian and Chinese markets provide so much volume that the price may be $120.00+ a barrel to us because we are inconvenient to sell to, not because India and China are willing to paying more per barrel. Cost benefit analysis. China and India are a hell of a lot closer than we are. Transportation costs.

Based on a large volume and reduced transportation costs, they could actually sell to the Indian and Chinese for less per barrel and make a higher profit. The Wal-Mart model.

Third. I also recall hearing that the Bush Admin brokered a deal with North Korea to trade oil in exchange for their agreement to stop pursuing nuclear tech/ development. I wonder what the price per barrel was established for that trade? Maybe the taxpayer/consumer is paying for all or part of that deal on a per gallon basis without knowing.

[Sundialsvc4]

Actually, at the immediate moment, those Euros get converted into Dollars and the transaction is finalized in Dollars.

Obviously, that status-quo cannot continue, although the United States is fighting against it mightily.

[sophistwatch]

You are right about the price quoted by oil companies.

Max has his theory and I have mine. There is some truth to his position - so I am not picking on him, but he is probably not as free to be blunt as I am.

There is NO real market driven reason that justifies the current price of oil or the pace of the recent and dramatic increases. The cost of production has not changed. The demand has changed, but in comparison to total capacity, it is inconsequential.

Max quotes peek oil theory but even that does not account for the radical increase in such a short period of time.

The oil companies are price gouging and price fixing and that is it. But that would be a boring article that would piss off a lot of people.

[KillTheMessenger]

Cost and price are never related. There is no "good margin" and "bad margin" in business. Moralists might think otherwise, but business people don't. The difference between price and cost is profit. Businesses always try to maximize profit. A good business is one that can. A poor business is one that can't. For a long time oil was a poor business (I personally know people who went broke in oil). Today it is a good business. Tomorrow it will be a very poor business... because there won't be any quantities of importance left.

[boogieandjive]

"Max quotes peek oil theory but even that does not account for the radical increase in such a short period of time. "

Peak oil is only one of the factors involved in the rising price of oil.

But if you look at a chart of output of those fields that HAVE hit peak oil . . . like British North Sea, Mexico's Cantarell and Burgan in Kuwait. You will see that the drop in output is radical, to use your description of price increase.

Now, the real problem is Ghawar, the biggest of giant oil fields in all the world. Something like 5% of all global production of oil comes from this one field. It has been pumping for 50 years now and many suspect that it has also hit peak oil and is declining at the same double digit rates of Cantarell and Burgan (both declining by over 14% per year).

Has Saudi King Abdullah refused to increase output because he is a greedy monopolist? OR is the Kingdom UNABLE to increase output?

Actually, if you watch Max's film about Peak Oil, you will see in the interview with Dr. Robert Hirsch. He says that the price of oil WOULD suddenly spike when it happens. There would be no gradual price increase through which we would slowly adapt.

The peak oil film. Look for Robert Hirsch:

http://www.youtube.com/watch?v=KrjX4Nf_wGM

http://www.youtube.com/watch?v=-sYLFqg2e3I

[mpkirby]

The cost of production HAS changed. The cost of getting new barrels of oil out are significantly more expensive than the costs were 10 or 15 years ago.

As an example, deep sea drilling rigs cost $600,000 dollars per day to lease.

Or look at the labor shortage, water shortage, energy shortage plaguing the Alberta tar sands in Canada.

EROEI is a key driver of whether or not more oil is really more oil. Just because they say the find a few billion barrels under the water doesn't mean it comes up for free.

Mike

[bgregs]

I could believe that if it weren't for two inconvenient facts:

1) The oil companies are NOT buying oil at the rate of $120/bbl. They are either pumping it out of the ground at around $10/bbl (upper limit) or buying it from the Saudis et al at the rate of around $50/bbl. Since they used to buy it from the Saudis at $10/bbl.......
2) Since the oil companies are making record profit levels never seen by ANY company in the history of history, this means that they are either selling record amounts of oil at the same profit margin (the percentage of total sales which is pure profit) or they are making a larger profit margin at similar or slightly higher sales rates.

[vippy]

The oil companies BOTTOM LINE (PROFIT) has increased. That tells me
they don't pay a higher price for the oil (cost of goods), nor did they increase
personnel costs. Somehow I figure they had to have a plan in place whereas
oil was traded on a 10 year plan for a specific price. Remember, we are
trading oil today on the future's market.

[sophistwatch]

I will grant you that costs have changed significantly over the last 16 years. That is a given. My point is that the radical price increases that are being charged per barrel and at the pump today are not in line with any US inflation number of the last say 5 years.

There is an external force at work that does not match market drivers. True there is abusive speculation but there is also other forces at play here.

When you do accounting of multi year projects you have to take into consideration the timing of the expenses and revenues. Over the last five years the cost increases do not match the prices being charged.

All you have to do is look at the profits being declared by the top oil companies over the last five years and it is easy to see that they have almost all recorded record profits every single year. You can't do that when your costs are out of control.

[mbaty]

Right. Deny benefits by simply "rebranding" PTSD as "Adjustment disorder." What an evil scam. And maybe if we used our money and our ingenuity to creating a sustainable infrastructure we wouldn't have many of these problems--fossil fuel dependance, water shortages, rising food prices--all of these things can be solved relatively easily, if only we could find the money to pay for them. But we seem to have found enough money to keep a false "war" going, interjecting ourselves into a civil war of religions and pretending like we're 'liberating' people by bringing the unregulated free market to their town. Then, when our soldiers come back, understandably stressed and traumatized, suddenly we can't find our wallet. Right.

[runswithscissors]

"Deny benefits by simply "rebranding" PTSD as "Adjustment disorder." "

That's about par for the course. The government's aim is always to downplay the devastating effect war has on the mind of soldiers. In the first World War, PTSD was referred to by its original name...shell shock. Then it became battle fatigue, then a few slight variations in Korea and Vietnam. The name Post Traumatic Stress Disorder evolved because it sounds less distressing than Shell Shock..almost makes it seem like war isn't even a prerequisite. Adjustment disorder is just another step...THAT sounds like something a kid would suffer after changing schools. Give it a decade and PTSD will be an archaic way of saying "adjustment disorder", much like shell shock seems archaic now.