Peak Oil is You
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Page added on April 14, 2016
Is Cheap Oil Contractionary?
Low oil prices were supposed to be a big boost for the world economy; but it didn’t happen. Maury Obstfeld, my long-time textbook co-author and now chief economist at the IMF, offers an interesting argument about why: he suggests that it’s because of the zero lower bound. Falling oil leads to falling inflation expectations, and since interest rates can’t fall, real rates go up, hurting recovery.
Matt O’Brien is skeptical, and so am I — even though I am very much in favor of rethinking our usual assumptions when the economy is at the ZLB.
First, a priori, falling oil prices shouldn’t affect expectations for the rate of inflation of non-oil goods and services, or at least it’s not obvious that it should — and that’s the inflation rate that should matter for investment. Still, you could argue that oil is in fact driving those expectations, whether it should or not. What Matt does is question whether correlation is causation.
I’d make another point: even using market expectations, real interest rates have in fact gone down, not up, in the face of falling oil prices:
How is this possible, given the zero lower bound? It’s all about the term structure: long-term rates aren’t at zero, although they’re at least somewhat supported by the floor on short-term rates. And as it turns out, during the recent oil crash long-term rates fell enough to more than offset the decline in expected inflation.
Of course, Maury could be right in an other things equal sense. But my guess is that the oil-price disappointment comes less from expectational channels than from two facts: oil is now a big driver of investment, via shale, and oil exporters are actually cash-constrained these days, with an arguably *higher* marginal propensity to spend than oil consumers.
Anyway, interesting stuff.
19 Comments on "Is Cheap Oil Contractionary?"
forbin on Thu, 14th Apr 2016 7:44 am
sighs
$40 dollar oil isnt cheap
when will they ever learn ?
Forbin
joe on Thu, 14th Apr 2016 8:18 am
One thing to consider. Oil prices fall, but tight oil costs more than easy oil to get, demand for oil wont go up because the money consumers would otherwise borrow to spend to increase oil demand is in fact being spent to get tight oil, in a negative spiral type of thing.
It might be that oil can’t go up because oil is economically more expensive even though the dollar price is low.
shortonoil on Thu, 14th Apr 2016 8:23 am
“Low oil prices were supposed to be a big boost for the world economy; but it didn’t happen.”
The battle between the barrel counters, and the BTU analyzers goes on. A year, or so ago every Tom, Dick and Harry economist was screaming from the roof tops how falling prices were going to be a boon for the economy. We stated 2 years ago (6 months before they did) that prices would fall, and that it would not a benefit to the economy. We put up this page as a response:
http://www.thehillsgroup.org/depletion2_022.htm
They fell, and the economy continued to go nowhere.
Now the IEA is saying that falling Shale production will support the price. We say that falling Shale production will only support the price until the market realizes that inventories are not declining. The production of Shale generates a heavy demand for oil; when the production goes so also will the demand it produces. The net change will be about zero.
The difference between the barrel counters, and the BTU analyzers is that the BTU analyzers factor in why oil is used in the first place. Oil is used because it acts as an energy source. Ignoring that is like ignoring how the rarity of horse drawn carriages has affected the demand for buggy whips. Instead the IEA wants to believe that Cinderellas every where are going to be riding around in their magical pumpkin carriages. They are saying that oil prices are going up because the Fairy Godmother is coming with Her magical barrels of oil! It will be oil that does not supply energy but that can power the economy anyway.
We plan on waiting on that outcome!
http://www.thehillsgroup.org/
twocats on Thu, 14th Apr 2016 10:54 am
Well, the weird part, and I think this highly supports things that Short on Oil has been saying for a long time: that the price of oil is not going to go back up.
even in bankruptcy a lot of these oil companies are going to continue to pump oil. So energy companies won’t be making any money, the general economy will continue to slide into contraction, shareholders are out of luck – so pension plans will be starved for yield. And the only people that will “profit” from the whole sadistic system are the Vulture Hedge Funds- I’m sorry “Creditor Committees” who bought the most highly secured bonds for $0.13 to $.50 on the dollar.
http://www.zerohedge.com/news/2016-04-14/more-energy-defaults-energy-xxi-files-chapter-11-gulf-keystone-delays-bond-payment
How much do you think these Creditor Committees are going to be focused on Exploration and Development of new sources? Why would they when they can simply suck existing depleting wells for income. Reduction of ongoing expenses will be paramount. Is there anything worse than a Seneca Cliff?
Plantagenet on Thu, 14th Apr 2016 12:32 pm
Yes, the average consumer saves $40-$100 a month because of cheaper oil prices. But those savings are immediately spent on higher Obamacare premiums, higher food prices, higher taxes, etc. The average consumer is losing ground year after year.
Therefore there is no boost from the lower gas prices.
Cheers!
Anonymous on Thu, 14th Apr 2016 1:38 pm
‘Cheap’ oil is still heavily subsidized by the same vast web of largely invisible supports that has existed for a century at least. Oil is ‘cheap’ atm, on the rigged world market, but the Trillion dollars or so spent globally underwriting the oil cartel, both private and public, well, that bill gets paid in full regardless.
Not that the Jew York Times would ever mention that part of the ‘story’.
Surf on Thu, 14th Apr 2016 1:55 pm
prior to 2008 cheap oil did mean a better economy. However the depression of 2008 did teach people a lesson on how to manage debt. Prior to 2008 people accumulated debt with the assumption they could use the growing equity in their home to cover it. People forgot that home equity does occasionally go negative. That happened in 2008 and many people found they had no equity to get a home load to temporarily cover their debts. Many lost their homes.
Now people know better and are more likely to save any excess cash they have rather then spend it. And when they do spend it they are more likely to use it to reduce their Debt. As a a result the economic boom has been greatly slowed or reduced considerably. Once most debt individuals own is payed off and unemployment drops to low levels people will start to spend.
Pennsyguy on Thu, 14th Apr 2016 6:40 pm
Right you are Surf. The 20th Century–that is the era of continuous growth–ended in 2008. It’s a new era when the old economic rules do not apply. Ideologies have limited life times.
shortonoil on Thu, 14th Apr 2016 6:41 pm
“Cheap’ oil is still heavily subsidized by the same vast web of largely invisible supports that has existed for a century at least. Oil is ‘cheap’ atm, on the rigged world market, but the Trillion dollars or so spent globally underwriting the oil cartel, both private and public, well, that bill gets paid in full regardless.”
We estimate that the “societal cost” of producing oil is almost equal to its total market value. That includes all the costs that the producers don’t pay for directly, such as roads, military, harbors, judicial costs, legislative costs, education, environmental impacts and many, many more. All the functions that the society must perform to make oil production, and its products possible. Our estimate is that for the US, alone, in 2012 it cost $2.7 trillion.
http://www.thehillsgroup.org/
Sissyfuss on Thu, 14th Apr 2016 10:46 pm
If the NYT wants to understand the current Ponzi, they should take the blue pill. And short, you’re enlightening graphs and text is (oil) well appreciated.
GregT on Fri, 15th Apr 2016 12:52 am
Anybody who wants to understand the current Ponzi, should stop reading the NYT, and all of the other AFP, MSM propaganda mills.
Davy on Fri, 15th Apr 2016 4:52 am
Nothing wrong with MSM if you can wade through shit and find a few gold nuggets. Facts are everywhere for those with a brain that can differentiate between agenda and truth. In fact it is good to read MSM to see what the sheeple are feeding on. I find the (non) MSM just as polluted. Many of the sources referenced on this board are not MSM but they sure smell like MSM. These references are opinions that support opinions. They may be facts but they are arranged to sell the snake oil of agenda. There are just a few truly objective sites and they tend to deal with a narrow range of subjects robertscribbler.com would be an example.
makati1 on Fri, 15th Apr 2016 5:43 am
GregT, I agree. Add in the WaPo and you have the two largest pushers of propaganda bullshit.
The uS is the number one promoter of bullshit as news. Lies on top of lies. I don’t even read them anymore. I can’t stand the smell.
https://consortiumnews.com/2016/04/13/the-new-propaganda-war/
“Despite Western media dominance, the U.S. government wants to stop the world from hearing the “other side” on foreign disputes by “countering” or discrediting those voices, explains Jonathan Marshall.”
GregT on Fri, 15th Apr 2016 6:34 am
Yah Mak,
We are inundated with US corporate news here in Canada, and have been for as long as I can remember. Our own news media used to be somewhat independent. Not anymore. The same stories on every channel, all slanted the same way, and little of any substance. I cancelled my newspaper subscription, and stopped watching TV news completely about 6 years ago. It’s become so blatantly obvious that it just pisses me off now. My wife still watches the evening news, but anything noteworthy she usually hears from me first. Most of what I would consider to be noteworthy, isn’t reported at all.
penury on Fri, 15th Apr 2016 9:47 am
Well folks lets consider why oil is cheap
1. World wide manufacturing is falling.
2. World wide consumption of manufactured goods is shrinking.
3, Check production figures for the months versus consumption.
4. The dollar has increased in value relative to EM currencies, meaning the price to non U.S. residents has increased by the same amount, (thank dog for reserve currency)
shortonoil on Fri, 15th Apr 2016 11:24 am
“Well folks lets consider why oil is cheap”
Oil is cheap if you are a consumer. It is not cheap if you are a producer; it is a disaster! Has the cost of maintaining roads, harbor, the military, and the rest of the other infrastructure needed to produce oil gone down?
The price of oil fell because it exceeded the consumers’ affordability:
http://www.thehillsgroup.org/depletion2_022.htm
The cost to produce crude as a percentage of GDP has gone up 61% over the last 55 years. The finished product price to the consumer is only part of its total the cost to the economy.
Apneaman on Fri, 15th Apr 2016 2:23 pm
Goodrich Petroleum Files Bankruptcy With Proposed Debt Plan
“Texas driller is latest to fall in epidemic of energy defaults
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Goodrich Petroleum Corp., the latest casualty of the energy slump, sought bankruptcy protection with a plan to eliminate about $400 million of debt.
The Chapter 11 petition filed in Houston Friday listed $507 million in debts, compared with only $99 million in assets. Goodrich said in an accompanying statement that it intends to keep operating under court protection with existing management in place.”
http://www.bloomberg.com/news/articles/2016-04-15/goodrich-petroleum-files-for-chapter-11-for-restructuring
makati1 on Fri, 15th Apr 2016 8:48 pm
Short, it’s about time the cash flowed the other way. The oily pushers are finally seeing the results of their oily addiction. The sooner the wells stop the better for humanity. And, yes, a few billion will die, and trillions of dollars will be lost, but it will leave a better world for the survivors. I would love to wake up tomorrow and see oil at $5 and it stay there forever.
shortonoil on Sat, 16th Apr 2016 8:08 am
“Is there anything worse than a Seneca Cliff?”
The primary failure of the Peak Oil concept has been that since production closely followed Hubbert’s curve up the front side it was assumed that it would follow it down the back. It never took into consideration that there could be a discontinuity in the curve at some point. That discontinuity appeared in 2012 at the energy half way point. It had previously been assumed that oil production could perpetually power oil production until the resource was completely removed. That concept was a fallacy!
Peak is the point not only where production begins to decline, but where producers can no longer make money producing oil. It is not the point where producers slowly begin reducing production, but where producers begin to fail completely. It is the point where producers begin to shut their doors, and abandon their fields.
Because oil production is an energy producing process, the decline will occur in relation to the energy producing capabilities of each field. That is why we have been stating that the high cost, low energy delivery producers would be shut-in first. Shale, bitumen, ultra deep water, and high sulfur extra heavy fall into the categories of low energy delivery. These fields will be shut-in because they are no longer profitable to operate, and once they are they will never again be reopened. It will never again be possible to made them profitable.
Petroleum supplies a large portion of the world’s energy budget. That energy supply has built a gigantic, integrated, technological, economic complex. The petroleum production process depends intimately upon that complex for equipment, parts, supplies, marketing, and trained personnel to run it. They are as interdependent as Siamese twins. They share the same blood flow; petroleum. If one perishes so will the other, in short order.
One twin has now been affected with the leukemia of petroleum production; inadequate price. As it dies it will become continually weaker; it will attempt to sustain itself as long as possible by feeding off its stronger twin; ultimately killing both of them. When the end comes it will come quickly. Like a physician giving a terminally ill patience the bad news, we have delivered a prognosis!
http://www.thehillsgroup.org/