Could Falling Oil Prices Spark A Financial Crisis?

19 Comments on "Could Falling Oil Prices Spark A Financial Crisis?"

Plantagenet on Thu, 4th Dec 2014 7:03 pm 



Low oil prices can certainly cause a financial crisis in the oil patch, and this potentially may be drag on the overall US economy.

Makati1 on Thu, 4th Dec 2014 7:08 pm 



Perhaps we have just witnessed the first collapse domino in the long run of dominoes lined up to fall and take down the global system of finance? Yep, 2015 is going to be exciting, I think.

GregT on Thu, 4th Dec 2014 7:21 pm 



This just in;

TSX tumbles 284 points as investors bail out of banks, energy.

http://www.cbc.ca/news/business/tsx-tumbles-284-points-as-investors-bail-out-of-banks-energy-1.2860958

Apneaman on Thu, 4th Dec 2014 11:40 pm 



The G20 has the bankers covered. As per usual.

New Rules: Cyprus-style Bail-ins to Take Deposits and Pensions

http://www.huffingtonpost.com/ellen-brown/new-g20-bailin-rules-now-_b_6244394.html

theedrich on Fri, 5th Dec 2014 4:02 am 



OK.  I’m converted.  The emperor, the MSM and all the Ø-worshippers have convinced me that there is no tomorrow.  Unemployment is down (we won’t notice the people who have given up looking for work, let alone the hopeless and changeless ones);  all the smiley-faces standing behind the demigod on the hypnosis-box screen show confidence and cheeriness;  we are now going to punish all of our (evil White) policemen for killing defenseless blacks;  we’re going to welcome all the wretched, the poor, the teeming masses, etc., etc., of the Third World in order to show our magnanimity;  and so forth.  I won’t worry about paying for it;  our national debt is only 18 terabucks ($18*10^12), a mere trifle, even though an exponentially growing one.  The rest of the world has to use our money, which only we can inflate print.  What!  Me worry?  Not as long as we have Ø in charge.  All we have to fear is fear itself.  So eat, drink and be merry.  For tomorrow will never come.

Davy on Fri, 5th Dec 2014 6:17 am 



It is possible the junk bond market will be the next bail out. It is intriguing to opine how TPTB will accomplish this. How long will they wait? We know that any segment of the economy that is too big to fail is not going to be allowed to fail. We saw the Fed’s Bullard chime in when the markets routed near the tapper end. I imagine in this case it will take direct support. The Fed is not going to talk the oil price up.

Those of you who think the energy component to the junk bond market is insignificant to the size of the whole market need to think again. This is a critical market with massive global counter party risk. There is sovereign risk to boot. There is also the risk of supply disruptions. I actually feel high oil prices are better than low at least within a sphere just outside the goldilocks range.

At this point in time the top is all that has the economy glued together. The bottom has been gutted. Locals have been delocalized. Everything has been securitized and risk disseminated throughout the system. What we see unfortunately is risk is like that pesky virus that cannot be cured. Risk is like randomness of chaos and can’t be controlled. It can only be ridden like a wave.

We just cannot have major instability anywhere without a variety of consequences and unintended consequences. This is just the reality of hyper complexity and interconnectedness in a finite world facing limits of growth, diminishing returns, and population overshoot. This situation has no solution and there must be a break. The question is when with the all-important degree and duration.

rockman on Fri, 5th Dec 2014 7:27 am 



Oil patch debt: I can’t quantify the point I’m making…just not enough details. But I’ll describe every finance structure I’ve ever been privy to in the last 40 years. It may or not be representative of our entire debt market today.

First, getting burned by either a significant drop in oil/NG isn’t new to the folks that loan us money. There have always been serious security structures built in every loan I’ve seen. For instance folks have been commenting how some companies won’t be hurt as badly thanks to hedging. Every hedge I’ve seen was a requirement of the lender more so then the operator. And the primary goal of such a hedge is to benefit the lender…not the company. There may be some truly “junk bonds” floated by some oil companies but I’ve never seen one. But there is a portion of our lending base that’s specifically focused on risky operations but more so on the success side of the equation then the oil/NG pricing side. In general we call them “mezzanine bankers”. But they aren’t bankers…they are investment companies that loan capex for acquisitions and operations. And none of them are unsophisticated pushovers. If I get a loan from a MB and use a hedge to cover pricing risk guess what: there’s a very good chance I’ll never see a penny of that income if the hedge makes money: it’s been assigned directly to the MB. So the good news: a hedge might help cover the loan repayment but might not bring a dollar in to run the company and carry on operations.

There are a number of other protective structures to protect the MB but I’ll stop here. And the MB money doesn’t come cheap. While usury laws can limit the interest rate they get around this by getting an equity position. So while they might be charging 8% interest I’ve seen MB’s end up with 20% to 25% of a company’s revenue while the loan is in place. You always refinance out of a MB “loan” as quick as you can secure a more conventional loan from a bank. Additional MB’s don’t just send you a big check on day one: it’s metered out as you need it. And you have to justify each project to them. And if they don’t like the project: no capex.

Also I forgot to mention: the company doesn’t have first call on any of their revenue. I’ve seen deals where a large % of the revenue is delivered directly to the MB with the company getting what’s left. And sometimes it not much more then to cover overhead and minor operations.

So some money lenders, including a few cutthroat MB, might get hammered to some degree by the oil price drop. But most of the folks financing our activities might not need a bail out. In fact, some might still be making a decent profit thanks to protective leveraging. BTW it’s not uncommon for a corporate takeover, be it voluntary or hostile, to be instigated by a company’s creditor. The company might disappear in the acquisition but the lender is saved. And that’s all they care about: as long as they get their interest and principal back that’s pretty much all they care about.

bobinget on Fri, 5th Dec 2014 10:30 am 



Thank you rockman for that cogent explanation.

I’ve nothing to add– except, this low oil price environment is utterly exaggerated. If anything
lower oil prices, as long as they last, will spur the economy. We’ve seen as much from today’s
“best employment report in years”.

When as the EIA reported over the last several
weeks employment goes up so does oil consumption. (100,000 bpd EXTRA) every week.

No bets on weather or wars. This
US Economy surge will prompt more oil and gas investment, not less. Markets will react to future
demand not this artificial oil glut.

Kenz300 on Fri, 5th Dec 2014 12:03 pm 



Low oil prices will help the global economy recover from the Great Recession.

Yes there will be some winners and losers but on average it will be good for the world economy.

Yes, risky investments in shale, tar sands and deep water will be reevaluated at these lower prices and production increases will slow. Russia, Iran, Venezuela and other high cost producers will be hurt and will be more on board with the “shared sacrifice” that KSA needs to reduce output.

KSA will not do it alone. Until there is a slowdown in new production and oil producing states are willing to “share” in the production reduction quotas there will be lower prices in the oil market.

Enjoy it while it lasts. A growing economy will lead to more demand which will lead to higher prices.

Apneaman on Fri, 5th Dec 2014 1:48 pm 



Your right, bobinget the economy
is fine and everyone should trust the government numbers; not their eyes.

Look at all the jobs being created tearing down all the tent cities that are now a common and growing feature of the American landscape. Homelessness is good for the economy!

San Jose Shuts Down Notorious Tent City for Homeless

http://philanthropy.com/blogs/philanthropytoday/san-jose-shuts-down-notorious-tent-city-for-homeless/94139

http://www.citylab.com/housing/2014/11/in-portland-a-contested-tent-city-offers-the-right-2-dream-too/383246/

Not everyone is tearing them down because they know there are few jobs and now where for them to go-New normal.

Seattle To Provide Tent Cities With Internet So Homeless People Can Communicate, Look For Jobs

http://www.huffingtonpost.com/2014/11/25/seattle-homeless-internet_n_6215632.html

List of tent cities in the United States

http://en.wikipedia.org/wiki/List_of_tent_cities_in_the_United_States

America’s homeless: The rise of Tent City, USA

http://money.cnn.com/2014/05/16/pf/tent-city/

All this in what is still the richest country in the world with a trillion dollar military/police state budget. It will never go back and for most of these people it will never get better Pretending otherwise to sooth your anxiety and giving people false hope is a cruel cut.

Northwest Resident on Fri, 5th Dec 2014 3:42 pm 



bobinget — If anything lower oil prices, as long as they last, will spur the economy.

kenz300 — Low oil prices will help the global economy recover from the Great Recession.

I don’t understand any informed person could believe those two opinions. It seems obvious to me that the current oil price free fall is nothing but disaster for the American economy at least, and the world economy as well.

What?! Is the assumption that people saving money on gasoline are going to run out and spend all their extra chump change on consumer items, and that will somehow juice the economy?

Maybe 20 or 30 years ago that might be the case. Today, definitely not.

Cheap Oil A Boon For The Economy? Think Again

http://www.theautomaticearth.com/cheap-oil-a-boon-for-the-economy-think-again/

Guess What Happened The Last Time The Price Of Oil Crashed Like This?…

http://beforeitsnews.com/alternative/2014/11/guess-what-happened-the-last-time-the-price-of-oil-crashed-like-this-3070104.html

There is so much information detailing exactly how bad the crashing oil prices are for the economy that you almost have to WANT to filter out that bad news to believe the two statements above. There’s no reason to believe that indebted, unemployed and government dependent Americans are going to rush out and spend their miniscule gas savings on consumer items.

Davy on Fri, 5th Dec 2014 4:11 pm 



The compression of POD is coming at several different angles. This phenomenon is broadly systematic with converging feedbacks nearly all negative. If you use simplistic econ 101 mentality that harks back to the 80’s and 90’s then you have just closed your eyes to what has happened since 08.

Maybe you are in denial or just don’t understand the consequences of distorted markets, manipulated numbers, and corruption at the highest levels. Maybe you don’t believe oil has a relative value to the economy by virtue of its energy delivery characteristics and that value is sinking quickly. Maybe you missed the point that a Billion or so people have been added to the world in recent years. Maybe you think the vast sums of debt are just digital abstractions that don’t really matter to the real economy. These digital abstractions can be magically created and erased as needed.

If this is the case then sure you are going to believe lower oil prices will boost the economy and be good in the long run. In fact you may feel this is the answer to our problems. In a nut shell you do not believe in limits of growth and diminishing returns. Then join the bulk of humanity and hold hands. That mind’s eye reminds me of that Coke song:

https://www.youtube.com/watch?v=ib-Qiyklq-Q

come on join in lets hold hands and sing

Harquebus on Fri, 5th Dec 2014 4:31 pm 



Crude oil production has been increasingly fulled by credit since the 70’s. That is how the banks make money. They create it by giving out loans.
I think the global ponzi may be coming down this time.

Davy on Fri, 5th Dec 2014 4:52 pm 



good summation of a oil price drop contagion in the works. Remember folk in this day and age it does not take much to stir up a shit storm

http://www.zerohedge.com/news/2014-12-05/energy-bond-crash-contagion-suggests-oil-will-stay-lower-longer

bobinget on Fri, 5th Dec 2014 5:44 pm 



I do not deny the PERCEPTION seems to be— oil prices are falling because the world eschews fossil fuels or economies worldwide are crashing, their currencies becoming worthless by the day.
Facts, however do not support this. Oil DEMAND continues to grow despite all the doomer talk.

Now, there is no magic line on a calendar for when 2015 demand begins to pick-up steam.
But it will. 100,000 barrels of demand is being added weekly to US consumption or possible exports.. In any case, refineries are working full tilt and making bundles of cash for a change. There’s talk of lay-offs and cancelled drilling and domino effects shuddering through industry. (jobless claims fell this week)

The reason the US will survive this so called crash is because it’s mostly imaginary.

The fact is prices are lower because two OPEC
members have strong unresolved religious differences… full stop.

Russia or Canada or the US for that matter could cut production a few hundred thousand barrels
700,000 Bpd to be exact. Imbalance solved.
But.. why should North Dakota or Permian take the hit?

WE should be celebrating OPEC’s collapse not adding to our stash of Spam.

Oil will still be traded in the world’s strongest currency. Ask Putin if he would like to see ‘his’ oil traded in ANY other currency. You can bet Russia prices it’s weapons exports in dollars to all comers.

India and China can within five years, could use every drop of exportable oil available today.

We need to find under desert, sea or ice another six million barrels a day mostly from Iraq. If you ever wondered, we invaded Iraq and have troops in country today to assure that six million Bpd goal is met 2020. Russia doesn’t appear to have skin in that game. If you think not, you are mistaken.

Incidentally soon we will be sending ‘advisors’
to help Libyans and Nigerians extract oil.

You choose, Sunni, Shiite or Sexy car?

Bandits on Fri, 5th Dec 2014 6:50 pm 



“Facts, however do not support this. Oil DEMAND continues to grow despite all the doomer talk”
I need some FACTS to back that up.

Apneaman on Fri, 5th Dec 2014 8:45 pm 



There are 1,000,000 million souls added to this world every 4 1/2 days. Births minus deaths. Although some majority of them are not consuming like N Americans and other wealthy nations every one of them is using oil to some degree. Of course there is demand, but is it enough per capita to keep growth based economies functional? Also, much of the growth in the last 40 plus years is due to financialization and debt. You can only get away with this for so long. That’s not just my opinion; it’s the history of fiat money and speculation. There are other factors as well that are not being addressed, like Americas failing infrastructure. What good is cheap gas if the pumps stop working, roads go un-repaired and bridges fall down? Try running a 21st century business/economy without 24/7 electricity and a solid infrastructure. It’s no coincidence that the neglect started at the same time as increased financialization and deregulation.

http://www.infrastructurereportcard.org/

http://www.cbsnews.com/news/falling-apart-america-neglected-infrastructure/

http://www.dailyimpact.net/2014/12/05/rage-against-the-dying-of-the-lights/

I would not want to live near a nuclear power plant, especially Turkey Point when the next big storm comes. Sea level rise is going to be a bitch.

http://www.miaminewtimes.com/2011-03-31/news/five-reasons-turkey-point-could-be-the-next-nuclear-disaster/full/

Notice how they keep moving the goal posts on the safety margins.

http://www.miamiherald.com/news/local/community/miami-dade/article1983871.html

agramante on Sat, 6th Dec 2014 3:24 am 



Lower prices benefit consumers, Kenz3000, not producers. As higher prices benefit the producers and not the consumers. It seems that these days one or the other is increasingly benefitting at the expense of the other, because most consumers have less disposable cash, and most producers have lower profit margins. So these price swings are pretty damaging overall.

Davy on Sat, 6th Dec 2014 6:32 am 



App, I would like to expand and clarify your above statement because it points to the issue now in our new normal since 08 and most recently the end of taper Oct14. Financialization through debt, securitization, fiat credit creation, and other modern market mechanism hit diminishing returns significantly in and around 2000. The FIRE economy grew significantly with the advent of hyper specialized debt instruments, computer algos, and securitization. The key point here is much of that supposed growth was not physical growth that can be considered real and beneficial.

We can consider some of it labor growth because think of all the real estate agents, bankers, and financial traders. The key here is these folks were taking returns from real growth and repackaging it. There was nothing physical that grew out of these actions like a crop. These FIRE people did not pull anything out of the ground. The government has exploded in the last 20 years or so. Much of that explosion is labor that relates to redistribution and regulations or IOW repackaging of real wealth.

These two sectors are actually parasitic because what happened was a metastasization of these segment that repackages wealth growing far greater than is a benefit. They actually rob the whole system of vital energy by reducing net real production and productivity. There activities have since this huge expansion mostly benefited a select few with redistributive activities. If you are part of this system and or have existing wealth you can employ into this parasitic economic segment you will suck wealth away from the real economy that is there to feed and support the whole population.

Along with this parasitic economic angle has come the power grabbing. The FIRE segment through its instruments of repackaging and redistribution of wealth is a perfect vehicle for the same activities related to power, influence, and systematic control. We may be showing growth numbers but it is not actual growth, it is not actual productivity growth, it is not support growth. What this repackaging ends up as is nothing more than a vast systematic Ponzi scheme. Ponzi schemes at this level are a general indication of a civilization in the end days systematically. The pie has stopped growing so cannibalization and parasitic wealth and power transfer has begun. Our yeast example works here or locust.

We then have the other vital component of thermodynamics and physical side of growth which makes the above situation so dangerous. We are at limits of growth and diminishing returns especially of the economic value of energy both economic energy and food energy. Water that is an integral part of economic energy and food. Water is considered widely in stress. Ecosystems which everything operates in are in vast decline. Climate which is vital to all extractive and supportive systematic functions is unstable.

This folks is not growth. We are in a psychosexual feel-good experience of growth yet it is not real growth. It is only repackaging a pie that is actually shrinking. If anything these numbers as they exponentially increase can be seen as an indicator of actual decline. Quality is not necessarily quantity nor quantity necessarily equate to value. We have a distortion of quality and value by quantity. More oil reserves are not more net energy to the bottom line for example. More debt based wealth is not more actual production or productivity of that production.

In the past year we have seen the end of growth in this repackaging and redistribution through the diminishing returns of all central bankers’ actions. The end is near because there are no other repackaging and redistribution vehicles left except an outright holocaust of population segments. This is not out of the question considering the tools available. We seem to be following the behavior of yeast and locust. Now is the most dangerous time in the history of man.