Oil Prices Plummet.. Why And What Does It Mean?

I had mentioned previously that the decline in manufacturing in China has led to significant declines in oil consumption. This has led to a glut in the oil supply, leading to a reduction in oil prices.

Since beginning this article, Brent Crude oil prices have taken the steepest cut in history. Meaning since that benchmark was established in 1985.

A complex issue. Oil production and prices are a complex balance of cooperation and competition between oil producing countries. Too much oil produced leads to prices plummeting to the point where it becomes more expensive to produce than profits made. Too little oil production leads to shortage conditions and global inflation. The breaking point for each country is different between cost and profit.

OPEC. Historically, this balance has been roughly maintained by OPEC, though the balance has not been fair to all members. To be honest, complete fairness would be next to impossible, adding to the complexity. Primarily, OPEC has been dominated by Saudi Arabia and decisions made by OPEC customarily favor the Saudis.

OPEC+. There is also a coalition of non-OPEC nations, commonly referred to as OPEC+, which commonly follow the decisions made by OPEC. Those decisions generally include whether member nations will reduce or increase oil production for the purpose of regulating oil prices to oil consuming nations. Russia is a member of OPEC+.

The US does not coordinate. One major point to note here. While the US is now the world leading oil producer, the US is not a member of OPEC or OPEC+.The US attempts to regulate oil market prices and conditions via political, economic and military force, as opposed to any form of cooperation or coordination with other oil producing countries. That force includes sanctions against Iran, Russia and Venezuela. The US also seizes control of much of the oil produced in Syria and Iraq.

Petrodollar. Another key point to keep in mind is that the value of the dollar largely depends on the petrodollar system, a system which I have written repeatedly is on the decline as other nations adopt alternative currencies for oil trade, bypassing the dollar. While the petrodollar system has been instrumental in establishing a common currency for oil trading, that is largely a matter of convenience. Multiple countries have made overtures of establishing a common currency for international trade, independent of any sovereign currency. In any case, the less the dollar is used as a currency of trade for oil, the more unstable the dollar becomes in relation to other currencies.

Reduced demand. For well over a year prior to the Corona virus, China had reduced their purchase of US oil by as much as 75% as a result of the trade war between the two countries. The current Corona virus situation really only directly affects that remaining 25% but has the potential to eliminate that entire 25% should China choose an oil supply source other than the US, which is entirely possible.

Shipping and freight. One more impact of the disruption in the general supply chain is, downstream from manufacturing, freight and shipping have declined. This has been a global trend, not limited to China by any means. Shipping has been on the decline since long before the Corona virus arose. The Corona virus simply caused a sharp sudden drop in the shipping industry on top of the existing decline.

Current events. This brings us up to current events. Not long ago, Russia announced that they would not be reducing oil production as a result. In addition, Saudi Arabia announced that they will actually be increasing their oil production next month. Western media is reporting that this is in retaliation to Russia’s statement but that makes very little logical sense. Russia is far more capable of sustaining lower oil prices than either the US or Saudi Arabia, as they are more diversified, being the world leading exporter of grain and expanding agricultural output. Saudi Arabia and the US are far more susceptible to declines in oil prices.

Future events. As oil consumption remains declined, this has occurred during winter months in the northern hemisphere, where the majority of highly industrialized nations reside. As winter ends and milder weather takes over, oil consumption will decline further just as Saudi Arabia increases oil production and Russia maintains stable production. The end result will be an oil oversupply, causing the price of oil to decline further. Eventually US oil producers will be forced to curtail production, leading to mass layoffs in the oil industry, even as the disruption in the supply chain causes layoffs in other industries. Oil futures are already reflecting the fact that this is fairly common knowledge. This will result in oil industry stock prices declining, which are historically some of the most stable stocks on the market.

Eventual recovery? Of course, at some point the Corona crisis will end in China. Though by the time it does, it may well be in full swing in other countries. When China first comes out of their crisis, oil prices will be at the bottom of the market as compared to any prices since the 1990’s. Yet that may not be enough to bring the oil market back to stability.

Real motivation? Contrary to the claims of western media, there is good reason to question whether the motivation for this oil war is truly between Russia and Saudi Arabia. Until this time Russia has cooperated with production limits. It has been the US which has gone beyond all discussed limits, destabilizing the OPEC market. Cost of oil production for Russia is higher than SA but much lower than shale and tar sands oil production in the US. This oil war stands to gut the petrodollar system entirely.

This oil war is something both SA and Russian economies would survive with measurable but not crippling impact. The countries that will be most hurt at first will be smaller oil producing nations with no diversity to their core economy. However, if they can force the petrodollar system into submission and bring US domestic oil production to it’s knees, OPEC/OPEC+ nations could well see a long term gain and establish dominance over the oil market permanently.

It may not take that much. Estimates say that US oil production must maintain an average of $60 a barrel to be profitable (that may have come down slightly in recent years). That’s for established fields. To tap new fields, oil would have to reach and maintain $70 a barrel to be worth the effort.

On the up side, lower oil prices benefit the average consumer. Though that is entirely contingent on the price of other goods remaining stable, which is absolutely not guaranteed at this moment in time due to the supply chain disruption.

The real effects of this will be seen rather quickly over the next few weeks to months.

Codependent Economics

So, the stock market rose 1300 points on Monday, 3/2/2020. I guess that means the economy has been saved from collapse. Capitalism saved itself plus all of us and all is right with the world.

Right. Not what happened.

What happened on Monday was that the Federal Reserve announced that they will be increasing the amount of fiat currency created from thin air to bail out failing banks. Then very soon they are lowering the core interest rate so that same newly created fantasy money can be loaned out to large businesses at much lower interest rates.

So, the Fed is expected to decrease the core interest rate by 0.5% in March. With the current core rate being 1.5–1.75%, that effectively means an interest rate of 1%. With another possible decrease later in the year.

The sole reason the Fed is taking these steps is to save the stock market. Not the economy, the stock market.

However, the conditions which led to the stock market decline last week still exist. Other markets in other countries around the world today have not recovered at all. The Corona virus quarantine in China is still ongoing with a related disruption in the supply chain. Deutsche Bank is still on the verge of collapse. Corporations are still laying people off in numerous countries and across different industries with more soon to follow.

Camouflage. What this means for the steps taken by the Fed comes down to camouflage. They have applied a band-aid, a mask, a veil, a curtain to hide the fact that, in truth, the economic decline is still happening. Basically, the operation was a success but the patient still died on the operating table.

Codependency. Stock market speculators and investors are addicts, no different from crack addicts. They are addicted to profits. They do not care what damage they do or who suffers for their profits, they just have to have their “fix”. The effects of the steps taken by the Fed equate to handing money to an unemployed, debt-ridden crack addict, then offering them a low interest loan. The addict remains addicted, unemployed and in debt. Receiving the money will make them happy for a short time but then they will blow that money on drugs, run up more debt and be back, asking for another handout, another loan and an extension of the first loan.

Devaluation. Each new dollar the Fed creates from thin air serves to further devalue the existing US currency in circulation. To make things worse, the existing currency is also fiat currency which has no value aside from what we claim it has and how much it trades against other currencies. As other countries suffer economic turmoil and debt, they trade in US dollars less and less. The closer we get to trade in dollars being zero, the closer we get to the value of the dollar being zero.

Trade deficit. The US has a trade deficit with nearly every country we trade with. Which truly makes one question how the dollar has any value at all. Though the higher the trade deficit becomes, the nearer we also come to hyperinflation. Our government further enforces this by imposing sanctions which limit the countries we trade with and goods we trade for. Tariffs act as a tax on US consumers, increasing the cost of goods we purchase, adding to inflation.

I won’t go into the effects of inflation itself. That’s fairly obvious.

The so-called “partial recovery” of the stock market on Monday will be short lived. Remember that when the Fed reduced the interest rate once in 2019, the market actually rose before the reduction and the same day as the reduction, the market declined. The reduction was not ENOUGH of a reduction to satisfy the addiction craving of the speculators. It remained that way until the Repo bailout began shortly after. It seems highly unlikely the Fed has any more tricks up their sleeves, so the Repo bailout and interest rate reduction is the final stunt before negative interest rates. Negative interest rates would devalue the dollar even more, causing the Fed to place currency creation on turbo steroids. Great for the stock market, devastating to the economy.

I expect this “recovery” to flatten in days, followed by further decline. If that doesn’t happen, the alternative is even worse. That the actual crash of the market is further delayed and when it happens is far more catastrophic than if it happens now.

I Was Wrong.. Kind Of

Yesterday I wrote that I expected the DOW to decline by at least another 1000 points on 2/28/2020. I admit when I am wrong and in this case I was. It only declined by end of day by -357 points.

Sometime during the day the unofficial damage control team jumped in and stopped the decline from being worse. Maybe a few large investors and/or algorithms decided to “buy the dip” with a low success rate. The result was a truly volatile day. When I say volatile, I mean look at a graph of the day and it looks like a raging fire.

I mentioned in my last article how I expect panic to set in when the market drops around 4000 points. The truth is, when you factor in the last two days of the previous week, the market has dropped very close to that number.

Media reporting. If you pay attention to something in financial media, you notice a trend. When the market increases by, say 1000 points, they say it rose by 1000 points. When the market declines, corporate media states the decline as a percentage, making the number seem smaller. This is one reason more panic has not taken hold. You will also notice that overall, they keep a narrow focus on daily changes when the market declines and a wider focus as it rises. Such as, “The market declined 5% today.” Yet they will say, “The market increased by 3000 points over the past month.”

Using real numbers. You will notice that when I state numbers going up or down, I use the actual numbers, not percentages. The straight numbers are far more illustrative and continuous. Percentages change, as is obvious. If the market is at 30,000 and suffers a sudden sharp drop of 1500 points, corporate media will report that as a 5% drop. The lower the numbers go, the same drop will indicate a much stronger percentage. Thus, when the market declines by 4000 points in a single week, I will state the market declined by 4000 points in a single week.

You’ll find lots of other tricks the media uses. Like stating a percentage drop over a longer time frame to use the largest beginning number to make the drop seem smaller.

The literal truth is that the nearly 4000 point drop in the past week represents trillions of dollars lost from the stock market.

Another truth is that investors have used so much of their liquidity to boost the market that they have no liquidity remaining. This is why the Fed has stepped in to bail out the Repo market and expand the balance sheet. They are being the cavalry for the rich.

Gold decline. One indicator of loss of liquidity is that gold has actually declined in price over the past few days as well, losing $66.92 per ounce over the previous week. However, it is still higher than one year ago by $293 per ounce. The reason for the drop over the past week is because of larger investors being forced to sell gold reserves for liquidity they have lost in stocks.

Personally, I rather hope the gold decline continues for at least a few days, so that smaller investors can afford to buy in before it rises again.

Bond market. In the same time frame as the stock decline, the total bond market has seen a dramatic rise. So a lot of investments have been moved into what is seen as safer territory. How safe that is would depend on what bonds that money is moved into. Keep in mind that bonds are a longer term arrangement, so investors are settling in for a long decline.

Bonds are debts. Something else to keep in mind is that bonds are loans taken on by companies. For investors bonds are safer than stocks. However, for corporations bonds are debts which must be paid out in the future. They may help a company in the short term but in the long term they are a liability.

So, again, I admit that I was wrong. The market did not decline by 1000 points on Friday. I stand by my statement that when it reaches an actual 4000 point cumulative drop, panic will set in. The market is nearly at that 4000 point mark now. In addition, with an extended decline lasting more than a week and gold also declining, this indicates investors are liquidating their positions. The combination of stock market losses and new debt taken on through bond issuance places many companies in long term debt which will take a serious toll on future profits.

Bankruptcies coming. This much of a decline in a short period will result in announcements of corporate and possibly personal bankruptcies starting next week. As those bankruptcies are announced, this will further depress the market.

Social impact. The obvious social impact is that as companies lose money and take on more debt, they will begin announcing further layoffs and closures. Expect announcements of corporate restructuring, a vague term I detest which means reducing wages, eliminating services and consolidating operations. As layoffs occur, more workers will cash out retirement accounts, causing more stress on the market. Consumer spending will decrease.

This isn’t likely to end soon. Once this trend has begun and continued for over a week with similar and related events in other countries, there is no reason to believe it will simply go away. I expect the decline to continue next week. For how long is anyone’s guess. I am of the opinion that the market will not rise near 30,000 again for years. If it does, it will be through some sleight of hand not immediately evident. There will be attempts at a negative interest rate, which will fail. For now, it may be best to keep cash on hand and wait to see what happens.

Corona Virus Is The Best Argument For Universal Healthcare

One of the biggest reasons the media is pushing fear of the Corona Virus is simple to understand. Drug company profits.

The media does not try and inform people in America. They sell fear. Fear sells products. So it is with the Corona Virus. What they are doing is making people terrified in advance of the virus gaining traction in the US. It is inevitable that the virus will spread to and through the US. However, before that happens the media will have Americans so terrified that they will seek out and pay for any ineffective treatment or prophylaxis available on the market, no matter the cost.

Look at who advertises on corporate television. Drug companies are one of the media’s biggest money machines. So are insurance companies. Of course the media is going to take marching orders regarding their “news” coverage from their most profitable clients.

Right now the fear being imposed upon the public is that the Corona virus is extremely deadly. That’s not exactly true.

Run the numbers. The highest concentration of people infected is still in Wuhan, China, a region of over 11 million people. The last number I heard of the number infected was around 80,000. Far less than 1% of the population. Yet the reality is even further removed than that from the fear-inducing media. Because the number infected being quoted is global. So this means we are not only talking about less than 1% of 11 million, we are talking about a much wider region and much larger population.

However, for simplicity we will say that the virus has infected 1% of the population. Then we will say the mortality rate for those infected is 2.3%, which is what is being quoted.

That means 2.3% OF 1% of the population may die from the virus.

Still not the full picture. Because allegedly 90% of those that have died from the virus are males, over 70 years old with a multiple decade history of smoking.

Higher impact in US. Now, that said, when (not if) the virus makes it’s way to the US general population, the mortality rate would likely increase dramatically. China has imposed a quarantine in 19 major cities. Not only would Americans object to such a quarantine but in a capitalist society a quarantine would result in millions becoming destitute. People cannot afford to stop working, so they would go to work even knowing they were sick and infectious. You can’t really hold it against them because they would see no other choice. The same would hold true for students. Most schools focus more on whether students are present more than whether they learn anything while they are present. That’s because schools gain more funding from filled seats than high grades. So we would have sick waiters/waitresses, food service workers, cashiers, teachers, drivers, nurses, etc all working and in direct contact with other human beings while sick and infectious.

Quarantine or no quarantine in the US, there is one massive difference between the US and China. In China, once the quarantine is lifted, their economy will pick back up where it left off within weeks. In the US, the financial/economic repercussions would take years to recover from. China has a Socialized medical system. In the US, medical care, hospital stays, including ICU care and loss of wages would put millions of Americans deep in debt, many into bankruptcy, some into losing their homes.

Like it or not, the Corona virus and the fear tactics being used by the media right this minute during an election year could be exactly the impetus needed to pass universal healthcare NOW, not later. This should be used by Progressives to our own advantage. Don’t even try and stop the media from fear mongering. Encourage it. Amplify it. When we combine the effects of the flu season and the coming Corona virus epidemic/pandemic, it is easy to foresee major economic implications which can devastate the economy. So use this as an argument to keep the pressure on for universal healthcare. Turn the tables on the media and the drug companies. Use their own weapons against them.

Stock Market Precipice

On Thur, 2/27/2020, the stock market fell 1191 points, bringing the total decline in the DOW to over 3000 points in one week.

There are several large, looming problems with this. The decline itself is not as much of an issue as one may imagine.

The biggest problem with the decline is how people are likely to react to it. If the market declines by 1000 points, people take notice. Yet the market has the capacity to regain that much in a day or two. When the market declines 2000 points in a week, people get nervous. When the market declines 3000 points in one week, people take action. This is where things get scary.

Beyond a 3000 point drop, if the market falls 4000 points, people panic. However, this is what is most likely to occur because of the actions people began taking at the 3000 point mark. Once panic sets in, even small stockholders will begin liquidating their investments out of fear that they will lose everything. This is the point where early withdrawal penalty means very little with retirement accounts.

Once investors start selling off their holdings to move them into something safer, that process will accelerate.

The other problem is that this truly reveals how tenuous the stock market and the economy itself truly has been all along. For over a year the media has been stating how strong the economy is, while those who pay attention have know just how much of a farce that statement has been all along. This strips away the illusion and shows the truth for all to see.

Another major issue is that this has happened while the Fed has been bailing out the Repo Market and expanding the balance sheet. It is simply not even possible for the Fed to create enough new money to counter this decline without devaluing the dollar catastrophically and buying stocks directly.

Congress will be unable to take any real action to fend this off because of the existing $23 trillion debt and massive deficit. Even if they took any action, who would they bail out? This decline is too widely spread to focus on a few banks or limited industries, unlike 2009. The 2009 bailout of banks and auto manufacturers never led to a real recovery and has led eventually to this inevitable decline.

There is no question that the people will not be bailed out, even though we are the source of the entire economy.

I fully expect the DOW to decline at least 1000 points on Fri, 2/28/2020. This is really bad because it is just before the weekend and the beginning of a new month. Historically consumer spending increases dramatically at the beginning of the month. This time it is entirely possible that increase will be significantly depressed as more people try and conserve what funds they have. Being tax season, consumer spending typically rises as consumers spend their tax refunds. That may not happen so much this year. For retailers that depend on that annual increase, it can cause definite further problems.

If that 1000+ point decline does not occur, I will be truly surprised.

On the up side of this, for those who want Trump voted from office, if this decline is severe enough to cause a recession or depression, this is what will help get rid of him. His followers have believed the hype about the economy, even as they sank deeper in debt or saw their jobs eliminated completely with no assistance forthcoming from this administration.

However, even with that it does not mean that the economy will recover, even after he departs office. I’ve said before that he is not fully responsible for what is coming but he has absolutely made it worse instead of better. Yet he has had significant assistance from the “resistance”.

When you look for someone to blame, do not point fingers at Russia or China or immigrants. The blame lies squarely on Wall Street and CONgress. This is a gaping fault line running through the middle of capitalism.

Corona Virus Effects Seen On Stock Market

On 2/24/2020, the DOW declined by -1032 points. I don’t bother quoting a percentage, percentages don’t tell anything at all. Whole numbers give a much clearer picture.

The last two trading days last week the DOW had declined by -128 and -228.

This comes as production in China has been severely negatively impacted by the quarantine due to the Corona Virus.

A major problem here is that to date, the consumer market has not yet seen any immediate effects resulting from the disruption in the supply chain. There have been warnings issued by various banks and investment firms. However, as far as consumer products, as of right now we are still relying on products stocked in warehouses and the last shipments allowed out of China before the quarantine was imposed.

What is likely to be seen as immediate effects would be exports to China. While some orders to China will still be delivered because they were already en route, many of those shipments will sit idly at the docks for some time. Subsequent orders will be impacted more, depending on how perishable the goods involved are. Raw materials for durable goods and complete durable items will be most affected. Which means the impact on the US and other economies will not be completely evident for weeks or months.

The effects will be compounded when considering disposable income lost by Chinese consumers, which will result in curtailed spending for some time after the quarantine has been lifted. The Chinese government can provide for basic necessities but consumer goods will take a considerable impact.

Further downstream, one must consider other countries depend on raw materials and sub-assemblies that come from China, including ingredients for some processed foods. Eventually that part of the supply chain will be affected as well.

One may believe that we do not import enough food from China for survival to be a concern. The truth is that we import billions of tons of food from China annually. Yet the concern does not end there. Reduced supplies of durable consumer goods means decreased sales for retailers. Reduced sales means layoffs. This time on a broad scale impacting basically every industry. Reduced profits in the financial sector because of stock declines mean even the financial sector will be impacted. Reduced imports of medical supplies from China could eventually lead to reductions in available care to only truly essential medical care, leading to layoffs across the medical field. Mass layoffs across all industries result in a downward spiral in consumer spending and food insecurity.

In addition, as supplies are depleted, various countries will be competing for alternative sources to replace China, so it will not only be the US seeking alternative sources to purchase from.

All countries that export to China are suffering trade losses. This may not be immediately evident in the US yet, as it is not the agricultural season. This would be more evident currently in the Southern hemisphere. For the moment, this has the potential to reduce food prices because of overstock in the market. In the long term, that effect will stabilize for consumers while causing losses for agricultural producers.

One thing I find interesting. Oil and gas consumption has declined drastically in China during the quarantine. By logic, this should cause a decrease in gas prices because of a glut in the US domestic market. Instead, gas prices have increased over the last 7–10 days.

Keep in mind that the stock market decline is happening as the Federal Reserve continues bailing out the Repo Market, with very little room to reduce the core interest rate without imposing a negative interest rate. A negative interest rate has been used in other countries with no positive result. In the US at this time, attempting such a thing could have a significant angry social response.

At this point, the US economy is backed into a corner. The economic events in multiple countries combined with a $23 trillion debt and $1 trillion deficit, taxes too low on the wealthy and no maneuvering room on the interest rate while the Fed has been bailing out failing banking institutions means there is nothing remaining which can be manipulated to prevent the coming collapse of the stock market followed by the general economy. The only thing that can happen now are moments of treading water before sinking completely. Oil will not save the economy. It’s useless exporting vehicles when citizens in other countries cannot afford to buy them.

This collapse will happen concurrently across most of the world economy. It is without irony that the countries likely to weather this storm most effectively will be the countries the US has isolated and attacked via sanctions and trade wars. Call it karma. It’s very possible other nations that have been coerced by the US into maintaining sanctions on those countries will reverse course and begin trading with the sanctioned countries again.

The bad part is that the US government will concern themselves first and foremost with the condition of the wealthy and corporations in a continuation of the trickle-down theory, as they have for decades. It will take a mass public insurgency to make them change course and concern themselves with the public welfare.

Sanders Is the Most Tenacious Russiagater

As the 2020 presidential race continues, there are many who still believe Sanders is an antiwar candidate. Nothing could be further from the truth.

Many also feel that Russiagate conspiracy theories will be used against Sanders. I fail to see how this could be true when he has been the most profligate Russiagate propagandists currently running for office. He has promoted the Russiagate conspiracy for the past 3.5 years at this point and, rather than stepping back from it, he is escalating and doubling down. Just days ago, he called Vladimir Putin a “thug” and Sanders himself claims “Russia” is helping his current campaign. Meaning he is setting himself up for these claims to be later used against him. Not to mention there is no sign of diplomacy to be found in this. 

I am making this post a loop, so the article with references works together with the content of the video. Please watch the video for full context and check the article for sources. 

This video is from 2018 and features Sanders introducing legislation meant to FORCE members of the Senate to accept the “intelligence assessment” which stated that “Russia interfered in the 2016 election”. No, sorry, you cannot call it propaganda. It is from Sanders’ own government web page. 

Sanders Introduces Resolution to Protect American Democracy from Russian Meddling
The Official U.S. Senate website of Senator Bernie Sanders of Vermont.www.sanders.senate.gov

Just last month, Sanders released the following statement. Again, not propaganda, these are his own words. 

Then on 2/21/20 he gave this statement during a press conference. Not propaganda, this is Sanders speaking on video.