Why we could see less than 30 USD oil again – part 2

Last week we saw that there is more and more oil coming online despite some problems in other oil-producing regions of the world and also despite the drop in sales of oil production that is in full swing now. However, I also hinted that the real toxic problem lies somewhere else.

Those who believe that oil consumption is going to grow forever, have not yet come to terms with the fact that China is the biggest Ponzi scheme ever. The sheer scale of it makes Bernie look like an ant in a herd of dinosaurs. China is in a huge building frenzy to shore up its grotesque and manicured growth figures. Hence, the world sees it as the mother of all economic miracles – and everyone tags along as to the finance boys and girls it looks like the last flimsy thread that saves the world economy from final doom and gloom. Everyone gobbles up the BS that China gives us every day, hoping that somehow the storm might blow over.

As Ronald Reagan used to say – arguing with reality is like trying to convince a Crocodile to eat you last, but eat you it will.

Our own countries are in the middle of the biggest economic crisis for almost a hundred years. We try to keep our economies and social systems afloat and deflation at bay by throwing tons of freshly minted money at banks and other financial institutions in a desperate attempt to save our own, smaller Ponzi schemes but as it is the nature of any Ponzi to eventually collapse – so will this bubble. Feeding it further will only make the scale of the eventual collapse even more staggering.

The trouble is that all the quantitative easing, all the helicopter money has lured us into keeping the consumption trousers on and spending money as if there was no tomorrow. Money that our children and grandchildren will have to work for and reimburse. Does that sound like a rant – you bet. I just don’t like the feeling that my kids will have to pay for us being stupid and making idiotic choices

Where have I been? Ahhh, yeah.

If we accept that the current situation is nothing but a grotesquely inflated bubble and that we keep feeding this bubble, well then the bubble must do what all bubbles do eventually. It pops and then the entire party deflates to more realistic dimensions taking our consumption levels with it but there is one thing that remains. If there is less consumption but the level of energy efficiency stays the same, then the different energy sectors will start to cannibalize themselves. It will be a big, nasty Battle Royal, and don’t count on Coal being the sole victim and the others getting out unscathed.

China has cities nobody needs, coupled with mountains of surplus cement, steel by the asteroid load, and yes, oceans of oil that it likely will never need and the Chinese keep buying with fiat money as they need to feed the bubble as in turn, their livelihoods depend on this monster-bubble as well. Everyone keeps feeding the Crocodile, and we are all somehow sure that the Crocodile will never even think of having us for lunch.

Oh, I forgot. Part of the explanation for China’s still growing oil consumption is that its leaders have decided to bumper up its national oil reserve. There sure is a lot of common sense in filling up the reservoirs when oil is perceived to be cheap especially if everyone believes that prices will rise again. However, this reserve is filling up quickly as tanks and caverns are in finite supply and the tipping point is not far.

Japan’s energy consumption has gone down already and the share of coal in the portfolio has risen. Coal also becomes more important in China and other Asian nations and once China’s tank-filling operation is over, a couple of hundred thousand barrels of oil per day will not find a willing buyer while countries like Iran are trying whatever they can to maximize output. Not really a recipe for higher prices I would say.

Looking beyond China, despite all this disruption in the market (Libya, Iraq, ISIS, Yemen, Problems in Nigeria, Canada, Shale going down) the oil price is still quite low. All this chaos and madness and still, oil has not jumped to 3 digits yet? Is that still the result of the open taps policy of OPEC?

I would rather believe that in reality, OPEC has lost control of the market and everyone is running for their shirts now. Saudi Arabia is smart enough to put a brave face on it and play the game as best they can, so they can still make everyone believe that they have leverage when in fact they have not. They know how incredibly fragile this entire situation is. This means that the race to the bottom is not over yet – to the contrary. It’s hotter than ever and the next dip will go lower-price than the last one.

This will convince the last hesitant that this storm is not going to blow over but that it will rather crash big oil as it is right now and level the ground for something new. Big Oil had it coming for a long time, and they have overplayed their hand. Their managements have lived to the beat of the quarterly report and have forgotten how to make long-term calls. But this business is still a long-term business. Shale will change that but only very slowly as the proportion of shale relative to conventional oil is still rather small. In the meantime, shale is going to distort the market as it swamps North America with relatively cheap oil and slowly takes the biggest fuel market out of the picture for the exporters. This is another paradigm change that will make the China bubble seem quaint in comparison and as there are new drillers ready to sink the drill bit again at USD 50, this race is sure to accelerate.

A development that many don’t want to see. Let’s see it with other eyes – who thought in the year 2000 that a little upstart in California with almost no cash and a really smart algorithm would dominate our online life today? Now Google holds the reins of the internet after the classical search engines had overplayed their hands. Some former leaders of the online business such as Yahoo are still around, but they are shadows of their former selves.

The big information business was trash hammered by an upstart that nobody took for real, and they had produced this situation themselves as they had ignored the warning lights for a really long time. There were plenty. Now it’s big oils time to feel the trash hammer.

And for the oil price, there is one thing left to say. There are all sorts of predictions out there (count mine in) but in the end, we must admit that the oil price does what it wants and as much as anyone claims that it responds to one particular thing, there is at least as much supporting evidence that it does not.

There is only one thing left to do. Brace.