Cheap Oil, Cheap Money, and Lots a Jobs!
Wow economic times are great!
Oil is cheap. Lots of Jobs! Money is dirt cheap! And the Dollar is Strong! That’s great. Right?
Well maybe, maybe not.
In the short term it could go either way really. A drop in oil, and a sudden increase in employment in the United States could bode well for the stagnated economies of Europe and Japan, and help the US get over its doldrums which it has yet to overcome. There is the possibility at least. But lower gas prices do not really equate to an increase in demand overall. The reality is that there is much overproduction as is and this is a general phenomenon that pervades all commodities including oil. But what is noteworthy is that even if demand were to increase in response to lower gas prices, in the areas where the demand would increase, prices would again begin to soar. Even oil prices would then respond with an immediate upturn should demand actually begin to solidify.
Though it would seem that lower oil prices are a good thing, in the end these may not impact the consumer much at all. Rather the retailers and product producers-distributors might see the profit, and take that profit in the event of an increase in overall consumer demand. But there is little reason that this “trickle down” effect from oil really has a chance to affect general prices for the long term either way. Besides this, the prospect of a global recovery is really quite dim at present due to the politics of the Middle East and the Ukraine where serious strategic concerns on both sides will weigh heavily on any easy compromise.
But if we are to think, as we hear every day that gas prices and their precedent, oil prices are going to be good for the general economy as a general principle we should consider that there are some serious obstacles in the way, even if demand were to pick up as thought.
Oil Price Drops But So Does a Sizable Chunk of the Economy
Oil is the world’s most valuable commodity. Yet in two months it has dropped thirty five percent in value. Is that good? Not for those producing it.
And since those producing it account for a good amount of the world’s real earnings and spending power, there will be some question as to how good a drop of thirty five percent in the price of the world’s most valuable commodity over such a short period of time may be. Of course demand is supposed to go up due to lower prices. But production will go down. And any investment capital that might have been available from oil revenues, will be much less now. All these oil producing nations also have huge debts and these will be tested, and in some cases severely.
Mining, Agriculture, and other commodities will also be affected and will add to the overall pressure.
The drop in oil prices today, may well signal a large increase later since there is only so much oil left at the price of present extraction.
Some people think that this drop in oil price is due to shale oil production in the United States. It may be in part due to shale oil production in the United States and elsewhere, but that’s just one factor. Maybe even a very small factor. One big factor is that oil production and exploration worldwide is now at an all time high, while global demand is lower. The global economy has receded. This is not much mentioned as a factor, but it is probably one of the most important factors. In fact, in a general sense the corrupted “structure” of the global economy may well be the most important reason for this huge drop in oil prices.
Three important reasons for the drop in Oil Price.
There are three main reasons for the phenomenon in oil we see today.
The first is that the world’s economy was supposed to be expanding by now. After all the money spent on expanding the world’s economy there seems little reason, assuming those who undertook this expansion knew what they were doing for the world’s economy to be receding now.
Yet it is. Many are the nations in the red. That means that much of the oil produced was over produced and the expansion envisioned for the global economy has not taken place, at least not as originally envisioned.
But there is another reason to question this drop in oil prices. And this one is more subtle. For the past twelve years under Federal Reserve chair persons Greenspan ,Bernanke and now Yellen , we have seen the Federal Reserve dump trillions of dollars into the global financial system. The exact amount may well be nearing hundreds of trillions of dollars now in the system. That’s a whole lot of money in a short span of twelve years. The effect of that is to inflate the economy. However, not all parts of the economyare going to be inflated equally. Some will be inflated much more than others. In this case the inflation took place in securities, stocks, and bonds and the like, and in credit and debt. But this caused over production of all commodities as well, as more companies could borrow the huge sums needed to explore and process oil and produce other commodities. This is perhaps the real reason Oil is at the low levels we see today. Oil production was inflated due to credit availability, but oil demand could not be. Trickle down didn’t trickle.
There is a third reason for the drop in oil prices and this one is more sinister. Iran, Russia, and to an extent Venezuela have found themselves on the wrong side of American Foreign policy. The Iranians for dabbling in dangerous nuclear developments, the Russians for supporting Syria, and Iran, and now for invading the Ukraine, and Venezuela for its anti-capitalist, possibly even anti-American socialist stance left over from the late president of Venezuela, Hugo Chavez. All these nations are now being targeted by various financial strategies emanating from the United States as a means to persuade them to follow along. This has left investment by the west in those nations limp and where there are great debts, any crimping of future credit can be quite disastrous for the indebted. But the lack of credit forces these nations to sell their product even at the breakeven point and thus keeps the oil flowing at very low prices. There is also some cooperation from Saudi Arabia, the UAE, Kuwait and Iraq. This cooperation may well be necessary for their own political stability. This is not merely a “market” move on their part.
Still a drop so significant is not indicative of anything good.
For there to be a price drop so significant in a commodity where proven world oil reserves can only last for twelve years according to a recent report based on our present consumption, something very critical went wrong.See American Foreign Policy
Economic Waves, and Synergism
There is a general principle in economics which is inviolable because it is dependent strictly on the physical limits of the natural world. It is this, that there exists a temporal conservation of energy at all times in any given locale of any given energetic medium. There is only so much energy available at an given point in a medium. Energy has to come from somewhere. If you take it from one place and move it to another, somewhere there is a loss of energy, and somewhere there is a gain. Even in the Sun, where there’s a whole lot of energy, there are times when we can see a shortage and that’s in the sunspots which is why they are darker than the surrounding area. There is a conservation of energy in any locale.
This sounds complex and vague, but really is not all that complex when you think about it. The fact is any wave, that has a quasi physical structure will rise and fall. This is because in all waves energy must be transferred and conserved. The wave can only go so high and so low during any oscillation in order to keep propagating. If it goes too high, or too low, energy propagation is lost since on average the given availability of energy per location in a given medium is limited to what the medium will allow, and what the harmonic frequency of the wave is. A wave that exceeds the available energy allowance of the medium at a given locale in any given time will die more quickly, or will have to slow down and lose energy overall as the excess is dissipated in the surroundings.
To make things more clear, we can say that wild oscillations are not conducive to the efficient propagation of energy. At any given time there is only so much energy in the medium. There is only so much potential for energy transfer in any given time period at any given location. That is we have only so much potential as a whole over the entire life of the wave, and only so much potential per oscillation at any given moment. If we use more energy than the medium can handle, or more energy at one location than will efficiently propagate the wave, the wave will soon die out, or redistribute into a lot of little waves where energy is better conserved, but still lost.
This applies neatly to the economic concepts of supply and demand as well. Supply must follow demand, and demand must follow supply and they must do so conservatively and efficiently if they are not to lose a sizable amount of their energy. That is to say there shouldn’t ever be wild swings between supply and demand, and if ever there are, these will sap the life out of the propagating wave. The reason is simply that both supply and demand as actions themselves require the expenditure of energy. If the energy expended in supply is not compensated by demand, in the right time, energy is lost overall, efficiency goes down and propagation becomes doubtful. What we need to keep in mind is that waves are usually complex synergisms that cooperate on the same frequency. Should that frequency be tampered with, the wave will be corrupted. Should demand and supply fall out of step, or out of their optimal frequency, or exceed the maximal amplitude, energy is lost, and the propagation of the wave will be challenged.
The key is that at any given time there is only so much energy available. If you use too much of it, you will essentially disrupt the wave because you are borrowing from its future propagation. To have a wave at all, it’s energy has to be distributed evenly throughout its life. It’s the same with economics. Take too much energy out at once, or in any given direction and you essentially deprive the wave of its future.
Economists generally see this as volatility being bad for prices. But the underlying cause is often misunderstood or understated. The underlying cause is the nature of all waves. If too high a crest is reached, or too low a trough, efficiency is lost, and the propagation will be interrupted or corrupted. You can see this if you pluck a guitar string too hard. The amplitude will only reach so far and much of the excess energy will be lost. The same is true of economic waves. Put too much energy in too quickly and much of it will be lost in an inefficient transfer of energy into the medium. That’s just natural, for any medium will only take so much transfer of energy at any given time, or over any given period. If we exceed that efficiency, the vitality of the wave is altered, and wild swings will begin ultimately resulting in a loss of vitality and propagation.
We should also keep in mind that most waves we experience are in confluence. That is they may look uneven in distribution, but that’s only because we are seeing a number of overlapping waves together with different phases but still on some common harmonic frequency, or some amplifying frequency. In essence timing is fundamental, and precision is essential in keeping the economy going even from a quasi physical perspective. We have to understand that all waves come from some energy source, and in effect require energy to be displaced. It’s exactly the same with any cyclical phenomenon in economics. That energy to create a wave must come from somewhere, whether its people being fascinated by a movie star, or a certain commodity becomes popular, there is a confluence of energy that will produce sales and economic activity. But this energy is always limited by time and space. If they buy one thing, they may not buy another, and if they buy too much of one thing in too little time, they may not have the money to buy anything else, including food, or fuel, or to pay their rent. That will disrupt other necessary cycles, or waves, and the effect is not likely to be too good.
The Federal Reserve Actions
When the Fed released all that credit and stimulus we should understand that the Fed did not create any wealth. What it created mostly was currency and debt. Wealth is actually created by the production of synergistic economic systems that tend to propagate, and resonate through the economy on a specific frequency(and not necessarily a quantitative frequency but reinforcement as a general principle.) What the Fed did was simply release the energy it had stored within the economy-prematurely, and disruptively into the general global economy. The result was over production and a loss of vitality since the medium could simply not absorb all that economic energy released.. Supply had far exceeded demand. And in the process much efficiency was lost.
Of course, in the present discussion of lower oil prices we can say that demand will respond in kind- in time. Demand for gas will go up as supply goes up, assuming prices go down, but it too will respond in an exaggerated manner. The world’s economy grew alright, so did securities so did debt, they all grew, monstrously and incoherently. But there was little synergism in any of it. There was little timing in it, and little amplification. The effects are scattered here and there, but do not reverberate coherently. The medium wasted much of that economic energy released. The same is almost certain for the temporary drop in oil prices.
These huge oscillations caused by the tremendous credit that the Fed unleashed, were good for the time being, for those who immediately benefited because they were the immediate recipients of all this credit, but what they ultimately did was disrupt the efficient temporal propagation of the economic wave in general. The global economy was shocked, but could not respond in kind because the release of all this money was simply too large and too specific and in general could not propagate throughout the rest of the economy. Stocks did well, investments went well, production increased, but demand was left standing at the gate because too little energy was distributed in that direction. Simply redistributing wealth in one fell swoop is not usually going to work, it almost never does.
But what you use now, you don’t use later because you don’t have it. If the energy released in credit is not returned to a receptive system there is a significant loss of potential for growth. On the other hand in a system that returns and amplifies the energy spent, there is actual growth, and if credit is tightened properly and in a timely fashion, this energy would be stored and thus there is potential growth as well and the system propagates; if its squandered, it doesn’t. In all economic systems, “frequency” is crucial.
We may see immediate effects from the drop in oil prices…but
So we can say that the lower oil prices may be good for now, assuming the anemic economy can even absorb these prices, but what happens now, will certainly influence what happens later. It’s not enough to just drive around and spend energy pointlessly. This energy must be returned to the system, and amplified. And ultimately this energy must be conserved if there is to be an ongoing potential for economic growth.
So we can see oil at sixty dollars a barrel due in part to economics, due in part to politics as pressure on Russia, Venezuela and Iran are rising, but all this may not be doing much for the propagation of the long term economic wave. The wave might be short circuited, might be deprived of the resonance it needs to go on. After all , waves are resonances, and as anyone who has sat on a swing should know well, abrupt and haphazardly violent forces tend to disrupt that resonance, and sooner or later the swinger gets stuck , or winds up on the floor , if these abrupt discordant movements continue. Unfortunately economies are far more complex than pendulums.
We see the same discord everywhere else too. Incongruous rises in the stock market. The market has soared, all the while commodities have been falling, and world order has been
disintegrating. The economy of the US did not likely grow much over the past ten years, while the market has soared to absurd levels. That is, the market is highly inflated and very much “out of tune” with the surrounding reality- it’s playing its own tune, but is little tuned to the rest of the economy.
We see the same even with employment. We have had seven million jobs created during Obama’s stay, yet when we look at the economy in general we really don’t see a great improvement overall. The GDP is hardly reflective of all those new jobs. The jobs are weak, and have been expensive to create. And this will sap the potential for growth.
More recently we have seen 330,000 jobs added in a single month. But what are these jobs actually producing? How are they supposed to propagate the wave? We are a debtor nation, we spend more than we make, will these jobs reduce that negative trade flow, or increase it? The answer is obvious, especially with the stronger dollar. We have a government and doctrine committed to absolute expenditure, absolute consumerism, with little thought or care given to the possibility that maybe this is not what we really need right now.
How were these new jobs created in the first place? Well counting all the bank bailouts, and all the government stimulus and all the QE1 and QE2 and QE3 and QE infinity and the unbelievably monstrous amounts of credit unleashed everywhere else and all over the world, we can clearly see where these jobs actually came from. We can also see this in the yearly government expenditures, where more than a trillion dollars is approved by a lame duck congress, but only if “bank bailouts” become easier according to the “reserved” Republicans. There’s a lot of pork all over the place and this is one major factor of the job creation, and this too is attributed to the easy credit. But is any of this sustainable?
This is a Temporal Zero Sum game, at least it is approximately so for any given finite period of time. What you spend today, you will not have tomorrow, or at least in the relatively “near” future. Unless of course you have more resources -relative to expenditures- available tomorrow than you do today. But will we? And even if we do, will we find a way to use those resources productively and efficiently? Will they resonate with state of the economy? This last point can never be overemphasized. Its nowhere near as simple as it may look. Just because resource is available, does not necessarily mean that it can be used efficiently or prosperously, or prudently, and certainly it cannot all be used immediately.
Will we find stability in the near future? That’s not very likely. Not after these gigantic incursions into our stored reserves. Credit is essentially the subtraction of long term stored reserves for immediate use. What may have been saved for the future, is being lent out and risked now. But it can only sanely be lent out if there is a good chance of increase in overall stores later.
But what is used now, cannot be used later. Unless the credit unleashed increases the amount of stored reserves to a level greater than before, the venture will fail. What we’re saying is that even if we break even for all this credit given out, that will not be good enough to sustain growth. All that amounts to is taking risks, and getting no rewards. That is almost certain to lead to a loss over time as “accidentals” are always part of the equation.
By itself lower oil prices will perhaps speed up certain parts of the economy at a given point. Maybe people will drive more and get out more, but that will not necessarily lead to lower prices for all other products. Those producers who have prices at a given level will tend to keep them there and attempt to reap the profits, and pay their own debts. But that will keep demand for those products at a constant level. What increase in demand there is, will probably prompt a price rise anyway. Since there is a high potential for price increases anyway due to all the debt and credit availability.
Oil Producers Are the Main Movers of the Economy
But the real hard core problem so dramatic a fall in oil prices is that oil is one of the most lucrative commodities in the world. And those who produce it buy and finance many products and services. Aside from all the money spent on oil exploration, which is now going to turn to a losing proposition, there will also be a loss of profits from a finished product. Those nations, like Russia, Saudi Arabia, the United Arab Emirates, Venezuela, Mexico, Canada, Nigeria, Norway, England and others will simply not have the capital they once did to both spend and invest. That will hurt the global economy in many ways. Money is actually more effective when consolidated , that is after all the primary reason for having capital at all. When spread out it is less effective overall. Of course it is necessary to spread it out to the masses in a finely tuned manner, but it will be less effective if distributed abruptly since the more the number of transactions needed to transfer wealth, the greater is the cost per transaction. In other words taking it from oil production and giving it to billions of people as a kind of stimulus and redistribution may not have an equivalent economic effect after all. Such a distribution, even if just, must be well timed in order to propagate the general health of the economy. In the final analysis the key concept is efficiency. It’s much more efficient, and orderly to distribute wealth in product creation, than it is to distribute it abruptly and haphazardly. There is more structure in the one, than the other. Redistributing this wealth to billions of people abruptly when there was a long term failure to do so for a decade is probably not going to have the desired effects.
It is the same with Job creation that exceeds its bounds. It’s good to see people employed and productive, but creating too many jobs that do not necessarily feed back into the system, do not amplify and propagate wealth may not have the desired effect. The system must be well tempered in order to actually work well. As for example a well tuned motor will only create so much torque per second. Too much torque, and it may become inefficient, and ultimately break down as it goes beyond the specifications it was created for. If your car’s engine starts and stops and has fits its very probable you’ll need a tow truck and a mechanic soon, even if it’s a BMW an Acura or a Bentley.
For too long wages were suppressed and job creation feeble. Now suddenly we see a surge in employment but its uneven, and unbalanced. Worse yet it seems more conducive to consumption, than any kind of conservation. Because the masses are so many, conservation(savings) for them is crucial otherwise they will usually not have enough capital to keep the economy well balanced or to make well thought out reasonable purchases. But conservation today is not in any way encouraged.
Rather than these wild oscillations, what we might have expected if all signs were good is that the economy would have remained well regulated and that prices over time would have adjusted naturally and that supply and demand would have remained in a relative short period equilibrium- if indeed things were going well. This would be true even if the economy were growing rapidly. Therefore wealth distribution would have been smooth and timely, and the ups and downs and the discrepancies between supply and demand would have been small, even if frequent.
What we can say is that when all is accounted for is that great variations in consumption, or production unilaterally are not usually a good sign for the economy, especially when there are no good reinforcing cofactors to be found in the surrounding economic medium. That is to say when there are no obvious natural reasons for large variations-like seasonal demand changes in natural gas for example, there is not likely anything good happening.
The Rapid Release of Credit is not Promising
It is nearly impossible to make up for these gigantic expenditures we have seen over the past fifteen years without severe corrections. If energy at any given point is usurped, it will come from the immediate area from which it was taken. The long term propagation of the wave will be disrupted. It should also be understood that all waves lose some of their energy to the surrounding area. The bigger the wave amplitude the greater the loss of integrity-generally speaking.
These aberrations can be seen all over the place in the economy right now. They can be seen in the degeneration of our foreign policy, they can be seen in the wild swings of the stock market, and commodity markets, they can be seen in the mountainous debt that’s gripped the world’s economy, they can be seen in the over production of commodities and products, they can be seen in the rising potential for price deflation, they can even be seen in the underlying dissatisfaction of the ordinary person with the way things are going. But sooner or later, something critical will give way, it always does.
The Geopolitical situation may well become uncontrollable, and degenerate completely.