We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

Samizdata quote of the day

The continuing plunge in the price of oil from $115 a barrel in mid-2014 to $30 today is really, really good news. I know just about every economic commentator says otherwise, predicting bankruptcies, stock market crashes, deflation, political turmoil and a return to gas guzzling. But that is because they are mostly paid to see the world from the point of view of producers, not consumers.

Matt Ridley.

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38 comments to Samizdata quote of the day

  • Paul Marks

    They need an excuse for the economic decline that is going to happen – indeed already is happening.

    That is why the fall in the price of oil, which is good economic news, is being treated as bad economic news.

    Remember we are supposedly many years into an “economic recovery” – and yet interest rates are zero (or even negative) in most of the Western World.

    The blame for the bust must not go to the Credit Bubble policies (the Credit Bubble is holy – it is sacred) so a scapegoat must be found.

    Low oil prices is the scapegoat.

    And, yes, the low oil prices are actually good economic news.

    For example without the low oil prices both the Japanese and the Chinese economies would have already collapsed.

  • NickM

    What Paul said. I can add no more.

  • mike

    The apparent fact that journalists or “economic commentators” can be paid to see the world in any way at all other than how they actually see it is damning indictment enough, the slags.

  • Mr Ed

    To misquote Chris Rea ‘Fuel if you think it’s over, it’s just begun‘.

    The ludicrous deflation beast stalking the land is the most ludicrous idea, that prices need to rise to keep businesses going. A pint of bitter in a Suffolk pub cost 12 new pence in 1971, it is now £3.60, a 30-fold increase in price in 45 years. Yet the prices of electronic goods continues to fall, as the quality and capability rises in ways for many unimaginable even 20 years ago.

  • llamas

    The fall in the price of oil is bad economic news for one small group of oil-producing nations, which is composed of two sub-groups, namely

    – medieval Middle-eastern monarchies and theocracies, which use their oil profits to export and expand genocidal religious lunacy, and
    – a couple of idiot-Marxist states which use their oil profits to pay for their economically-insane socialist policies.

    If the drop in oil prices sends those nations into an unrecoverable tail-spin – Oh. Well. I say that’s a good outcome.

    For everybody else – Everybody Else – lower oil prices are a wonderful economic boon with a powerful here-and-now effect right at most people’s bottom line. Oil producers and refiners won’t go bankrupt, and their profits won’t tank – producers will bank wells that are uneconomic at the lower price and not drill any more, and refiners and sellers will mark up their products regardless of the cost of the raw material. There will be no stock market crashes – those are seldom if ever caused by something so simple and directly-observable as the cost of a raw material, a simple market signal that anyone can understand. Deflation? Why? Political turmoil? Only the good kind I outlined above.

    There is no social, political or economic downside to lower oil prices. None. We should welcome them with open arms. If lower oil prices lead to anything measurable, it will be growth. Hooray. Finally.

    llater,

    llamas

  • RRS

    One thing not yet widely discussed (let alone examined) is “how much” (%, volumes, or whatever) of the global and then respective regional economic activities (commerce) is “oil” or “oil& gas” related.

    That does not mean by production only, but transport & energy costs, etc.

    It might also include some measures of the marginal utility on consumption choices.

    Still, if one takes the total costs incurred to produce those fuels as a percentage of “global GDP” (lousy number/)or as a percentage of any other pertinent base; or, the total amount paid out in sales of those fuels similarly compared, the results may be surprising.

    One might wonder how they would compare (e.g.)to the wordsmiths’ conclusions that “Healthcare” is 16% of the U S economy? Is “Oil & Gas” 25%, 10%?

  • JohnK

    If an “economist” is arguing that a fall in the price of oil from $115 to $45 a barrel is a bad thing for the global economy, then I must assume that the same “economist” must therefore believe that a rise in the price of oil to, say, $450 a barrel would provide a boost to the global economy: QED.

    I would say that the governor of the institution should take that “economist’s” crayon off him, and stop him writing to the papers.

  • Mr Ed

    a couple of idiot-Marxist states which use their oil profits to pay for their economically-insane socialist policies.

    Venezuela, yes, but that’s a wee bit harsh on Scotland.

  • Sigivald

    Gas guzzling?

    Yeah, cheap energy is so horrible.

  • Cristina

    Remember Russia, Mr Ed.

  • If this particular oilfield employee may comment…

    Actually, I agree: I for one am delighted that the oil price has collapsed, mainly because a decade of high oil prices has allowed the whole industry to become bureaucratic, bloated, wasteful, inefficient, staffed with people who have achieved managerial status through arselicking and backstabbing rather than an ability to deliver, and ushered in local content laws which mean fabulously wealthy corrupt politicians and gangsters in developing countries get to plunder more of their country’s wealth. In short, the high oil price has masked a multitude of sins that are now being laid bare.

    Good. Hopefully this will usher in massive reform in the oil companies, and equally massive reform in the producing nations. ExxonMobil doesn’t need much reform as they seem to have prepared for low prices; Chevron isn’t in bad shape; Shell is a pension programme run by and for the employees at the expense of the shareholders, and badly needs reforming; BP is all at sea with no strategy in sight and will do well not to be broken up and sold off; Total is an utter basket case which seems to exist largely to keep otherwise unemployable Frenchmen in a job.

    I’m also hoping to see reform in the oil producing countries. I see Azerbaijan has called in the IMF to stave off default. One of their conditions should be that the ruling Aliyev family packs their bags and leaves the Presidential palace for good. Nigeria is also nearing default, although the only two solutions I can think of for that place are recolonisation or multiple nuclear strikes. Russia needs to toss Putin out and bring in somebody who doesn’t think he’s Peter the Great. Kazakhstan needs the same treatment as Azerbaijan. Brazil has managed to mire itself neck-deep in a corruption scandal before the oil price collapsed: fortunately they can play football well, and the girls look good in bikinis playing beach volleyball. Angola’s economy is about to collapse, but then I never did have much hope for a nation with a machete on its flag.

    Plus, I’ve been smart enough not to believe the boom would last forever and spent the past 10 years making hay while the sun shone but preparing for a bust at any moment. I have no sympathy whatsoever for those jumped-up tossers in places like Aberdeen who mortgaged themselves to the gills on a damp dormor bungalow and drove around in an Audi S6 on hire purchase because their mate gave them a manager position in some shitty recruitment company and are now out on their arse with no useful skills. The clear out couldn’t come soon enough.

  • Laird

    The article is behind a paywall so I can’t read precisely what Mr. Ridley had to say. Perhaps he did cover this. But low oil prices don’t merely benefit consumers (per his quote); they are good for many producers as well. Any product which includes a large petroleum component (plastics, fertilizers, cosmetics, textiles, even some food additives) benefits from these prices. It’s only oil producers (along with their lenders and certain ancillary businesses) which suffer.

    Shale oil, fracking, and other technological advances have all contributed to the remarkably rapid drop in oil prices. But most of the drop is not attributable to technology, but rather to the ongoing worldwide quasi-recession in which we’ve been mired for the last 8 years or so. It’s not just oil; all industrial commodities have seen large price drops over the last 3-5 years. Check out copper, palladium, lumber, cotton, any of the grains, etc; all are down substantially. It’s due to weak demand, which all comes back to the ongoing global recession.

    In many respects these low prices are good things. But collectively they are symptomatic of one very large Bad Thing. And this recession shows no signs of ending; indeed, I can’t see how it can end without some massive corrections which clear out decades of government-spawned economic distortion. And that won’t be pretty.

  • Alex

    It’s not just oil; all industrial commodities have seen large price drops over the last 3-5 years. Check out copper, palladium, lumber, cotton, any of the grains, etc; all are down substantially. It’s due to weak demand, which all comes back to the ongoing global recession.

    That is surprising to me. I haven’t done particularly well during the recession but my household has recently been consuming again (after many years of making doing and mending). Replaced my 20 year old refrigerator after if finally gave up the ghost, replaced an 11 year old TV which was close to failing, etc. Most people seem to replace their goods much more regularly. World population is at an all time high (but I do appreciate that a billion people are under 18 years old and therefore unlikely to be consumers of household goods).

    I guess I’m trying to understand where the weak demand is. Is it an American phenomenon?
    I live in one of the poorest areas of the UK (or so the stats say) and believe me most people in this area are conspicuous consumers. New telly every couple of years, etc.

    I understand that the Chinese have become a consumer nation. Not having been there I can’t know for myself if this is remotely accurate but it would seem to follow.

    Or are the lefties somewhat correct – are the worlds poor (ie, the real poor) getting poorer? Is that where the demand has dropped?

  • The Pedant-General

    Can I just note that this is SQOTD 666. Should we be concerned?

  • Mr Ed

    Dear P-G,

    Just above your comment and Laird’s is Jake Barnes with surely SQOTD 667.

    And anyway, I met the Devil in a small church in Wenhaston, Suffolk, England. He seems to be a diligent chap, only wanting his fair share of souls.

  • ap

    Laird,

    This appears to be a non-paywalled version.

  • Nicholas (Andy.royd) Gray

    Alex, you’ve solved a puzzle of many years! Why do people feel cold when in the presence of ghosts? I used to think it was because your body was getting ready for a fight/flight situation when it seemed that something unusual was occuring, but now I realise that some fridge ghost was in the area! (Your fridge gave up the ghost.) Perhaps regular ghosts use fridge ghosts to keep the beer cool, or the snacks! Thanks for clearing that up.

  • Greg

    I thought the current lull in oil prices was due to the Saudis (and others? all of OPEC?) flooding the market so as to drive the US shale oil guys out of business and that once the latter crashes, the Saudis will return to business as usual and we’ll be paying $4/gallon in the US again (I know, no sympathy from those of you paying $6/gallon). Am I wrong?

  • newrouter

    flooding the market so as to drive the US shale oil guys out of business and that once the latter crashes, the Saudis will return to business as usual

    no that “parrot” is a dead, pushing up daiseys…

    Introducing Fracklog, the New-Fangled Oil Storage System: Energy

    link

  • Bod

    This is part of a far greater story which is starting to get *some* coverage. As noted above, commodity prices have been falling for some time – due to falling demand, of course – so the marginal producers mothball their production and cut their costs. It’s reasonably easy to mothball or put an open-cast mine on reduced production, but far harder to implement drastically reduced production at the wellhead, apparently. And it’s really difficult to retool and mothball refineries, so you end up in the situation we’re in now.

    There’s been some recent commentary on the state of the Baltic Dry Exchange collapse. Nobody’s shipping anything (go take a look at Marinetraffic.com). A lot of the world’s excess tanker capacity is moored in places like Galveston and Baton Rouge waiting to hook up to an offloading buoy. When you take into account the relatively small volume of storage capacity for crude and refined fuel compared with the volume processed (particularly in the US – gee, I wonder how that happened?), a small drop in demand at the consumer could rapidly lead to all storage capacity being filled – and that’s where we seem to be now. With the exception of the last week or so, nature has spared much of the US from its habitual winter punishment, so inventories of heating oil and bunker are probably way up too.

    The Saudis et. al. are screwed even in the medium – let alone the long – term. Sure, they can offer their crude at prices that will cause marginal US producers to shutter some of their operations, but the jig is up. OPEC will never have the kind of leverage they had before.

    The firm I work for has a couple of quite bright guys, one of whom is a regular stop on my office ‘walkthroughs’. His take is that we’re on a knife edge. The Fed is screwed, because a rate increase will collapse the house of cards, the Chinese are starting to ask for their money back – which we don’t have. Furthermore the Chinese are diversifying, trading goods with Africa for influence, commodities and real estate as ‘trading zones’ which is of course a convenient way of describing military bases, and making new friends along the way. The thought is that with new friends, China may be a little more assertive in wanting the West to pay back those debts we ran up for cheap flip-flops and bisphenol-laden vibrators* that we just had to buy for $1.99 at Walmart.

    Eventually, we all run out of everyone else’s money, and we’ve just about reached that point now. US Retailers are running on inventory. One large regional retailer over here that has been on the edge for a very long time (Kohl’s) lost 18% on the stock market. I consider them a reasonable bellwether, because much of their stock is sourced from Asia, and I can go in any of the stores around here and the shelves are never fully stocked, yet their staff are standing around doing nothing. And they’re not alone.

    Just in time to have austerity forced down our throat by a guy (elected by imbeciles) who thinks that you should make do with deodorants designed by a People’s Hygiene Committee.

    When I think about the global economy, I always seem to remember those images on the posters that Saint Bob used to try and shame us with for the Live Aid events. Those starving refugees? That’s us.

    * Well, I didn’t get one, but I hope you get the point.

  • Cal

    >I thought the current lull in oil prices was due to the Saudis (and others? all of OPEC?) flooding the market so as to drive the US shale oil guys out of business and that once the latter crashes, the Saudis will return to business as usual and we’ll be paying $4/gallon in the US again (I know, no sympathy from those of you paying $6/gallon). Am I wrong?

    That’s what the Saudis are hoping, but most people in the industry, and most economists/analysts who watch these things, are saying that things aren’t going to turn out that way (for various complicated reasons which I won’t pretend to have a good grasp of).

  • Deep Lurker

    flooding the market so as to drive the US shale oil guys out of business and that once the latter crashes, the Saudis will return to business as usual and we’ll be paying $4/gallon in the US again

    Shades of Standard Oil, from a century ago, where supposedly we were only saved by the wise intervention of progressive government. However…

    Despite the widespread belief that Rockefeller maintained his position by selling oil below cost in order to drive competitors out of business, a careful study of the record of the antitrust case that led to the breaking up of Standard Oil found no evidence that he had ever done so. The story appears to be the historian’s equivalent of an urban myth.

  • Nicholas (Andy.royd) Gray

    I think we have reached the point of peak.. pessimism. Soon we will see pessimists declining in numbers, and becoming an endangered species. Does anyone want to create a pessimists reserve? Must be in inhospitable conditions with minimal sunlight. Otherwise we’ll lose people to laugh at and ridicule.

  • AngryTory

    but that’s a wee bit harsh on Scotland.

    no it’s not. Nor Norway. Nor even England UK under Thatcher – that’s why her reforms were so necessary.

    bankruptcies, stock market crashes, deflation, political turmoil and a return to gas guzzling

    well all of these things are good and necessary, long overdue, and have been held off only due to massive borrowing in the EU and the rest of the “Welfare West”. The end can’t come soon enough, and yes it will be hard:
    Germany will look like Greece, and Greece like Yemen.

    The only good news is that the UK will have the Brexit option to get out of most of this, and then deal with its own reforms itself, before the crash really hits.

  • Eric

    Oil isn’t low because of the Saudis or because of US tight plays. It’s low as a result of demand shocks. This is a year old, but nothing has changed:

    https://www.stlouisfed.org/on-the-economy/2015/january/oil-prices-is-supply-or-demand-behind-the-slump

    Low oil in and of itself is a good thing, but the price is a symptom of larger problems.

  • @Greg,

    Am I wrong?

    I’m afraid so. Alisa of this parish recently pointed me towards this post, which explains all.

    @Bod,

    Furthermore the Chinese are diversifying, trading goods with Africa for influence, commodities and real estate as ‘trading zones’ which is of course a convenient way of describing military bases, and making new friends along the way.

    Nah, the Chinese have been in Africa for well over a decade and are encountering exactly the same problems that the Europeans did. I work with the Chinese on oil and gas projects in Africa, and they are the most risk-averse and nervous of all the stakeholders.

    @Eric

    Low oil in and of itself is a good thing, but the price is a symptom of larger problems.

    Agreed.

  • Paul Marks

    Look a Greece – where the stock market is lower than it was 25 years ago.

    In short if you had invested money 25 years ago in Greek business – you would not be worse off than if you had kept the money in a sack under your bed.

    And look at Japan – the third largest economy in the world, which is falling apart (going bankrupt – in fact of not in law) before our eyes. Yet everyone in the establishment is too “polite” to mention it.

    Or look at China (the second largest economy in the world) – where anyone who tries to present accurate economic figures “goes missing”.

    All three of these places are oil importers – they import their oil and gas.

    Imagine what these places would be like if the price of oil went UP.

    They would be total economic collapse – they would be starving.

    That is how bad the world economy really is.

  • Julie near Chicago

    Suppose the world economy is in such terrible shape as some of us think it is.

    In that case I can understand how some people would think that there needs to be somebody running things, because this ship is obviously sinking fast and it can’t possibly right itself. It’s going to the bottom for sure.

    Almost the first thing you learn in flight training is to LET GO when the plane takes a nosedive. It’s rather counterintuitive that it will come out of the dive and out of the stall if you just … let go.

  • JohnW

    Strange world where cheap energy is considered a bad thing.

  • llamas

    Would someone who knows more about oil production than I care to comment on the story, which I have now heard various times, along the lines of

    ‘Saudi Arabia can stand oil prices as low as $25-$30 a barrel indefinitely, and large volumes of US shale-oil production are profitable at $40-$50 a barrel, so we can expect oil prices to float around between these two numbers for a long time to come. The production already trapped in innumerable tankers growing barnacles at anchor around the world will be an effective cushion against serious upward price spikes caused by increased demand – US shale production will ramp up long before the accumulated backlog is consumed and stem any price rise.’

    llater,

    llamas

  • JohnK

    Llamas:

    I think the saudis can pump oil very cheaply, maybe in the $10 to $20 a barrel range, and sell it at a profit. However, the Saudi state needs oil to be around $80 a barrel to fund its social and military programmes, as well as its world wide Wahhabist propaganda network. So with oil at less than $40 a barrel, the Saudis are heading for bankruptcy. It couldn’t happen to nicer people of course, but that does not mean that what happens after the Saudi state collapses will be pleasant to watch.

  • AngryTory

    The Saudi collapse will be nothing compared to the EU collapse…

  • bob sykes

    The focus on oil is a red herring. All commodity prices are falling, and world freight volume is declining. These are signals that the world is in recession, or more likely never actually recovered from the Great Recession. Unfortunately, the central banks have shot their wads, and have nothing left to counter what’s coming.

  • Would someone who knows more about oil production than I care to comment on the story

    Okay!

    ‘Saudi Arabia can stand oil prices as low as $25-$30 a barrel indefinitely,

    In terms of production costs, yes. Easily. In terms of balancing the state budget and keeping enough people happy to prevent political instability plus fight Iran, that is another issue altogether.

    and large volumes of US shale-oil production are profitable at $40-$50 a barrel,

    Hmmm. Not sure. Depends what you mean my “large volumes”. I’d say $40 is a bit low. $60-70 perhaps more realistic.

    so we can expect oil prices to float around between these two numbers for a long time to come.

    It’s hard to tell, but I reckon $40-50 by the end of this year, around $60-70 average next year. This is gut feel, mind.

    The production already trapped in innumerable tankers growing barnacles at anchor around the world will be an effective cushion against serious upward price spikes caused by increased demand – US shale production will ramp up long before the accumulated backlog is consumed and stem any price rise.’

    Nah, I don’t think the offshore storage is that much. Perhaps on a local level it might provide some cushion, but not globally. US shale production ought to ramp up more quickly than conventional developments though, which might serve to prevent a sudden upwards spike. Put it this way, the mere knowledge that the US can produce its own oil if it really needs to is a massive factor in making sure prices don’t go up past $100 for a long time yet.

  • […] in a comment here a few weeks ago. There is so much goodness. You can start with its author’s comment on low oil prices […]

  • Tedd

    …a couple of idiot-Marxist states which use their oil profits to pay for their economically-insane socialist policies.

    Venezuela, yes, but that’s a wee bit harsh on Scotland.

    And Canada.

    Wikipedia lists the U.S., Canada, Brazil, and Mexico in the top ten, so I’m not sure the description is really all that apt (even though I agree with the sentiment).

  • There is one big bankruptcy due to the present oil price that is about a year away: Russia.

    Personally, I can’t wait.

  • There is one big bankruptcy due to the present oil price that is about a year away: Russia.

    Kazakhstan will go first. Russia might just be able to hold on.