People will not ship or produce if the cost to produce+ship is higher than what they can recoup. There is a bottom on prices despite what the idiotic supply and demand curves in textbooks show. Contrary to what they tell you in economics 101 supply and demand is not a law, there are significant exceptions.
In fact, if the price of shipping increases enough to make production uneconomic, then people will be laid off. When this is occurring throughout the world, you get a ripple effect. It’s not self-reinforcing in the sense that it increases the price of oil (in fact, it decreases it), it is self-reinforcing in the sense that it does make the economy worse, because it reduces demand for a wide variety of goods, whether shipped or not.
What happens then is what we’ve seen before, the price of oil drops and you get a “recovery”, which is to say a pendulum from shitty economy to sucky economy and back again. The current economic juggling act is about making sure the economy stays sucky, and doesn’t get to shitty, and you do that by keeping the price of oil from exploding. When it does, you lose.
There can be no good global economy right now. There is not enough oil in the world to do it under current economic models. Cannot be done. You may be able to have a few places doing well, but only a few. The solution to this is to GET OFF OIL, but no one is willing to allow that to happen, because old money wants to control the new economy and isn’t sure they can do that with current technologies. That’s why you have idiots talking about shale oil, or using natural gas, or anything else which keeps an economy where a small group of people provide the energy for everyone else, and make a killing doing so.
So instead you have revolutions, you have unions being crushed and so on. At its base this is all related to the price of oil. Oil in Saudi Arabia costs about $7/barrel to produce. Think about what that means in terms of profit, especially in a country where those profits stick to the hands of a few people. Think about the fact that with all that money they could buy anything, unless the US has rich as rich as Saudi Princes and companies which are so large in terms of market capitalization that they can’t be bought. (Well, or they could do ownership controls, but strangely, they prefer to be stinking rich.)
The rich MUST be kept rich. If they aren’t, the oilarchies buy up everything. That’s not exactly true, but it is true enough because that’s the way the people at the top think. They know that they either stay so big they can’t be bought, or they’re bought.
Of course there’s more to this. We could discuss regulatory and environmental (and labor, but labor is the smallest part of it) arbitrage to China (who refuse to allow outsiders to buy anything that matters, period.) We could talk about the structure of the suburban economy, which is both profoundly unproductive and based on oil, so that any nation which embraces suburbanism can’t boom without driving up oil prices and, at this point, causing oil price spikes. We could talk about financialization, but financialization is just a side-effect of needing lots of rich people and having less and less to sell to the world, which is about suburbanization, which is what the rich bribed the middle class with – you can have your little castle and your unearned unwarranted wealth increase in your unproductive suburb away from brown and black people, in exchange we get to be really, really rich. Like all deals with the devil, of course, most people get cheated, but then when you decide you deserve money you didn’t earn and that being away from black people is important to you, you’ve already sold your soul. The rich will find this out as well.
guest
Not really a pendulum to me. More like a boa constrictor. It lets you breathe a bit, then when you exhale, it tightens again. Then all the shit gets squeezed out of you so you can breathe. Repeat cycle.
There are a couple statements above that seem like nonsequitors. “The rich MUST be kept rich. If they aren’t, the oilarchies buy up everything.” Maybe that is supposed to follow on the previous paragraph. But that paragraph is unclear and seems to be missing a few words or phrases. Such as “..unless the US has rich as rich as Saudi Princes..”.
Tom Hickey
At this point in the cycle, I think that rising oil prices will be deflationary, and if prices don’t pull back on their own, then economic contraction will set in, forcing global demand down.
I expect the market price of oil, which is set by the Saudis as swing producer, to stay right at the point where the global economy can function barring a shock.The Saudi’s, if they remain in power, will extract as much as they can without causing a global pullback. The global economy is expanding, so petro prices will be rising and that will translate into generally higher prices across the board. If it doesn’t happen too abruptly, it probably can be accommodated. A one-off rise to say 200 would hike prices generally so much as to choke demand, and there could be a global depression. That’s why those carrier divisions are in the Persian Gulf.
That doesn’t mean that there are not going to be huge regional and local imbalances along with this. The US, being largely suburban, with little public transportation, is badly positioned, for instance. Rises in the price of oil are a significant demand leakage in the US, and any increase reduces discretionary spending. In 2008, 3.50 gas nationally was the breaking point. I suspect that this will similar again, although gas could stretch to 4.00 this time. 5.00 is definitely a game-changer, and it is hardly out of the question with the ME in turmoil.
It is almost inevitable that some shocks will disrupt the price of oil, disrupting the global economy along with them. It’s just a question of how big any of these shocks will be. But we knew this back in 1973, and haven’t done anything much about it.
skuppers
Not wishing to resemble a one trick pony, but …I yam what I yam.
*People will not ship or produce if the cost to produce+ship is higher than what they can recoup.*
Two weeks ago, my Canadian customer called me to get a price quote on shipping 54000 lbs of pork from Des Moines to somewhere in Alberta (sorry Ian, don’t remember the name of the town). Pork was sitting in a freezer ready to ship, but they couldn’t find a price to ship that would keep their margin intact. The price they paid previously was around $3300.00. I got quotes from several truckers, the lowest was about $4400.00. That’s before we add our margin. Customer declined. So the pork sits in storage. Storage costs about 52 cents/hundred weight every two weeks – $280/2 weeks or $560/month. The product is only good for 3 months from slaughter date. How long will this sit in storage? Don’t know, but if they can’t move it in 3 months, it will be destroyed – that’s $74000 of pork thrown out. They’ll prolly sell at a discount to get it off of their books and recoup losses, but pay a premium in transport. What does that do to company margins? What does that do over many shipments, and how many losses like that can they absorb? My primary contact from that company was “let go” last month…
Bernard
America is a suburban country for the most part. Interstate roads to get you out of the major cities. if oil goes up enough, then we’ll see how the white people in the suburbs deal with the price they pay for their “safety” from the brown and black “others” who live in the cities.
that is almost worth seeing, in and of itself.
Cujo359
The Northwest is a bit different, I know, but around here if you want to get away from people of color, living in the city is what you do. At least, you do if you can afford it. I live in the suburbs because I like having a yard, and I like not knowing what my neighbors are fighting about. Plus, it’s affordable.
There are motivations for living in the suburbs that don’t involve getting away from people you’re prejudiced against. Might want to add that thought to the mix when we’re discussing the costs of change.
beowulf
Skuppers, if the US and Canada had ever built out NAWAPA, your Iowa cargo would be trucked to the Mississippi River(on the East border of Iowa) and would go by barge to Alberta the rest of the way. Of course there’s no way NAWAPA would ever get past an environmental impact study (assuming Canadian environ. regs are similar to our own). However Canadian engineer Roy Tinney’s CeNAWP alternative (providing the same amount of water without needing to add a single reservoir– NAWAPA would create dozens) would mean shipping to the Missouri River (on West border of Iowa) to barge up to Alberta.
There was a Bulletin of the Atomic Scientists special issue in 1967 comparing the two plans:
NAWAPA
http://books.google.com/books?id=5wcAAAAAMBAJ&pg=PA8
CENAWP
http://books.google.com/books?id=5wcAAAAAMBAJ&pg=PA25
anon2525
…customer called me to get a price quote on shipping 54000 lbs of pork from Des Moines to somewhere in Alberta (sorry Ian, don’t remember the name of the town). Pork was sitting in a freezer ready to ship, but they couldn’t find a price to ship that would keep their margin intact. The price they paid previously was around $3300.00. I got quotes from several truckers, the lowest was about $4400.00. That’s before we add our margin. Customer declined. So the pork sits in storage. Storage costs about 52 cents/hundred weight every two weeks – $280/2 weeks or $560/month. The product is only good for 3 months from slaughter date. How long will this sit in storage? Don’t know, but if they can’t move it in 3 months, it will be destroyed – that’s $74000 of pork thrown out. They’ll prolly sell at a discount to get it off of their books and recoup losses, but pay a premium in transport.
So, the price being offered to the customer is $74,000 for the pork + $4,400 for shipping, or $78,400, assuming that it could be shipped today with no more storage costs.
Why isn’t the customer–let’s assume that it is a grocery-store chain–willing to pay the price? Either the chain has an alternative source that’s offering the pork at a lower price, possibly because it is closer, or the chain doesn’t think that it can sell the pork for a profit at that price–that is, the chain knows its customers and what they’ll pay and doesn’t want to get stuck with pork that it cannot sell.
Whichever the reason–an alternate, lower-priced source or a calculation that the pork cannot be sold at that price–the price is still dictated by demand (actually, the law of supply&demand, but the supply is fixed in this example), once again, assuming that the price of oil remains constant. At the price that is being asked, there is no demand (so far).
Either, some retailer sees a change in conditions that makes it think that it can sell the pork at that price (i.e., the demand changes) or the producer lowers the price until it reaches zero (i.e., keep it until the meat is wasted and discarded–price paid: $0.00 per pound).
And if, given the current price of oil, the pork producers are not able to find a lower-priced way to produce it or accept a lower profit margin (or both), then they are priced out of that particular market, at least until conditions change.
grs
We could talk about the structure of the suburban economy, which is both profoundly unproductive and based on oil, so that any nation which embraces suburbanism can’t boom without driving up oil prices and, at this point, causing oil price spikes.
True for the U.S., Canada, China, and Russia based solely on size. In these countries, trains should have been the mainstay for cargo (never mind passenger lines). Oil won that fight. But most countries aren’t on these scales. It’s easier to go with rail lines.
It’s one thing to talk about people’s cars and home heating when discussing alternative fuels. Shipping is the driving force. Shipping is to fossil fuels and alternative fuels as porn was to the VHS and Betamax. I don’t think people realize how much junk is transported by truck. I think I’ve said it here before. If the U.S. wants to get off fossil fuels, they need a wind farm the size of California and a solar farm the size of Texas. Just get off oil and stay on coal and natural gas? You could scale it down some. I don’t know where plastics fall in this debate.
S Brennan
“…there he goes again”, having to state the obvious
“..There can be no good global economy right now. There is not enough oil in the world to do it under current economic models.”
Right on Ian
Morocco Bama
There are a thousand hacking at the branches of evil to one who is striking at the root.
Henry David Thoreau
Last time I checked, unionized government employees lived in suburbs, as well. My suburban neighborhood is pretty black and brown, and international. This is not my father’s suburb. But it is a suburb……except now it’s an equal opportunity destroyer of the planet….and of souls.
Pepe
Remove oil (and food crops) from commodity markets.
Notorious P.A.T.
Hey, why are we supposed to worry about government debt? I know all the people in DC are telling us it should be our #1 priority but they never say why. What’s the problem?
Lex
I realize how much junk is transported by truck.
If the OTR guys ever get fed up and start striking, the US gets brought to its bloody knees in less than a week. And you can’t just replace long haul truckers; it’s not like driving a car…especially given how few Americans can even drive a car with a manual much less a diesel tractor that requires shifting every 300 rpm.
Formerly T-Bear
Those “peak oil” whingers persist in their ignorance. Current world “demand” equates roughly with “supply”, that amount at about 85 MILLION barrels a day. Nary a thought is given to the consideration that some good portion of that 85 millions bbls is frivolously used; frivolously meaning used without regard to being used in economic pursuit.
BBC produced this mirror to see ourselves:
http://www.bbc.co.uk/news/magazine-12606943
about the change in “lifestyle” that has occurred in recent historical times, the reader should maybe recount to themselves how much has been the same in their “lifestyle” over the same period.
Because the majority of eejits voted against Carter when he led by example to become aware of energy usage and to adopt alternative choices in supplying energy needs, to reduce the speed at which we use up energy (saving many lives in the bargain), and to conserve energy resources by lowering the thermometer that automatically regulates the comfort zone we have become accustomed (primarily out of sloth), that majority is still eejits by all reasoning.
That reasoning has now led to the choice *skuppers* has so well outlined, as well as the consequence mentioned, the loss of either economic income or of economic goods, not to mention the long term effect of depressing future economic supplies for those goods derived directly from the risk of loss of the ability to transport from production to market at an economically sustainable price. This choice is now between turning on the key of a SUV or eating, the democratic majority eejits insisting on turning on the key. It goes to show the power of ignorance and the depth of economic ignorance in the country. This ignorance will not be reversed without catastrophic failure of the edifice that spawned the ignorance and the destruction of the wealth that sponsored the creation of this ignorance. All other avenues of salvation through political action have been totally corrupted and are not of consequence, that die is cast.
rrot
FTW
HumbleAuthor
With regards to arbitrage to China: oil, and by extension food, will end this debate, either by acclamation or by fiat. Still, I predict that the Nash Equilibrium in this contest of nations is sustainability, and eventually nations will either accept that or fail to be relevant. China is hitting a food wall, in part driven by oil (though it has enormous interest in Saskatchewan’s potash… also a driver of fertiliser prices), part by population, and part by diminishing agricultural returns. One way or another, the problem will simply solve itself. China’s problem is compounded by the fact that the provinces simply don’t listen to the Beijing. The mountains are high, and the emperor is far away.