Month: February 2011 Page 1 of 3

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.

European leaders draft a “competitiveness” treaty meant to lower wages and cut pensions

No, I’m not kidding. It includes:

a debt brake which will stop countries from deficit spending beyond a target;
automatic monitoring which can force pension cuts;
a requirement to monitor wages and productivity and to then lower wages if they rise “too quickly”

Every one of these are anti-worker. The last is a modern version of the bankers obsessions in the 80s and 90s – wage push inflation, which was the idea that inflation is primarily caused by wages rising faster than inflation, so when they do, you must strangle them. This was a stupid idea at the time, it is even stupider now, when the main inflation problems are commodity price (energy, food, others) driven, and exacerbated far more by huge pools of liquid money at the top than by ordinary citizens having pensions and good wages.

But ultimately the choice is simple: you either tax the top at very high progressive rates or you take it out of everyone else. Since the rich have more control over the political apparatus than the middle and working classes, they chose to strangle everyone else, rather than themselves.

It’s them, or you. They’ve chosen you.

One way the price of oil hurts the economy

Promoted from comments:

I work for a small freight forwarder. How small? My boss, and myself – that’s it. Last year we shipped over 61,250 million tons of beef, pork, and chicken; mostly to Australia and Hong Kong, but several smaller markets too. You pick up the product, stuff the container, and off it goes. At each point in the transport, whether it’s rail from Chicago to Long Beach, or Long Beach to the actual port, or port to destination, fuel is used and it adds to the total price. Never mind the fuel used in the production of the meat.

In addition to the cost of the space on freight, there is something called FSC – fuel surcharge; on ocean freight it’s called Bunker, or BAF. It was about 18% 2009-2010. Then 21% last quarter of 2010. 23% in January 2011. 26% this month and expected to go up next month from there. So, if your freight rate is 3500 bucks Long Beach to Sydney, you add another 900 bucks for fuel; on every shipment. As the railcars come in to Long Beach, they need to be unloaded and the product transloaded into containers, then dreyed to the ship – that’s about 800 bucks/container – most of that is fuel. So when the P of oil goes from sub-$100 to over $115/bbl (and don’t forget that everyone along the chain is adding their margins), it adds a huge cost. At a certain point the cost of doing business becomes unprofitable to continue doing business – that point is not far off in the shipping world. Have you noticed that the price of a tasty Rib-eye has gone from about $5/lbs to over $10/lbs recently? Most of that is fuel.

In a nut-shell you have the price of product rapidly increasing, resulting in lower demand, resulting in lower quantities ordered/shipped, resulting in product scarcity, resulting in higher prices yet, resulting in lower demand…resulting in lower revenue and therefore workforce reductions…ad naseum… That’s how the price of oil plays out.

I would add, as an aside, that in the longer term this is why I think the big box stores may be a lot less big and you may see a return to more local production. This is especially true the farther you get from the coast, navigable rivers and canals, as ground transport sucks a ton more energy than sea transport.

Wisdom

is learning from other people’s mistakes.

Foolishness is not even learning from your own.

Fools must take at least partial responsibility for the results of their inability to learn.

Oil passes $119/barrel

On February 24, 2011

If it doesn’t drop back down, kiss the economy goodbye. Note that while the proximate cause of this is the civil war in Libya, it was made possible by:

1) extremely loose monetary policy on the part of the US Fed.

2) Pushing growth into China and other developing 2nd world countries. Every dollar of GDP growth in China uses twice the energy used by a dollar of growth in the developed world. In exchange for cheap labor you use energy. Labor is in oversupply, oil is bottlenecked. This is moronic. (This is not to say such countries don’t need to grow, just that doing environmental, regulatory and labor arbitrage into them has huge costs that aren’t recognized.)

3) Refusal to do anything about climate change, which has led to very volatile weather which has led to widespread and unpredictable crop failures which makes food price spikes likely. Those food price spikes make it so that the day laboring class in countries like Libya and Egypt and so on can barely afford to eat. That makes revolutions happen.

4) Refusal to move off of oil in a large way. Trillions of dollars for bankers, but hardly any money to refit western economies to a new energy regime.

5) Refusal to bankrupt rich people when they, actually, go bankrupt, leaving them with tons of money for speculation and to spend on activities and items which actually are using oil now.

Until the West gets serious about climate change, refitting their economies, financial regulation and taxing not only their rich but the rich of the oilarchies, there will be no sustained economic recovery that doesn’t feel like a hangover, and every recovery will be fragile and ultimately limited by resource price runups. The world economy is already running as hot as it can. Any hotter and even without a crisis, oil would have spiked.

The power of the rich will have to be broken. Historically that happens in two ways: war (including real revolutions) and massive economic collapse.

Wisconsin: teach some politicians a lesson by ending their careers

On February 22, 2011