Oil: The US is in for a Bumpy Ride.

You are right to think that the US is in for a bumpy ride, it is, and for the reasons I and others have been going on about for more than a decade.

The core issue that connects all the significant actors, in different ways, is energy – its supply and its cost.

Right now US tight hydrocarbon firms are pumping for all their worth in order to generate cash flow to enable them to pay their loans. They are stuck. They simply can not reduce output by one iota, they have no choice but to pump and pump no matter how much money they lose.

US industry and consumers are ‘happy’ because energy prices seem to be lower. However this does not spark off a consumer boom as had been expected because the consumers have got no money, they are tapped out. This can be seen from retail figures and even more from what can be seen in the activities of retailers who are closing down and cutting back at a furious rate.

In turn this means manufacturers can’t sell – the only sector doing ‘OK’ is autos and they depend, like the oil folks, on cheap money. Basically a new bubble of commoditised sub prime debt has been created.

Saudi Arabia is pumping for all it is worth in order to squash the unconventional oil firms in the US. They may have started out with this in a coordinated attack with the US on Russia bit they sure as anything are not doing so any longer. The target has changed.

Russia is pumping for all its worth in order to capitalise upon their ability to make profit from their sales. Their financial structure means they still make a profit from their sales but although cost of sales is still lower than the sale price the gross revenues are, of course falling – but not as much as those with a dollar fixation imagine.

If the current price regime continues for years into the future than the value of the big agreements made last year might be impacted but the thing is that China and Russia are dealing in yuan and roubles, not in dollars. This means that the dollar’s fluctuations are not relevant and the price of the rouble and yuan as a pair will be much more stable than rouble – dollar -yuan will be.

China has devalued slightly, but the currency, due to its link to the dollar, is still very over valued. They could move another 20% to get to the ‘correct’ value. Of course by doing so they’d kick the US in the nuts such that they’d not be getting off the floor for a while.

For them cheaper energy is worthwhile but is not essential. It was the decline in China’s energy consumption early last year that told us what was happening globally – that consumption of Chinese goods was falling. The Chinese knew this too, before the energy figures gave he game away. That led them to move ahead with moving toward the internal market which has a huge amount of room to grow – just as the US market did from early in the last century when they were already the world’s largest economy (since about 1870).

It is obvious that the Chinese devaluation was a signal to the IMF and US. As many do not understand, a currency pegged to another, as the yuan and dollar are, are not freely traded. For inclusion in the IMF basket the yuan needs to be unpegged, either fully or almost so.

This is a signal to the IMF that China is willing to do what is needed.

The US is being told that China will no longer support the dollar as it has been doing.

Whilst events may seem to be coincidental they are probably less coincidental than we might imagine. China is making foreign policy moves, in concert with Russia. Saudi Arabia is making its own moves. The target, on the whole, is the US.

The goal is to force the dollar into appreciation against as many significant currency pairs as possible thus weakening the US freedom of action across the globe and in the internal market.

Remember, having a ‘strong’ currency is often not the best option, especially when the holders of that currency have been spending the past 6 years trying to devalue it, without success.

The big issue facing all of us is this: it is quite possible that the global economy can no longer afford to pay as much as it is for oil. If we can not afford to pay then we will not and the price will fall further. This WILL result in a fall in oil output from all but the cheapest sources – this means the US will cease to produce almost any oil. Only the cheapest producers will be viable and only the cheapest producers with manufacturing infrastructure will be able to maintain anything like current standards of living.

There’s only one economy that fits that description – you can guess which it is.

There’s one other economy that has the means to access the ‘cheap’ energy from that source AND the internal market and manufacturing infrastructure to maintain anything like current standards of living and you can probably guess which that is.

As a helper, the US does not fit either description.

 

Andrew Wilson.

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