naked capitalism

Melancholy Korean says:

Yves, good stuff as always. Reading about oil prices is so much fun when one doesn’t have a skin in the game. I mean, I am seriously impressed with those who have the testicular fortitude to trade this thing, especially on the short side.

I always preferred smooth, reasonable markets to super volatile ones. The trend is up, up, up. One day, of course, that’s gonna change. Bubbles burst as sure as the sun rises. But timing is everything!

Jeff says:

Spend a moment and think about Goldman’s prediction. They’re saying oil will rise to $200 and then fall to $75. When you think about why they would make such an odd prediction, it has to be one of 3 possible conclusions:

1. Goldman analysts are fools
2. Goldman is shorting oil and playing us for fools, or
3. Goldman thinks there will be an Israeli nuclear strike on Iran before year end.

While it could be 2, I’m going with 3. Where there’s smoke, there’s fire and there is a LOT of suspicious smoke in Israel.

I suspect that most of the big players (ie Goldman, etc) in oil are holding until the election which is why you’re seeing demand destruction but not price capitulation…

DownSouth says:

A lot of the arguments you cite, and especially the one from Peak Oil Debunked, strike me as sophistry. The numbers just don’t add up.

There is something in physics called mass balance or material balance. You can read about it here…

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

but essentially it is based on the principle that matter cannot disappear or be created spontaneously.

In the immediate case it would look something like this:

I(april)=I(march)+P(april)-C(april)

where:

I(april) = Inventory at end of april

I(march) = Inventory at end of march

P(april) = Production during month of april

C(april) = Consumption during month of april

In the case of oil, inventory fluctuates very little. This is so because increased inventory requires increased storage, and, relatively speaking, oil storage is almost non-existent. Therefore,

I(march) = I(april)

is for all intents and purposes a true statement.

Plugging this back into our material balance equation, we can solve for the following result:

P(april) = C(april)

The mental picture that Peak Oil Dubunked paints is that world oil production is up 2 million BOPD and consumption is flat or falling. But how can this be? Where is the oil? We’re talking (2 million BOPD)x(91 days) or 182 million barrels of oil for a single quarter. Even if Iran does have 30 million barrels sitting in tankers in the Persian Gulf, where’s the other 150 million barrels?

All this carries us back to what Paul Krugman has been saying for months. It’s why the oil traders hang on pins and needles every Wednesday morning waiting for the inventory numbers. Everything is contained in the inventory numbers, and anything else is just pure sophistry.

Anonymous says:

There is a critical factor you are leaving out.

I can’t at the moment find a reference but my memory is that production from currently active oil wells is declining by 4 million bpd.

That means that new wells coming online have to make up that difference AND allow for growth from chindia, etc.

The drop in gas consumption is trivial by comparision.

hbl says:

I have been surprised to not see any detailed analysis anywhere of potential effects on the global economy, currencies, etc were oil prices to dramatically reverse (other than brief mentions of likely increased margins for producers of goods) especially given how large a percentage of the US current account deficit oil is now responsible for.

However, thanks to gaius marius’s blog, I just found this, and it provides some observations on possible monetary effects:

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2008/06/30/the-end-of-the-inflation-scare.aspx

Anonymous says:

Following up on the prior comments – is it possible that the production figures are flat out wrong? If not OPEC, then perhaps US producers are “hoarding” oil in the ground

Anonymous says:

2 sigma move?

Would have guessed 3 +

Michael McKinlay says:

We are seeing demand destruction , not supply growth.

Oil prices will correlate with economic growth in an overall downward trend as Peak Oil sets in. The correlation will be that of an inelastic commodity but reflect the increasing scarcity of oil.

The evidence suggested here for the oil supply is very short term and does not reflect the demand destruction . Indeed if the economies in Japan, the EU and the US continue to shrink oil supply will be adequate for some time.

Faber said it himself , the recession began in October. I guess if we can live with a increasingly shrinking economy there is no problem.

mxq says:

Wallace (BizWeek) and Sprecher (ICE) have it out.

Juan says:

DownSouth,

Thank you for the reply and question but one need not be a ‘cynical old pessimist’ to recognize that there have been and are problems in both the U.S. and global economy, or, what can be thought of as a globally synchronized recession in process of developing.

Such process is always uneven but in a world of interpenetrated national economies, a world of global assembly lines, cannot not but be combined. Further, on basis of decade by decade change in world GDP, weak avg. rate of nonfinancial profit (not earnings), etc, this is taking place within a particular historic context.

Capitalism’s postwar ‘golden age’ had begun ending even during the later 1960s but it took the recessions of 1970-71 (partially synchronized) and 1974-75 to deliver the message.

What grew out of these? A generalized turn to deregulation and market fundamentalisms which came to be grouped under the rubric ‘neo-liberal’ and then ‘Washington Consensus’, ‘both’ of which facilitated deeper interpenetration of nominally national economies, greater looting of less advanced regions and what became financial hypertrophy.

The financial came to dominate that which it ultimately depends upon, the real creation of new value through the processes of production.

Now, this latter circumstance has been commonplace over the history of the capital system, i.e. overproduction of means of production and falling rate of profit generate attempts to offset such a fall through speculative activities. Such turns to making money from money or, differently, to substitute speculative gains for real losses have, at base, been driven by differential rates of return between trade in fictitious capital, mere claims, and profit of production.

The relationship has tended to be inverse but to my knowledge never so institutionalized as became the case during the 1980s but moreso the 1990s and this decade, something that I relate to an overdevelopment of, overdependence on, the credit system, the beginnings of which were noted even in 1974 by the Minneapolis FRB:

we have substituted credit expansion for savings as the means to finance the growth of consumer and business spending. Another dose of the old medicine would only worsen the disease, in the longer run if not immediately.
(Bruce K. MacLaury, President, Federal Reserve Bank of Minneapolis, 1974 Annual Report Essay)

Nevertheless, more ‘doses’ were forthcoming until, with with the de facto ending of reserve requirements (1990 and 1992 reductions + generalized use of sweep accounting by 1994), the rise of MMFs, of Government Sponsored Enterprises, of global non-bank banks; the interacting of all and more, a system of potentially unlimited expansion of credit money had come into being. I believe it was Larry Lindsey who called this a condition of “nuclear credit fission”.

In short, a form of rentier capitalism had developed and become institutionalized — such a form contains internal contradictions, manifestations of which we’ve been seeing and, as it expands claims to the real beyond this latter’s ability to generate new value, is also a more overall contradiction that, as it sharpens, is also a greater fragility and uncontrollability (both of which demand still greater ‘doses’ no matter their fatal nature).

“why would [the mechanism I desribe re determination of spot prices] not continue to do so in the future? Because the form of capitalism it is associated with will not survive; we have seen it breaking down for some time now. Rentier capitalism is a dependent form and one which is unable to reproduce itself ad infinitum no matter the levels of (increasingly desperate and deluded) institutional support.

At a lower level of abstraction, oil price regimes rise and fall. You may want to read Section 2 in the attached 2007 paper.
OPEC Pricing Power
http://www.oxfordenergy.org/pdfs/WPM31.pdf

Pardon the length but simply a quite reduced attempt to provide context to my thoughts on ‘disconnect between the real and financial’ (which is not really a ‘disconnect’ but a dialectic).

NB even though some of my above may have an ‘Austrian school’ tone, I do not subscribe to that or any other of the neoclassical ’schools’ of economics but instead one which was initially developed as a critique of the old political economists, has been perpetually upgraded over the last roughly 130-140 years and better connects/combines theory with the motion of material realities.

DownSouth says:

Juan,

Thank you for your response. I very much agree with your philosophical framework and, being an ex-pat living in Latin America, am all too aware of the devastation that rampant neo-liberalism has left in its wake. I suppose the policies promoted so stridently by the United States are finally coming home to roost. Nestor Kirchner seems all but profetic now. In his speech to the Fourth Summit of the Americas, regarding the havoc neo-liberalism had caused in his region, he called it “a death trap, a trap that first traps and affects the weak, but then later, in one form or another, also arrives to the powerful.”

The one place I might disagree with you is to the question as to what high oil prices represent. Are they a further manifestation of market fundamentalism run amok? Or are they the antithesis of this, a refusal by non-OECD countries to participate in a market system that demands natural resources and agricultural products on the cheap?

I am currently reading a book you might find of great interest–J.H. Elliott’s Imperial Spain: 1469-1716. It offers a historical account of a conuntry that suffered many of the same problems the U.S. suffers today. It is made even more interesting because, as the author notes in the foreward, he chose not to focus soley on power, politics, personality and diplomacy in his narrative, but social, economic, cultural and inintellectual developments as well.

He talks of “the growth of a powerful rentier class in Castile, investing its money not in trade or industry but in profitable Government bonds, and living contentedly on its annuities.”

“During the [16th] century, events had conspired to disparage in the national estimation the more prosaic virtues of hard work and consistent effort. The mines of Postosi brought to the country untold wealth, if money was short today, it would be abundant again tomorrow when the treasure fleet reached Seville. Why plan, why save, why work?” Elliot asks. “There seemed little point in demeaning oneself with manual labour, when, as so often happened, the idle prospered and the toilers were left without reward.”

There are of course many other haunting similarites between imperial Spain and modern USA– the intellectual, cultural, social, military and diplomatic happenings of a far-flung and over extended empire that died from within–to make it a very intriguing and timely read.

Juan says:

DownSouth;

The one place I might disagree with you is to the question as to what high oil prices represent. Are they a further manifestation of market fundamentalism run amok? Or are they the antithesis of this, a refusal by non-OECD countries to participate in a market system that demands natural resources and agricultural products on the cheap?

If price of oils was determined by cost of production/supply/demand rather than trade in financial instruments, I would place more weight on ‘refusal to participate’. As it’s developed since 1987, it strikes me that the producing nations and major integrated oilcos’ abilities to move price has been substantially diminished.

Neo-liberal market fundamentalisms include financial opening and deregulation which, in different forms, were applied on a world scale right along with the theft of public goods through privatizations, et cet — a ‘grand’ global looting had been unleashed in a (partially directed) effort to overcome systemic crisis.

Here let me repeat something which I wrote elsewhere three months ago:

‘Between 1965 and 1973, the U.S. manufacturing sector’s rate of profit fell by 40%, a decline that worsened with the 1974-5 recession, was hit again by the severe early 80’s slump, began recovering in the 1990s but peaked in 1997, falling into 2003 since which there has been some rise but – in all cases over the last decades – never to pre-1965-73 levels.

Andrew Glyn considered the world to have been “suddenly projected from boom to crisis” with the first phase of above.

The failure of political Keynesianism, and then monetarist policies to ressurect rate of profit dovetailed with a ‘we don’t know what to do so lets try 19th c laissez-faire on a world scale’ set of policies demanded by the U.S., given voice by Reagan and Thatcher in her famous statement: ‘There Is No Alternative [to a worldwide free market]‘, or TINA.

Borders to capital flow in all its manifestations had to be everywhere broken; state owned industries had to be privatized; poor fiscal management had to be tightened and almost everywhere on the backs of the working class and poor as needed social services were cut and cut again. Debt payments, no matter how great a percentage of export earnings, had to be made if a govt were to expect future access to IMF and World Bank funds.

Neoclassical economists and their theories provided ideological justification; a sort of ‘we are all neoliberals now’ attitude infected world leaders until, in 1989, John Williamson coined the term ‘Washington Consensus’, which was very much not the consensus of those most subject to the various ’shock therapies’.

So, how did the world do under this set of misguided fundamentalisms?

“Real global GDP growth averaged 4.9%a year in the Golden Age years from 1950 through 1973, but dropped to 3.4% annually in the unstable period between 1974 and1979. Dissatisfied with the instability, inflation, low profits and falling financial asset prices of the 1970s, advanced country elites pushed hard for a switch to a more business friendly political-economic system; global Neoliberalism was the result. World GDP growth averaged 3.3% a year in the early Neoliberal period of the 1980s, then slowed dramatically to 2.3% from 1990-99 as Neoliberalism strengthened, making the 1990s by far the slowest growth decade of the post war era.” (James Crotty)

As would be expected, the post-1973 annual growth rate of world real gross domestic investment fell substantially through 1996.

With the exception of parts of Asia, economic development throughout the world failed to gain traction, chronic excess capacity on one hand and credit fueled financial exuberance on the other.

Given the system’s inability to create employment so rapidly as required, a glut of labor and an expanding informal sectors as well. All the ‘better’ to intensify the international (and domestic) competition among workers, drive and hold wages down so also make consumer credit increasingly important to retention of living standards, no matter that this has been only another transfer to loan capital.

Average weekly earnings, constant 1982 dollars, for all private nonfarm workers in the U.S. peaked in 1972 at $331.59, falling to $257.95 in 1992 until ‘recovering’ to $277.57 in 2004 and likely having faltered again since then.

It is at least interesting that conditions of surplus labor, lower wages, deficit funding, tech innovations, etc, have not been able to generate another long wave expansionary phase. One might even suspect that finance has been ‘pumping’ too much from the real and that ‘long-felt unease’ is related to this.’

The primary contradictions which I’ve seen developing over the last number of decades have been:
1. the ending of national economies v. what can only be national states, a contradiction between economic mode of organization and national states.
2. progressive expansion of fictitious capital v. the possibility of satisfying such claims, a ’satisfying’ which depends upon a) global creation of surplus value and b) substitution of credit for a relative insufficiency of realized surplus value (profit). This has provided much of the ‘advanced’ world with what is no more than a superficial prosperity even as it has also helped undermined its real basis. The spectacle of finance hides too much.
3. In combination, the above two have generated greater class, ethnic, international and subnational tensions. The social relations of the world capital system have become quite strained, which is not to say that capitalism is ‘doomed’ but that its present form has become increasingly untenable and a ‘change in state’ is almost certainly unavoidable, in fact seems to be underway.

Thanks for the book recommendation. The years during which I lived in Latin America helped open my eyes, subsequent study helped still further.