"The political perils of low oil prices"

[URL]http://www.europeanenergyreview.eu/site/pagina.php?id=3796[/URL]

[quote]Oil prices have rapidly dropped in recent months, and some analysts predict a further (steep) decline. This might seem like good news to consumer states, but there is a catch. Whereas producer states could balance their budgets at $30 a barrel less than ten years ago, they now need $100 a barrel to make ends meet. If oil prices continue to correct, expect instability to hit producer states across the board. That might (ironically) help to set a price floor and push prices up again, but it's not a development that consumer countries should be happy about. Keeping oil prices at $100/b remains a better plan than seeing producer states collapse.

. . .

The starting point: pricing peril

Current spot prices may be worrisome for producer states, but the real issue is [I]how long[/I] prices will remain depressed. On the face of it, OPEC has never had it so good. Brent prices averaged historic highs of $114/b from January to June. The problem is that OPEC states have gotten used to high prices. Unless average prices continue to hold up over $100/b, financing gaps will start to show - even at benchmarks around the $80-90/b mark. That's a staggering indictment of how badly resource rich states have managed their wealth over the past few years. '$100/b' is the new '$30/b' from the early 2000s required to keep producer states in the political black.

Iran, Russia and Venezuela have their budgetary books balanced at over $110/b break even points. Ecuador has its budget balanced at three figures, with Bolivia, Argentina and Mexico in similarly precarious positions. Nigeria, Angola and Algeria are no different across Africa. Caspian States are all 'out of the money' at anything less than the $100/b mark, while Libya and Iraq need all the receipts they can muster to rebuild their shattered states. But what's perhaps even worse for producer states, is the enormous uncertainty reflected on the future curve. Under a 'business as usual' scenario, this increasingly looks like a geo-economic car crash waiting to happen.

. . .

And that's the whole problem here - the gap between geological costs of production and the geopolitical cost of survival is simply too wide for producers to cover without falling back on draconian measures. If this 'self-correcting' mechanism between price and political unrest starts supporting an informal price floor then so be it, but we shouldn't be fooled that this is serving anyone's interests - on either side of the consumer-producer ledger. Yes, it will help firm prices when certain producers struggle to adapt to rapidly shifting economic conditions, but assuming that more and more producer states hit political problems as prices slip, we're merely cementing the 'too big to fail' status of the very largest oil producers. Seeing petro-states dropping like political flies as prices correct isn't a proper 'solution' for a floor, not only because prices will rebound with a vengeance when markets tighten, but because it will make us even more dependent on a handful of key suppliers. As we all know from previous problems in Iraq (2.9 mb/d), Iran (3 mb/d), Libya (1.48 m/bd), Nigeria (2.4 mb/d) and even Venezuela (2.7 mb/d), once things go politically wrong, it takes a very long time, if ever, to get back to optimal production levels. It's the antithesis of where consumers want to be in terms of sourcing plentiful and fungible supplies.

Final scene: corpses all over the stage

By way of reminder, as much as petro-states currently face a systemic crisis trying to set a price floor, it was only in March that we saw how badly placed OPEC is to moderate the market at the top. Seeing petro-states in a pickle might warm the hearts of many right now, but markets can turn, and turn fast. When they do, the oil weapon will shift target as well. It will no longer be pointed at petro players heads, but directly at consumer states. That's the consequence of a dysfunctional energy system - not just with a $50-$150/b outlook eminently possible, but swings well beyond that 'price band' all too likely.

Splitting this price directly in two and sticking close to $100/b might not be that bad an idea after all: Mopping up the mess from producer state implosion would require an effort far beyond the international systems capabilities and reach. Carefully agreed truces are always better than outright wars, particularly for those squeamish about collateral damage. Corpses would litter the entire energy stage.[/quote]

Re. jobs-creationism/intelligent-jobs-design, a similar "intelligent" conundrum arises when comparing the predictions of "the real ID theory" to the real world, which is filled with obvious results of evolutionary accident and fitting-of-square-pegs-into-round-holes, some of which are guffaw-worthy in their stupidity, if one chooses to anthropomorphize them. Humans only replacing their teeth once ... incapable of regrowing damaged limbs or central nerves, retinas inside-out leading to a blind spot ... incapable of digesting cellulose into energy ... the list is endless.

[QUOTE=cheesehead;304524]"The political perils of low oil prices"

[URL]http://www.europeanenergyreview.eu/site/pagina.php?id=3796[/URL]

[QUOTE]Whereas producer states could balance their budgets at $30 a barrel less than ten years ago, they now need $100 a barrel to make ends meet.[/QUOTE][/QUOTE]
That`s their problem, for tying their spending to a known-highly-price-volatile commodity and not provisioning for the proverbial rainy day. Not dissimilar from governments of "modern western developed" economies tying their spending to Ponzi-economic delusional projections of 8% annual growth in perpetuity and then crying rivers of tears when the reality "unexpectedly" failed to live up to their innumerate fantasies.

[b]San Bernardino is 3rd bankrupt CA city in a month:[/b]

The "wave of municipal bankruptcies" several well-known pundits (e.g. Meredith Whitney and Mish) have been predicting for years may finally be here ... at least in my state of California, where [url=http://latimesblogs.latimes.com/lanow/2012/07/san-bernardino-bankruptcy-could-other-california-cities-be-next.html]San Bernardino[/url] this week became the third California city to seek bankruptcy protection in the last month.

[b]Friday Funnies, Thursday Edition:[/b]

The unintended jokes are coming thick and fast ths week...for example in this "you can trust us to not read any of these e-mails we will soon have access too ... because we say so" blurb from the head of the NSA:

[url=www.reuters.com/article/2012/07/10/net-us-usa-security-cyber-idUSBRE86901620120710?feedType=RSS&feedName=domesticNews]U.S. spy agencies say won't read Americans' email for cybersecurity[/url]: [i]WASHINGTON (Reuters) - The head of the U.S. spy agency that eavesdrops on electronic communications overseas sought on Monday to reassure Americans that the National Security Agency would not read their personal email if a new cybersecurity law was enacted to allow private companies to share information with the government.[/i]
[quote]"The reality is we can do protection of civil liberties and privacy and cybersecurity as a nation," General Keith Alexander said in a speech at the American Enterprise Institute.[/quote]
Sure, "we can do protection of civil liberties and privacy and cybersecurity and all that stuff as a nation " ... but what Gen. Alexander omitted to say is, [u]we can't do all of them at the same time[/u], at least not with the broad and intrusive data-gathering capabilities the White House and NSA are pushing for.

It's analogous to taxes - because there are no serious legal penalties for government officials who waste tax monies, there is every incentive for them to do so in order to buy votes and influence:
[i]
"The only way to keep government from misspending your tax money is to not give it to them in the first place."
[/i]
In the realm of privacy-protection, the analogous maxim is
[i]
"The only way to keep government (and social-media-style sites) from misusing your personal information is to not give it to them in the first place."
[/i]
Another clue that Gen. Alexander is a clueless suit is this next little gem:
[quote]The U.S. government has blamed hackers from China for breaking into U.S. company computers and stealing proprietary information. Internet security firms say billions of dollars worth of intellectual property has been stolen.

"[u]In my opinion, it's the greatest transfer of wealth in history[/u]," Alexander said.[/quote]
"What is the 'Wall Street' of which you speak?", added the general.

As usual, the truly dangerous terrorists - the ones wielding weapons of mass financial fraud - continue to operate in plain sight right here at home and across the globe, and not only are not being held to account for their crimes, they are being rewarded by the governments they have bought.

ZH's Bruce Krasting has some personal experience with the designed-to-be-rigged Libor market, but his attempted apologia is less than convincing:

[url=www.zerohedge.com/contributed/2012-07-13/bloodletting]Bloodletting[/url]: [i]My Libor story[/i]
[quote]The only thing interesting about this story is that it’s 30++ years old. People have been sandbagging Libor quotes since the concept of Libor was originated.I don’t believe that there is a money pro on either the buy or sell side over the past thirty years who didn’t understand that the Libor Fixing was “fixed”. If they claim to be “shocked” today, they are either lying or stupid. The same goes for every central banker and treasury official that knows the way to the bathroom.
[u]
As far as any consumers who took out a Libor based loan are concerned; they have no claim at all. If Libor hadn’t been “fixed” all these years they would have paid substantially more on those loans. Libor has always been jimmied down, not up.
[/u]
The world has been looking for an excuse to hang some bankers (and a few regulators). Liborgate looks like it could be the opportunity for the bloodletting. I’m convinced that this is the wrong issue to bring out the nooses.[/quote]
Well, all the "right" issues failed to bring any justice, Bruce. The banksters should in fact hope for some kind of a "cleansing calling-upon-the-carper", because if justice continues to be evaded by the PTB, those nooses may very well become all too real at some point.

In fact, Bruce destroys his own "victimless crime" thesis when he replies to one reader thusly:
[quote]Who gives a shit if some swaps guys at Bear Sterns [sic] got clipped a few years back? I don't. They knew full well the sand box they were playing in. No way to cry foul today.[/quote]
Wow - talk about myopic. That "sandbox" would be "the global economy and financial system", and it wasn't just Bear that "got clipped" a few years back, you twit. The economic damage has been profound and will be long-lasting, and most of the losses have yet to be borne, and you can get that it will not be "some swaps guys at Bear Stearns" who will be paying the tab.


[url=www.reuters.com/article/2012/07/13/us-sanbernardino-investigation-idUSBRE86C04U20120713?feedType=RSS&feedName=domesticNews]Authorities probe San Bernardino, city mulls bankruptcy move[/url]: [i](Reuters) - Authorities are investigating financially troubled San Bernardino, California, where the city council voted this week to approve a bankruptcy filing amid a claim by the city attorney that fraudulent accounting may have contributed to the city's problems.[/i]
[quote]San Bernardino City Attorney James Penman on Tuesday told the city council that financial documents had been falsified for years.[/quote]
Sounds like classical accounting-control fraud, which as William Black notes, is behind nearly all the the major bank, fund, company and now, sovereign and municipality blowups in recent memory: The S&L crisis, Enron, Worldcom, Madoff, AIG, Lehman, Bear Stearns, various PIIGs which lied their way into the EMU, MF Global, the JPMorgan [url=http://www.zerohedge.com/news/jpm-admits-cio-group-mismarked-hundreds-billions-cds-effort-artificially-boost-profits]whale trade[/url] blowup, etc. It emerged in the past several days that the blown-up midwest brokerage PFGBest [url=http://articles.chicagotribune.com/2012-07-12/business/sns-rt-us-broker-pfgbest-auditorbre86b02n-20120711_1_attempt-on-monday-morning-auditor-futures-broker]had an auditor in the form of a lady[/url] operating out of her home. As with the Madoff ponzi, none of the alleged financial-regulators-on-the-job found that odd, apparently, assuming they even checked who the auditor was, which I suspect they did not, because that kind of "doing event the bare token minimal due diligence required of one" is frowned upon in the financial industry.

Not that such (alleged) flat-out fraud is necessary - the biggest fraud perpetrated by indebted governments and municipalities the world over is the one right out in plain sight: The making of promises (typically binding upon the taxpayers) to one's favored constituencies which are mathematically impossible to keep, long-term.


[b]Friday Funnies[/b]

[url=http://www.zerohedge.com/news/italys-version-austerity-3-months-vacation]Italy's Version Of Austerity: 3 Months Of Vacation[/url]

(Italy is not the only chronically-overspending EU nation busily making a mockery of "austerity" - [url=http://www.zerohedge.com/news/guest-post-five-things-i%E2%80%99ve-learned-ground-portugal]here is a boots-on-the-ground report from Portugal[/url].)

[url=http://www.zerohedge.com/news/daily-show-correspondents-explain-economy]The Daily Show Correspondents Explain The Economy[/url]
[quote]Just over a month ago, the intrepid correspondents from The Daily Show set out on a mission to educate the US public on what exactly 'The Economy' is all about. In their inimitable style they chose five topics to summarise such a broad subject: Banks; Wall Street; Recessions & Depressions; Trickle-Down Economics; and Economists. The challenge as always is to guess where the satire ends and the truth begins as so much of the following five clips is scarily close to the truth.[/quote]

And we only *wish* this "Let's see if we can come up with an even bigger jumble of bailout acronyms that the US Fed" list of current Eurozone "funding mechanisms and entities" were a joke:

[url=www.zerohedge.com/news/dummies-guide-europes-ever-increasing-jumble-acronyms]Dummies Guide To Europe's Ever-Increasing Jumble Of Acronyms[/url]

A couple of the better reader replies to the above:
[quote][i]Sandmann
Sandmann's picture
[/i]
Don't know why you bother. This is called dancing on the volcano. European Elites are famed for their angels-on-pinheads sophistry to disguise impotence. We have a leaderless rudderless vessel bouncing off the rocks - if you want to read the script go to Friedrich Duerrenmatt and read Der Tunnel

[url]http://en.wikipedia.org/wiki/The_Tunnel_%28short_story%29[/url]

[url]http://www.amazon.com/Die-Panne-Der-Tunnel-Durrenmatt/dp/B006U1UYX6[/url]

[i]
Thu, 07/12/2012 - 12:53 | 2610268 TWSceptic
TWSceptic's picture
[/i]
"rescue programs" typical for governments. One fail after the other, just keep repeating. I got a rescue program: ETFPS (End The Fvcking Ponzi Scheme).[/quote]

[b]Friday Funnies, Bastille Day Edition:[/b]

[url=http://dilbert.com/strips/comic/2012-07-14/]Dilbert explains JP Morgan's business model[/url]

Dilbert [url=http://dilbert.com/strips/comic/2012-07-10/]explains[/url] the [url=http://dilbert.com/strips/comic/2012-07-11/]social-media[/url] [url=http://dilbert.com/strips/comic/2012-07-12/]business[/url] [url=http://dilbert.com/strips/comic/2012-07-13/]model[/url] (This is a 4-parter, starting with the leftmost link).

I've been waiting for this to finally be published.

[url]http://www.cbsnews.com/8301-505123_162-57474742/spain-banks-owe-more-than-bailout-loan-total/[/url]

[QUOTE](Money Watch) Spain's banks have at least $191 billion loans on their books that are at high risk of not being repaid, the Bank of Spain reported today. That is $69 billion more than the total bailout loan offered to the banks by the EU last month -- and with Spain's economy in a recession and an unemployment rate of more than 23 percent, the number of bad loans is more likely to climb than fall. Spain is supposed to sign an agreement with the European Union to secure $122 billion of bailout funds for its struggling banks Friday.

Bond markets reacted strongly to this news. In mid-day trading interest rates on the 10-year Spanish bond were just below the critical 7 percent level. Shorter term bonds also hit dangerous highs. The 5 year was at 6.3 percent and the 2-year was just below 5 percent.[/QUOTE]

They are still in denial. I expect them to increase this figure by about $100 billion. Their economy is still stagnant, more people will default on loans, the banks are still overleveraged. Sometimes it is best to throw out the bathwater and start fresh.

DarJones

[QUOTE=Fusion_power;305110]Sometimes it is best to throw out the bathwater and start fresh.[/QUOTE]With or without the babies?

On Barry's site, blogger "George Washington" just posted a concise list of recent bank fraud - I do believe even a cursory glance at the list answers the titular query in the affirmative:

[url=www.ritholtz.com/blog/2012/07/are-big-banks-criminal-enterprises/]Are Big Banks Criminal Enterprises?[/url]

One reader replies:
[quote]There was not anything new in the list. The real problem is that government has done nothing about all this fraud and malfeasance. If there are no prosecutions, then there is no risk in continuing to do these same things. Until we get an administration that wants to put another Bill Black in, and wants to support him, everything coming out of the financial system is suspect.

Instead, though, what we get is bailouts for the big banks and Dodd-Frank bill that punishes the community banks who were not much involved, if involved at all, in all the fraud and unethical conduct. We are punishing the wrong people.[/quote]

[b]Friday Funnies:[/b]

[url=http://www.thedailyshow.com/full-episodes/wed-july-18-2012-sigourney-weaver]The Daily Show Explains the Libor Scandal[/url]

Paul (xilman) will enjoy the "Never Trust anything..." bit. I notice that last night's "Wunch of bankers" episode is titled [url=http://www.thedailyshow.com/watch/wed-july-18-2012/mystery-finance-theater-2012]Mystery Finance Theater 2012[/url] - I may have to sue TDS for trademark impingement, or something.

Ernst: What is your take on Bain Capital, Romney and his refusal to release additional tax records?

[QUOTE=Xyzzy;305300]Ernst: What is your take on Bain Capital, Romney and his refusal to release additional tax records?[/QUOTE]

I expect he wouldn't be refusing-to-release so doggedly unless he realized that "if I release these, it's bye-bye presidency." Not necessarily because of illegalities, mind you, but just the "this guy would be the biggest tax dodger in the White House since, well, ever" rap his Cayman-Islands bank accounts and such point to.

Much as it bugs me, I find myself in agreement with Paul Krugman on this. Mr. K - that's short for Keynesian Klown - has one of his rare moments when he gets away from innumerate money-printing dogma and "more debt is the solution for a crisis caused by too much debt" insanity, resulting in an interesting Op-Ed on the differences between the career arcs of Romney the Elder and Romney the Younger:

[url=www.nytimes.com/2012/07/09/opinion/krugman-mitts-gray-areas.html?ref=opinion]Mitt’s Gray Areas[/url]: [i]The contrast between George Romney and his son Mitt — a contrast both in their business careers and in their willingness to come clean about their financial affairs — dramatically illustrates how America has changed. [/i]
[quote]What did George Romney do for a living? The answer was straightforward: he ran an auto company, American Motors. And he ran it very well indeed: at a time when the Big Three were still fixated on big cars and ignoring the rising tide of imports, Romney shifted to a highly successful focus on compacts that restored the company’s fortunes, not to mention that it saved the jobs of many American workers.

It also made him personally rich. We know this because during his run for president, he released not one, not two, but 12 years’ worth of tax returns, explaining that any one year might just be a fluke. From those returns we learn that in his best year, 1960, he made more than $660,000 — the equivalent, adjusted for inflation, of around $5 million today.

Those returns also reveal that he paid a lot of taxes — 36 percent of his income in 1960, 37 percent over the whole period. This was in part because, as one report at the time put it, he “seldom took advantage of loopholes to escape his tax obligations.” But it was also because taxes on the rich were much higher in the ’50s and ’60s than they are now. In fact, once you include the indirect effects of taxes on corporate profits, taxes on the very rich were about twice current levels.

Now fast-forward to Romney the Younger, who made even more money during his business career at Bain Capital. Unlike his father, however, Mr. Romney didn’t get rich by producing things people wanted to buy; he made his fortune through financial engineering that seems in many cases to have left workers worse off, and in some cases driven companies into bankruptcy.

And there’s another contrast: George Romney was open and forthcoming about what he did with his wealth, but Mitt Romney has largely kept his finances secret. He did, grudgingly, release one year’s tax return plus an estimate for the next year, showing that he paid a startlingly low tax rate. But as the Vanity Fair report points out, we’re still very much in the dark about his investments, some of which seem very mysterious.

Put it this way: Has there ever before been a major presidential candidate who had a multimillion-dollar Swiss bank account, plus tens of millions invested in the Cayman Islands, famed as a tax haven?

And then there’s his Individual Retirement Account. I.R.A.’s are supposed to be a tax-advantaged vehicle for middle-class savers, with annual contributions limited to a few thousand dollars a year. Yet somehow Mr. Romney ended up with an account worth between $20 million and $101 million. [/quote]
Now, lest you think that PK and I are now best buddies, I must say it's rather funny to see a proponent of relentless economic and monetary "financial engineering" accusing Mitt of the wrongness of making one`s fortune in a close-kin field ... especially because so much Wall Street-style financial engineering is enabled by government, if not directly caused by it (e.g. Treasury markets).

After another round of "government-sponsored delusional hope and massive lying", Spanish bond yields in the past week [url=http://globaleconomicanalysis.blogspot.com/2012/07/full-spanish-bailout-coming-up-yield-on.html]have rocketed[/url] back into "wildly unaffordable" territory ... and even the [url=http://cnnibusiness.files.wordpress.com/2012/07/doyle.pdf]crooked IMF[/url] is talking openly about [url=http://globaleconomicanalysis.blogspot.com/2012/07/imf-seeks-to-halt-aid-to-greece.html]cutting their losses[/url] on Greece come September.

And speaking of "government-sponsored delusional hope and massive lying"...

[url=www.reuters.com/article/2012/07/23/us-fed-idUSBRE86M01E20120723?feedType=RSS&feedName=domesticNews]Fed official highlights benefits of flexible QE: FT[/url]: [i](Reuters) - An open-ended round of quantitative easing that could be adjusted to suit economic conditions should be considered if the Fed launches a fresh round of monetary stimulus, a top policy official in the Federal Reserve said in an interview with the Financial Times.[/i]
[quote]There is "pretty significant" downside risks to the U.S. economy from the euro zone crisis, John Williams, president of the Federal Reserve Bank of San Francisco, said in an interview with the Financial Times on Monday.[/quote]
"Not that we at the world's central banks had anything to with these multiple interlocking debt crises, mind you ... you in the back! What is that crack you just made about 'encouraging debt bubbles?' How dare you question the omniscience of the mighty [strike]Oz[/strike] Fed?"
[quote]"The main benefit from my point of view is it will get the markets to stop focusing on the terminal date and also focusing on, ‘Oh, are they going to do QE3?'" he is quoted as saying.[/quote]
Because it's not about the actual economy - you know, the thing that puts food on the table - but about keeping the Mighty Stock Markets fixated on their next central-banker-supplied heroin fix.
[quote]If the Fed launched another round of quantitative easing, Williams said that buying mortgage-backed securities, rather than Treasuries, would be more advantageous.

"There's a lot more you can buy without interfering with market function and you maybe get a little more bang for the buck," he said.[/quote]
Liar - the [b]whole point[/b] of such bank subsidies and transfers of toxic debt from private to public balance sheets is interfering with market function - just in a way the oh-so-wise central planners deem desirable.
[quote]He said the Bank of England's "funding for lending" scheme, which will provide cheap funding for British banks that increase their lending to households and businesses, would not work in the United States.[/quote]
Right - because here in the U.S. the fed gave the banksters trillions without even attaching any requirements to "increase lending", and they still weren't able/willing to do so in any meaningful way. And of course we have the usual silence when a Keynesian Klown tries to contemplate the sacrilegious concept of "lack of loan demand".
[quote]Williams is regarded as close to the center of gravity on the rate-setting Federal Open Market Committee, of which he is a voting member this year. The FOMC will conclude its next meeting on August 1.[/quote]
Williams is regarded by me as a typical pompous fool of a Keynesian central-planning addict. The man probably hasn't worked even 1 day at a real job since entering college to get that worse-than-useless economics degree. (Probably multiple useless degrees in his case.)

[QUOTE=literka;292868]Let me write few facts of my fantasy. It was four months ago, when everybody, even educated people were writing about collapse of euro. Not only that value will decrease, but that it will stop to exist. I was the only one person, who wrote that euro will appreciate with respect to a dollar (euro was 1.19 then).[/quote]
[url=http://finance.yahoo.com/q/bc?s=FXE]Whoops[/url].

[quote]The same was about Greece. I wrote against everybody that there would not be a default. These are facts. You may write that I lack education, I don't care about it, but you cannot deny facts, unless you don't know that Greece still exists.[/QUOTE]
This will play out the same way your Euro prediction did - lying politicians and crooked central bankers provide a few months of false hope, then reality finally asserts itself.