ANALYSIS: the real key to oil at $34 is buried in history

The Slog uses history to show that stuttering economic recovery and cheap oil are the direct result of flawed ideology, irresponsible banking, half-baked geopolitics and growing wealth inequality.

When I saw Piers Morgan trending at No 1 on Twitter this morning, my immediate hope was that he’d suffered some kind of mortal wound – after being eaten alive by Alan Greenspan, say, or perhaps shot in the back after running away from the scene of a crime. Looking on the trend page itself, it was amazing to see how many people had hoped for the same outcome.

But it was just Ron Smearpig applying his GCSE woodwork skills to an analysis of The Trump’s unstoppable bandwagon. So instead of going into that nonsense, here’s a chart I did earlier:

oil2yr

In case you hadn’t already guessed, this is the price collapse of crude oil over the last two years. It’s another classic of shorter and weaker rallies, and the pace of the plunge has two recent parallels. This is the price graph since 1970:

oil70-15

The 1986 crash was caused by a global economic slowdown exacerbated by Saudi intransigence in refusing to cut production. So too was the one we’re currently looking at: in 1986, the Saudis wanted to crush north sea oil, today they want to crush shale. The fact they made the same mistake twice would suggest that the Oil sheiks are not the sharpest cards in the pack.

The 2008-10 slump is the unique drop here, not the other two. It was caused by financialised capitalism going on the greatest dysfunctional greed-fest of all time, causing a wild panic in the face of what looked for all the world like a global economic closedown of investment and output.

Three key points that do however make 2008-2016 completely different to 1984-6 are:

  1. We’ve now had two North Face collapses in a decade
  2. After the 1984 collapse, the Fed eased monetary policy and went for aggressive economic stimulus; this time, it quadrupled its balance sheet (to save the banking system by buying its toxic assets) but did nothing to stimulate business investment or risk activity. The relatively quick recovery post 1986 compares very favourably with the stuttering false starts we’ve had since 2008
  3. The current oil plunge was this time further exacerbated by the Americans playing price-destruction silly buggers in a game of energy geopolitics against Russia.

Only now – with too much too late, as it were – is Yellen trying to wean markets, senior corporates and multinationals off misleading ‘free money’ profits. But the damage will be doubled by making it expensive to invest – especially given how potentially damaging dollar-denominated debt is to the emerging markets.

With the Davos Dandies convincing the market (for the time being) that things will be back to ‘normal’ in a trice, I think it’s always a good idea to look at the holes in their self-serving analyses. The realities of history enable us to do this. To sum up,

  • Bernanke and Paulson put the banks and Wall Street before the economies in 2008 by applying monetary policy alongside Zirp. It was the diametric opposite of what should have been done, and has aggravated a global demand fall-off…..in itself partly due to the vast increases in wealth disparity since the early 1980s.
  • Energy geopolitics made the oil slump worse this time, but gluts alone do not explain the falls in 2016: the world is heading for a slump because neoliberal monetarism chose to stimulate bank recovery not economic activity and consumption.
  • China is not carefully rebalancing its economy: it is suffering the trauma of a massive reduction in demand for its output caused by the stubborn application of flawed monetary ideology.

We are where we are for reasons that lie at the door of all the usual suspects: investment banking, Friedmanism, obscene greed, monetarism, US foreign policy and Saudi idiocy. To talk airily about ‘services’ and ‘rebalancing’ in the face of poor manufacturing output and flatlining trade is like saying Britain’s infrastructure is crumbling because trickle-down wealth has ensured that ordinary citizens don’t need an infrastructure any more. It’s a nice soundbite, but it is also complete poppycock.

Previously at The Slog: Chinese wealthy rush to get their money out of China because things are going so well

7 thoughts on “ANALYSIS: the real key to oil at $34 is buried in history

  1. Re the oil price and 1986. Times have changed. Neither Saudi Arabia nor Russia can afford to cut production ,as both countries are heading for insolvency, SA, in particular. Then, there is new supply from our new friends in Iran. The final nail in the coffin for the oil price is China, bonkers rigged economy, in collapse, look at copper and iron ore prices. So, an oil price less than $20 is coming our way, It takes 12-18 months for this wealth transfer to take effect in the Northern Hemisphere, but it will happen. It might even revive that Powerhouse economy called ‘ Europe’. Expect a Government document telling you that the fall in oil prices is further reason to stay in the EU to be published ,shortly.

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  2. John ! I spend a lot of my time trying to render stuff down to my level of comprehension..
    For one reason or another I caused a Little bit of discord n “casa mia”.
    A young 12 old visitor was on his lap top morphing real time portraits.
    (it’s lap tops now not bicycle clips they bring with them!)
    His mum was texting! I thought how can I break thru … So I prepared myself with some heavy weight ammo( (A cut and paste of the route of “beaver” in ancient times and as used by vulgar peasants now a days .)Plus a image of a soft drink most folk wont order, for fear of making prats of themselves!
    I looked at the lad and said .. so his mother could hear
    “I have never ever seen a green beaver before lad” He had no idea this was on it’s way………………………
    She de-texed herself and came over ……well I thought the lad was going to split his sides …’was as big a surprise to him as his mother.
    I had ready ready

    cut and paste:
    The castle’s name means beautiful view. The name Belvoir is, in fact, a Norman import by the French-speaking invaders, but the native Anglo-Saxon population was unable to pronounce such a foreign word, preferring to call it “Beaver Castle” which persists today.
    Paste end.

    John
    These castle were on a high ground so …………………..the shit has flowed down hill for a long time!.
    dofornow

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  3. The Saudis may well be as daft as a brush, but there is method in their madness, since they don’t want to lose market share to a bunch of fly-by-nights.

    I got to thinking about the real reasons the economy is in an enduring funk. How much does the average punter spend these days on:
    Mobile phones and contracts
    PCs, software, licences and help
    Netflix, HBO
    Insurance, insurance and insurance
    Pension plans
    Non-prescription drugs, massages, therapies and shrinks
    Cars, servicing and gizmos
    Plus loads more

    No wonder there’s no money left, just standing still is so expensive.

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  4. Yet another great post John.
    And yet Trump and Clinton are leading the race in the USA, go figure. The Tories feel permanent, unless they all eat each other over the EU.
    Most of the so called new hyped Global companies out there produce very little Google, Facebook etc yet they all suck cash from productive companies , which probably explains why UK industrial production GNP is down to less than 9% of total.
    I think we need to face it the people who see the Emperor is naked are very small in number and most have little influence on the levers of power, me included.

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