[shortonoil]

From the Maestro himself, Alan Greenspan, to innumerable industry pundits, we have heard the reverberations of how resilient the economy has been in the face of increasing energy prices. Oil has skyrocketed from $22 per barrel in 2004 to $77 today, and not withstanding the fact that energy is required for all economic activity, the amazing US economy keeps chugging along. Held up as proof that the economy is immune to higher energy cost, this one fact has become the corpnucopians primary defense against PO pessimism.

In lieu of this perplexing US economic fortitude, the Peak Oil crowd has mostly ignored the fact that the situation has not yet become critical. They don’t speak about how bad things are, they talk about the inevitable day of reckoning. When in fact, the situation is probably very, very bad; it is just that the ingenious mastications of a hand full of investment bankers, have unintentionally, temporarily papered over the problem.

For those of you who are unfamiliar with the mysteries of investment banking and the derivatives market, I would like to recommend Paul Tustain’s link. Even for those knowledgeable on the subject, this plain English presentation is worth the read for his unusual insights.

Tustain

In particular, pay attention to his discussion on the enigma of declining credit spreads. As oil prices have been going up, interest rates have been going down. Fairly Flaky has been able to finance its increasing energy cost with the magic of CDO/CDS instruments. By passing the risk on to unsuspecting investors, Fairly Flaky manages to stay in business long after it creditors should have auctioned off its assets.

In spite of rising energy costs, these tinkling, clever money managers have keep the housing market, retail sales and the insatiable consumer humming along. This has kept much of the rest of the world busy as well. But the spread can not close much more, and oil can continue its upward journey.

[jeffvail]

Financial Wizardry & Collapse: http://www.jeffvail.net/2006/09/financi ... lapse.html

A post of mine from a while back on this topic discussing credit default swaps and other collateralized debt obligations in the context of collapse--understanding the derivtives markets and their risk-distribution function will be critical to understanding the impact of peak oil on our industrial economy.

[PeakingAroundtheCorner]

Ummmm...so what does all this mean?

[shortonoil]

PeakingAroundtheCorner said:

$this->bbcode_second_pass_quote('', 'U')mmmm...so what does all this mean?

[shortonoil]

Recent news of the coming train wreck! Oil up, any one exposed to subprime taking a beating. I wonder how long this will take to affect investment grade bonds in general. Probably when investors realize interest rates can not go down anymore to cover increasing energy costs.

REUTERS

[MattSavinar]

$this->bbcode_second_pass_quote('PeakingAroundtheCorner', 'U')mmmm...so what does all this mean?

[MattSavinar]

$this->bbcode_second_pass_quote('jeffvail', 'F')inancial Wizardry & Collapse: http://www.jeffvail.net/2006/09/financi ... lapse.html

A post of mine from a while back on this topic discussing credit default swaps and other collateralized debt obligations in the context of collapse--understanding the derivtives markets and their risk-distribution function will be critical to understanding the impact of peak oil on our industrial economy.

[PeakingAroundtheCorner]

$this->bbcode_second_pass_quote('MattSavinar', '')$this->bbcode_second_pass_quote('PeakingAroundtheCorner', 'U')mmmm...so what does all this mean?

[FoxV]

$this->bbcode_second_pass_quote('shortonoil', 'I') wonder how long this will take to affect investment grade bonds in general.

[Eli]

Great article, it is probably as close financially speaking as I will come to understanding the current situation.

The whole thing just sounds like a scam for rich guys.

The article seemed really honest. I liked how they ended it by saying that is why they invest in Gold bullion. But then went on to say that is what they see as the safest bet but, "this time who knows." Very reassuring.


We live in an amazing world there is this huge mountain of debt and collapse going on in the financial markets and then at the same time we are running low on physical energy supply.

[billp]

$this->bbcode_second_pass_quote('', 'I') was with it the whole way, until the end, when the bizarre comment that "Bernanke and guys like him" are "remarkably good" at "underpinning the economy," or something like that.

[Armageddon]

I saved the article and will read it later. But , what I have learned recently about what is happening, but don't exactly know what it means is that somehow all of the subprime loans have been sold to the public hidden in some type of stocks or bonds. And , when things start to collapse, people will lose their money they invested not knowing what they invested in. I wish I knew more about this, but I don't.

[Bas]

I'm a bit dissapointed that the article itself doesn't mention oil, but I guess you made that connection for us, Shortonoil.

[shortonoil]

Eli said:

$this->bbcode_second_pass_quote('', 'W')e live in an amazing world there is this huge mountain of debt and collapse going on in the financial markets and then at the same time we are running low on physical energy supply.

[Eli]

Yeah Short

it is one big huge shit sandwich.


This is going to be one seriously chaotic collapse.

Bernanke said today that core inflation is holding steady for now.

So, thankfully as long as you ignore food and fuel inflation is not that bad. That is inflation is not bad as long as you do not consume food or energy yourself, or depend on something that uses food or energy.

This is like being on the deck of the Titanic after it has hit the ice berg, then it catches fire and then German U-boats start shooting torpedoes at us and then Aliens from mars start attacking and vaporizing everyone then it gets real bad.

[mkwin]

I don't see the relevance of mortgage back securities to peak oil.

The world is awash with cash. Everyone knows this. It has been caused by the Japanese with their 0% interest rate and the historically low interest rates around the world.

Why have interest rates been low? - No it's not as one poster said 'because of the evil central bankers', it's due to the deflationary effect of globalization. This has kept a lid on inflation which has allowed us to drive global growth forward rapidly. Now there is so much cash floating around almost all assets are over valued. We are now seeing a tightening of the global credit system with interest rates rising around the world. This is why house prices are looking vulnerable around the world.

There is absolutely no correlation between this excess liquidity and the price of oil. The reason oil has become less significant is ever cheaper good production in the developing world has more than compensated for the increase in the price of oil and our economies are far less dependant on oil than they were when we were more manufacturing focused.

[shortonoil]

mkwin said:

$this->bbcode_second_pass_quote('', 'T')here is absolutely no correlation between this excess liquidity and the price of oil. The reason oil has become less significant is ever cheaper good production in the developing world has more than compensated for the increase in the price of oil and our economies are far less dependant on oil than they were when we were more manufacturing focused.

[matt21811]

shortonoil,
The export of oil consumption theory is wrong . World GDP growth has been outdoing world oil usage for decades. The only time is hasn't is when the price was really really cheap.

[mkwin]

$this->bbcode_second_pass_quote('shortonoil', '
')
Low interest rates as a result of the financial markets manipulations, have been masking the effect of increased oil prices. It appears that started ending today.

[shortonoil]

mkwin said:

$this->bbcode_second_pass_quote('', 'W')ith all due respect you, you don't know what you're talking about. Interest rates are set by central banks - not by the financial markets.