A "Flood" of new oil..........

[don]

Fighting to the Last Bonar

by MIKE WHITNEY

“The Fed’s ‘need’ to take on an even more active role as foreigners further slow the purchases of our paper is to put the pedal to the metal on the currency debasement race now being run in the developed world — a race which is speeding us all toward the end of the present currency regime.” Stephanie Pomboy, MacroMavens

“No matter what our Western counterparts tell us, we can see what’s going on. NATO is blatantly building up its forces in Eastern Europe, including the Black Sea and the Baltic Sea areas. Its operational and combat training activities are gaining in scale.” Russian President Vladimir Putin

If there was a way the United States could achieve its long-term strategic objectives and, at the same time, avoid a war with Russia, it would so. Unfortunately, that is not an option, which is why there’s going to be a clash between the two nuclear-armed adversaries sometime in the near future.

Let me explain: The Obama administration is trying to rebalance US policy in a way that shifts the focus of attention from the Middle East to Asia, which is expected to be the fastest growing region in the coming century. This policy-change is called the “pivot” to Asia. In order to benefit from Asia’s surge of growth, the US plans to beef up its presence on the continent, expand its military bases, strengthen bilateral alliances and trade agreements, and assume the role of regional security kingpin. The not-so-secret purpose of the policy is China “containment”, that is, Washington wants to preserve its position as the world’s only superpower by controlling China’s explosive growth. (The US wants a weak, divided China that will do what it’s told.)

In order to achieve its goals in Asia, the US needs to push NATO further eastward, tighten its encirclement of Russia, and control the flow of oil and gas from east to west. These are the necessary preconditions for establishing US hegemonic rule over the continent. And this is why the Obama administration is so invested in Kiev’s blundering junta-government; it’s because Washington needs Poroshenko’s neo Nazi shock troops to draw Russia into a conflagration in Ukraine that will drain its resources, discredit Putin in the eyes of his EU trading partners, and create the pretext for deploying NATO to Russia’s western border.

The idea that Obama’s proxy army in Ukraine is defending the country’s sovereignty is pure bunkum. What’s going on below the surface is the US is trying to stave off irreversible economic decline and an ever-shrinking share of global GDP through military force. What we’re seeing in Ukraine today, is a 21st century version of the Great Game implemented by political fantasists and Koolaid drinkers who think they can turn the clock back to the post WW2 heyday of the US Empire when the world was America’s oyster. Thankfully, that period is over.

Keep in mind, the glorious US military has spent the last 13 years fighting sheep herders in flip-flops in Afghanistan in a conflict that, at best, could be characterized as a stalemate. And now the White House wants to take on Russia?

Can you appreciate the insanity of the policy?

This is why Secretary of Defense Chuck Hagel was sacked last week, because he wasn’t sufficiently eager to pursue this madcap policy of escalating the wars in Afghanistan, Iraq, Syria and Ukraine. Everyone knows it’s true, the administration hasn’t even tried to deny it. They’d rather stick with foam-at-the-mouth buffoons, like Susan Rice and Samantha Powers, then a decorated veteran who has more credibility and intelligence in his little finger than Obama’s whole National Security team put together.

So now Obama is completely surrounded by rabid warmongering imbeciles, all of whom ascribe to the same fairytale that the US is going to dust-off Russia, remove Assad, redraw the map of the Middle East, control the flow of gas and oil from the ME to markets in the EU, and establish myriad beachheads across Asia where they can keep a tight grip on China’s growth.

Tell me, dear reader, doesn’t that strike you as a bit improbable?

But, of course, the Obama claque think it’s all within their grasp, because, well, because that’s what they’ve been told to think, and because that’s what the US has to do if it wants to maintain its exalted position as the world’s lone superpower when its economic significance in the world is steadily declining. You see, here’s the thing: The exceptional nation is becoming more unexceptional all the time, and that’s what has the political class worried, because they see the handwriting on the wall, and the writing says, “Enjoy it while it lasts, buddy, cuz you ain’t gonna be numero uno much longer.”

And the US has allies in this wacky crusade too, notably Israel and Saudi Arabia. The Saudis have been particularly helpful lately by flooding the market with oil to push down prices and crush the Russian economy. (On Friday, Benchmark crude oil prices plummeted to a four-year low, with Brent crude sinking to $69.11 a barrel.) The Obama administration is using the classic one-two punch of economic sanctions and plunging oil revenues to bully Moscow into withdrawing from Crimea so Washington can move its nuclear arsenal to within spitting distance of Moscow.

Here’s a bit of background:

“Think about how the Obama administration sees the state of the world. It wants Tehran to come to heel over its nuclear programme. It wants Vladimir Putin to back off in eastern Ukraine. But after recent experiences in Iraq and Afghanistan, the White House has no desire to put American boots on the ground. Instead, with the help of its Saudi ally, Washington is trying to drive down the oil price by flooding an already weak market with crude. As the Russians and the Iranians are heavily dependent on oil exports, the assumption is that they will become easier to deal with.

John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.” (Stakes are high as US plays the oil card against Iran and Russia, Larry Eliot, Guardian)

And here’s more:

“Less than a week after the Minsk Protocol was signed, Kerry made a little-noted trip to Jeddah to see King Abdullah at his summer residence. When it was reported at all, this was put across as part of Kerry’s campaign to secure Arab support in the fight against the Islamic State.

Stop right there. That is not all there was to the visit, my trustworthy sources tell me. The other half of the visit had to do with Washington’s unabated desire to ruin the Russian economy. To do this, Kerry told the Saudis 1) to raise production and 2) to cut its crude price. Keep in mind these pertinent numbers: The Saudis produce a barrel of oil for less than $30 as break-even in the national budget; the Russians need $105.

Shortly after Kerry’s visit, the Saudis began increasing production, sure enough — by more than 100,000 barrels daily during the rest of September, more apparently to come…

Think about this. Winter is coming, there are serious production outages now in Iraq, Nigeria, Venezuela and Libya, other OPEC members are screaming for relief, and the Saudis make back-to-back moves certain to push falling prices still lower? You do the math, with Kerry’s unreported itinerary in mind, and to help you along I offer this from an extremely well-positioned source in the commodities markets:

“There are very big hands pushing oil into global supply now,” this source wrote in an e-mail note the other day.” (What Really Happened in Beijing: Putin, Obama, Xi And The Back Story The Media Won’t Tell You, Patrick L. Smith, Salon)

The Obama team managed to persuade our good buddies the Saudis to flood the market with oil, drive down prices, and put the Russian economy into a nosedive. At the same time, the US has intensified its economic sanctions, done everything in its power to sabotage Gazprom’s South Stream pipeline (that would bypass Ukraine and deliver natural gas to Europe via a southern route), and cajole the Ukrainian parliament into auctioning off 49 percent of the leasing rights and underground storage facilities to privately-owned foreign corporations.

How do you like that? So the US has launched a full-blown economic war against Russia that’s been completely omitted in the western media. Are you surprised?

Washington is determined to block further Russo-EU economic integration in order to collapse the Russian economy and put foreign capital in control of regional energy distribution. It’s all about the pivot. The big money guys figure the US has to pivot to Asia to be a player in the next century. All of these unprovoked attacks on Moscow are based on that one lunatic strategy.

But aren’t people in the EU going to be angry when they can’t get the energy they need (at the prices they want) to run their businesses and heat their homes?

Washington doesn’t think so. Washington thinks its allies in the Middle East can meet the EU’s energy needs without any difficulty. Check out this clip from an article by analyst F. William Engdahl:

“…details are emerging of a new secret and quite stupid Saudi-US deal on Syria and the so-called IS. It involves oil and gas control of the entire region and the weakening of Russia and Iran by Saudi Arabian flooding the world market with cheap oil. ….

On September 11, US Secretary of State Kerry met Saudi King Abdullah at his palace on the Red Sea. The King invited former head of Saudi intelligence, Prince Bandar to attend. There a deal was hammered out which saw Saudi support for the Syrian airstrikes against ISIS on condition Washington backed the Saudis in toppling Assad, a firm ally of Russia and de facto of Iran and an obstacle to Saudi and UAE plans to control the emerging EU natural gas market and destroy Russia’s lucrative EU trade. A report in the Wall Street Journal noted there had been “months of behind-the-scenes work by the US and Arab leaders, who agreed on the need to cooperate against Islamic State, but not how or when.

The process gave the Saudis leverage to extract a fresh US commitment to beef up training for rebels fighting Mr. Assad, whose demise the Saudis still see as a top priority.”
(The Secret Stupid Saudi-US Deal on Syria, F. William Engdahl, BFP)

So the wars in Ukraine and Syria are not really separate conflicts at all. They’re both part of the same global resource war the US has been prosecuting for the last decade and a half. The US plans to cut off the flow of Russian gas and replace it with gas from Qatar which will flow through Syria and onto the EU market after Assad is toppled.

Here’s what’s going on: Syria’s troubles began shortly after it announced that it was going to be part of an “Islamic pipeline” that would transfer natural gas from the South Pars gas field off the coast of Iran across Iraq and Syria, eventually connecting to Greece and the lucrative EU market. According to author Dmitri Minin:

“A gas pipeline from Iran would be highly profitable for Syria. Europe would gain from it as well, but clearly someone in the West didn’t like it. The West’s gas-supplying allies in the Persian Gulf weren’t happy with it either, nor was would-be no. 1 gas transporter Turkey, as it would then be out of the game.” (The Geopolitics of Gas and the Syrian Crisis: Syrian “Opposition” Armed to Thwart Construction of Iran-Iraq-Syria Gas Pipeline, Dmitri Minin, Global Research)

Two months after Assad signed the deal with Iraq and Iran, the rebellion broke out in Syria. That’s quite a coincidence, don’t you think? Funny how frequently those kinds of things happen when foreign leaders don’t march to Washington’s tune.

Here’s more from Minin:

“Qatar is doing all it can to thwart the construction of the pipeline, including arming the opposition fighters in Syria, many of whom come from Saudi Arabia, Pakistan and Libya…

The Arabic newspaper Al-Akhbar cites information according to which there is a plan approved by the U.S. government to create a new pipeline for transporting gas from Qatar to Europe involving Turkey and Israel…

This new pipeline is to begin in Qatar, cross Saudi territory and then the territory of Jordan, thus bypassing Shiite Iraq, and reach Syria. Near Homs the pipeline is to branch in three directions: to Latakia, Tripoli in northern Lebanon, and Turkey. Homs, where there are also hydrocarbon reserves, is the project’s main crossroads, and it is not surprising… that the fiercest fighting is taking place. Here the fate of Syria is being decided. The parts of Syrian territory where detachments of rebels are operating with the support of the U.S., Qatar and Turkey, that is, the north, Homs and the environs of Damascus, coincide with the route that the pipeline is to follow to Turkey and Tripoli, Lebanon. A comparison of a map of armed hostilities and a map of the Qatar pipeline route indicates a link between armed activities and the desire to control these Syrian territories. Qatar’s allies are trying to accomplish three goals: to break Russia’s gas monopoly in Europe; to free Turkey from its dependence on Iranian gas; and to give Israel the chance to export its gas to Europe by land at less cost.”

How do you like that; another coincidence: “The fiercest fighting (in Syria) is taking place” where there’s massive “hydrocarbon reserves” and along the planned pipeline route.

So the conflict in Syria isn’t really about terrorism at all. It’s about natural gas, competing pipelines and access to markets in the EU. It’s about money and power. The whole ISIS-thing is a big hoax to conceal what’s really going on, which is a global war for resources, more blood for oil.
But how does the US benefit from all of this, after all, won’t the gas revenues go to Qatar and the transit countries rather than the US?

Yep, they sure will. But the gas will also be denominated in dollars which will shore up demand for USDs thus perpetuating the petrodollar recycling system which creates a vast market for US debt and which helps to keep US stocks and bonds in the nosebleed section. And that’s what this is all about, preserving dollar supremacy by forcing nations to hold excessive amounts of USDs to use in their energy transactions and to service their dollar-denominated debts.

As long as Washington can control the world’s energy supplies and force the world to trade in dollars, it can spend well in excess of what it produces and not be held to account. It’s like having a credit card you never have to pay off.

That’s a racket Uncle Sam is prepared to defend with everything he’s got, even nukes.

Mike Whitney, Asia Times

[don]

Re: Fighting to the Last Bonar

by Immanuel Wallerstein

"U.S. Standing in the Middle East"

On November 27, The New York Times headlined an article "Conflicting Policies on Syria and Islamic State Erode U.S. Standing in Mideast." But this is not new. U.S. standing in the Middle East (and elsewhere) has been eroding for almost 50 years. The reality is far larger than the immediate dispute between anti-Assad forces in Syria and their supporters elsewhere on the one hand and the Obama regime in the United States on the other.

The fact is that the United States has become in the expression derived from onetime nautical practice a "loose cannon," that is, a power whose actions are unpredictable, uncontrollable, and dangerous to itself and to others. As a result, it is trusted by almost no-one, even when many countries and political groups call upon it for assistance in specific ways in the short run.

How is it that the erstwhile unquestioned hegemonic power of the world-system, and still the strongest military power by far, has come to this sorry state? It is reviled or at least sternly reproached not only by the world left but by the world right and even such centrist forces as remain in this increasingly polarized world. The decline of the United States is not due to errors in policy but is structural - that is, not really subject to reversal.

It is perhaps useful to trace the successive moments of this erosion of effective power. The United States was at the height of its power in the period 1945-1970, when it got its way on the world scene 95% of the time on 95% of the issues, which is my definition of true hegemony. This hegemonic position was sustained by the collusion of the Soviet Union, which had a tacit deal with the United States of a division of zones of influence, not to be threatened by any military confrontation between the two. This was called the cold war, with an emphasis on the word "cold" and by their possession of nuclear weapons, guarantee of "mutual assured destruction."

The point of the cold war was not to subdue the presumed ideological enemy but to keep a check on one's own satellites. This cozy arrangement was first threatened by the unwillingness of movements in what was then called the "Third World" to suffer the negatives of this status quo. The Chinese Communist Party defied Stalin's injunction to compromise with the Kuomintang and instead marched on Shanghai and proclaimed the People's Republic. The Viet Minh defied the Geneva accords and insisted on marching on Saigon to unite the country under their rule. The Algerian Front de Libération Nationale in Algeria defied the French Communist Party's injunction to give priority to the class struggle in France and launched its struggle for independence. And the Cuban guerillas that overthrew the Batista dictatorship forced the Soviet Union to help them defend again U.S. invasion by taking over the label of Communist Party from the group that had colluded with Batista.

The defeat of the United States in Vietnam was the result both of the war’s enormous drain on the U.S. Treasury and by the growing internal opposition to the war by middle-class youth draftees and their families, which bequeathed a permanent constraint on future U.S. military action in the so-called Vietnam syndrome.

The world-revolution of 1968 saw a worldwide rebellion not only against U.S. hegemony but against Soviet collusion with the United States. It also saw a rejection of the Old Left parties (Communist parties, Social-Democratic parties, national liberation movements) on the grounds that, despite coming to power, they had not changed the world as they had promised and had become part of the problem not part of the solution.

The United States under presidents from Richard Nixon to Bill Clinton (and including Ronald Reagan) sought to slow down U.S. decline by a triple policy. It invited its closest allies to change their status from satellite to that of partner, with the proviso that they not drift too far from U.S. policies. It shifted its focus in the world-economy from developmentalism to a demand for export-oriented production in the global South and the neoliberal injunctions of the Washington Consensus. And it sought to curb the creation of further nuclear powers beyond the five permanent members of the Security Council by imposing on all other countries an ending of their nuclear armament projects, a treaty that was not signed by and ignored by Israel, India, Pakistan, and South Africa.

These U.S. efforts were partially successful. They did slow down but not reverse U.S. decline. When in the late 1980s the Soviet Union began to collapse, the United States was in fact dismayed. The cold war was not meant to be won but to continue indefinitely. The most immediate consequence of the collapse of the Soviet Union was the invasion of Kuwait by Saddam Hussein's Iraq. The Soviet Union was no longer there to restrain Iraq in the interest of U.S.-Soviet arrangements.

And while the United States won the Gulf war, it demonstrated further weakness by the fact that it could not finance its own role but was dependent for 90% of its costs on four other countries - Kuwait, Saudi Arabia, Germany, and Japan. The decision by President George H.W. Bush not to march on Baghdad but content himself with the restoration of Kuwaiti sovereignty was no doubt a wise judgment but was seen by many in the United States as a humiliation in that Saddam Hussein remained in power.

The next turning-point was with the coming to power of President George W. Bush and the coterie of neo-con interventionists that surrounded him. This group seized upon the September 11 attack by al-Qaeda to justify an invasion of Iraq in 2003 to overthrow Saddam Hussein. This was seen by the interventionists as a mode of restoring waning U.S. hegemony in the world-system. Instead, it badly backfired in two ways. The United States for the very first time lost a vote in the U.N. Security Council and Iraqi resistance to U.S. presence was vaster and more persistent than anticipated. In sum, the invasion transformed a slow decline into a precipitate decline, which brings us to the efforts of the Obama regime to deal with this decline.

The reason neither President Obama nor any future U.S. president will be able to reverse this is because the United States has been unwilling to accept this new reality and adjust to it. The United States is still striving to restore its hegemonic role. Pursuing this impossible task leads it to pursue the so-called "conflicting policies" in the Middle East and elsewhere. Like a loose cannon, it constantly shifts position seeking to stabilize the world geopolitical ship. U.S. public opinion is torn between the glories of being the "leader" and the costs of trying to be the leader. Public opinion zigzags constantly.

As other countries and movements regard this spectacle, they place no trust in U.S. policies and therefore pursue each their own priorities. The problem for the world is that loose cannons result in destruction, both of the perpetrators and the rest of the world. And this increases the role that fear plays in the actions of everyone else, augmenting the dangers to world survival.

[photon555]

Re: Fighting to the Last Bonar

Thanks for posting these two interesting articles, Don. They both indicate dangerous days ahead, I believe. I see a structural link between this thread and the one on 5th gen war. I believe the 5GW meme is deluding the US interventionists into believing they can continue to exercise hegemonic control without paying the costs of former conventional type operations. Japan attacked Pearl Harbor because it needed access to oil, which it was denied by the US embargo. What will Russia's reaction to the US economic sanctions be if it sees no way out of an economic death spiral? Even worse, what will happen if the US interventionists believe they can use their 5GW "magic" to remove stubborn opponents like Putin? Or will Putin decide its time for a few Saudi oil facilities to have an "accident."

[GRG55]

Re: A "Flood" of new oil..........

Oh yes, it's for East Ukraine coal and gas fields that some Americans are interested in- albet this represents only 0.000001% of Americans.

Lower the price of oil in hope that Russia will give up the gas fields so who and who can earn a couple tens of million bucks.

Of course, it remains to be seen whether air raids alone can solve the problems in Syria. But judging from how it worked out in Afghanistan, the chance of succeeding is very very low.

It's no wonder that Hagel resigned!

I recall hearing much the same thing about why the USA invaded Iraq..."it's all about the oil".

So, how much of Iraq's current oil assets are under the control of American companies - as opposed to European companies like BP, Royal Dutch Shell and Total, Russian companies like Lukoil and Gazprom and Chinese companies like CNPC, PetroChina and CNOOC?

The prize in Iraq was magnitudes greater than anything in Ukraine.

[GRG55]

Re: Fighting to the Last Bonar

by MIKE WHITNEY

...The Arabic newspaper Al-Akhbar cites information according to which there is a plan approved by the U.S. government to create a new pipeline for transporting gas from Qatar to Europe involving Turkey and Israel…

This new pipeline is to begin in Qatar, cross Saudi territory and then the territory of Jordan, thus bypassing Shiite Iraq, and reach Syria. Near Homs the pipeline is to branch in three directions: to Latakia, Tripoli in northern Lebanon, and Turkey. Homs, where there are also hydrocarbon reserves, is the project’s main crossroads, and it is not surprising… that the fiercest fighting is taking place. Here the fate of Syria is being decided. The parts of Syrian territory where detachments of rebels are operating with the support of the U.S., Qatar and Turkey, that is, the north, Homs and the environs of Damascus, coincide with the route that the pipeline is to follow to Turkey and Tripoli, Lebanon. A comparison of a map of armed hostilities and a map of the Qatar pipeline route indicates a link between armed activities and the desire to control these Syrian territories. Qatar’s allies are trying to accomplish three goals: to break Russia’s gas monopoly in Europe; to free Turkey from its dependence on Iranian gas; and to give Israel the chance to export its gas to Europe by land at less cost.”...

Mike Whitney, Asia Times

A Qatari gas pipeline through Saudi Arabia? I'd be willing to wager that'll never happen. The Qatari and Saudi Ruling Families have a very strained relationship that is long standing. And in the Arab world grievances last for centuries, as the post-Saddam slaughter of Iraqi by Iraqi (but one example) amply demonstrates.

Here is but one recent episode:

Three Gulf Arab states recall envoys in rift with Qatar

RIYADH/DOHAWed Mar 5, 2014 2:03pm EST

(Reuters) - Saudi Arabia, the United Arab Emirates and Bahrain withdrew their ambassadors from Qatar on Wednesday in an unprecedented public split between Gulf Arab allies who have fallen out over the role of Islamists in a region in turmoil...

...Saudi Arabia and the UAE are fuming especially over Qatar's support for the Muslim Brotherhood, an Islamist movement whose political ideology challenges the principle of dynastic rule.

They also resent the way Doha has sheltered influential Brotherhood cleric Yusuf Qaradawi and given him regular airtime on its pan-Arab satellite television channel Al Jazeera...

...Qatar suggested the move stemmed from displeasure over its actions beyond the Gulf, for example in Syria and Egypt, where it has backed groups opposed to the Saudi government...

In the Gulf monarchies "the government" and the Ruling Family are one and the same. Being "opposed to the Saudi government" is exactly the same as being opposed to the House of Saud.

[touchring]

Re: A "Flood" of new oil..........

I recall hearing much the same thing about why the USA invaded Iraq..."it's all about the oil".

So, how much of Iraq's current oil assets are under the control of American companies - as opposed to European companies like BP, Royal Dutch Shell and Total, Russian companies like Lukoil and Gazprom and Chinese companies like CNPC, PetroChina and CNOOC?

The prize in Iraq was magnitudes greater than anything in Ukraine.

For Ukraine, the gas and coal assets is not even worth the attention of Sir Buffett considering the risk and pittance, let alone America, but for politicians that earn only a couple hundred grand a year, ten or twenty million dollars in director fees is a good enough reason to commit America into a new war.

It's crazy to think that you can buy the service of the most powerful military in the world for a couple tens of millions.

[GRG55]

Re: A "Flood" of new oil..........

For Ukraine, the gas and coal assets is not even worth the attention of Sir Buffett considering the risk and pittance, let alone America, but for politicians that earn only a couple hundred grand a year, ten or twenty million dollars in director fees is a good enough reason to commit America into a new war.

It's crazy to think that you can buy the service of the most powerful military in the world for a couple tens of millions.

I agree with your latter comment. Which may be why I disagree with your former comment.

[touchring]

Re: A "Flood" of new oil..........

I agree with your latter comment. Which may be why I disagree with your former comment.

I must say I'm just speculating from a layman perspective, but your call was a good one with industry insight.

Do you think it's still a good to scoop some good energy stocks such as SU if oil price falls to $60? Or would this fall be a medium term trend, so stay away for the time being.

[GRG55]

Re: A "Flood" of new oil..........

I must say I'm just speculating from a layman perspective, but your call was a good one with industry insight.

Do you think it's still a good to scoop some good energy stocks such as SU if oil price falls to $60? Or would this fall be a medium term trend, so stay away for the time being.

SU will be a good buy if there is a really emotional flush out..but it is at present a more risky bet than some others imo due to its high exposure to oil sands. In a PCO world it will be a core holding with its long reserve life. But timing is everything, and the time to buy will be when there is blood in the streets...and we seem to have all the right precursors for the probability of that outcome to be elevated now.

[TBBNF]

Re: A "Flood" of new oil..........

Some interesting stats on how big the oil 'glut' really is compared to historical data and supposed economic growth.
The Oil-Drenched Black Swan, Part 1 (December 1, 2014)
http://www.oftwominds.com/blogdec14/...swan12-14.html

[vt]

Re: A "Flood" of new oil..........

Part 2:

http://www.oftwominds.com/blog.html

[EJ]

Re: A "Flood" of new oil..........

Some interesting stats on how big the oil 'glut' really is compared to historical data and supposed economic growth.
The Oil-Drenched Black Swan, Part 1 (December 1, 2014)
http://www.oftwominds.com/blogdec14/...swan12-14.html

All due respect to Smith but his analysis is incorrect.

First of all oil price spikes are coincident with recessions and contribute to them but do not cause them. The causation is far more complex involving an interplay among:

1. The credit cycle as determined by credit demand and interest rates.
2. Inflation as determined by money supply/demand.
3. Nominal economic growth as determined by total output.
4. Real economic as determined by total output minus inflation.
5. Oil prices as determined by a combination of three primary factors: oil supply/demand, inflation, and speculation by Wall Street in the paper oil markets.

To further complicate the picture, Peak Cheap Oil starts to impact the marginal cost of production globally in 1999 and starting around 2005 Fortress Americas energy policies (deregulation and cheap credit policy) begins to ramp domestic unconventional oil production.

Also, the Fed's credit cycle management policy was complicated in 2006 - 2008 by the home mortgage credit bubble.

An oil price spike attended every recession since the early 1970s leading observers to conclude that the oil price spike caused the recession by crowding out consumer demand. Not so. Consider that last oil price spikes followed by recession.

• Q1 2004 the Fed declares success at reflating the economy out of the recession that was triggered by the collapse of the stock market bubble.
• Q1 2004 nominal GDP reaches 7.1% (!) and real GDP 4.4% while inflation rises from 1.7% Q1 2004 to 4.7% Q3 3002.
• The Fed begins to raise rates from 1% Q2 2004 to 5.2% Q3 2006.
• By Q2 2006 the Fed has cut inflation to 1.8%, nominal GDP to 4.6% and real GDP to 2.1% and holds rates pat at 5.3%.
• Oil prices have been rising throughout the Fed's reflation and the tightening dipping only modestly for six months between Mid-2005 and early 2006.
• Even as the economy slows and inflation falls, average monthly oil prices rocket from $58.20 in January 2007 to $140 June 2008.

As we warned about here in December 2007 with a forecast of a massive recession and 40% decline in the stock market in 2008, the Fed's attempt to manage inflation and economic growth collapsed the home mortgage credit bubble, crashed the markets, and produced the American Financial Crisis and resulting global recession. The oil price rise did cause gasoline prices to rise, but this only cut consumer spending by around $60B per 50 cents increase, not enough to push the economy into recession.

The PCO oil price rise complicated the Fed's job of modulating inflation and economic growth because sustained high oil prices feed into prices across the economy. Additionally complicating the Fed's job was Wall Streets speculation in the paper oil markets. It is a now generally accepted fact even in the mainstream business media that the run-up in the oil price from 2007 to mid 2008 was primarily driven by Wall Street speculation in the paper oil market.

Second, as I noted here, there is no evidence of a global recession. U.S. growth exceeded forecasts in Q1 and Q2 this year. Japan's self-inflicted recession is reversible. China's economy while growing more slowly than in the past has plenty of excess reserves accumulation fuel to run on as its trade surplus continues to grow. The euro zone while growing under well under a 1% rate is not shrinking and looks to benefit from the U.S. recovery.

Finally, the oil price is not a reliable indicator of future economic growth or contraction. Note, for example, that the oil price spike from the start of 2008 into June 2008, from $91 to $140, occurred over the first six months of the biggest recession since the 1930s.

Here's my argument: The rise from $58 to $100 was due to supply/demand economics and from $100 to $140 was due to speculation in the paper oil markets. Similarly, the recent decline from $106 to $80 was due to supply/demand economics but the decline from ~$80 to, what, $65? $60? will turn out to have been due to speculation in the paper oil markets.

Logically, if the boyz on Wall Street can spike the price of oil off a negative supply/demand imbalance from $91 to $140 during the first six months of the worst global recession 80 years why can't they jam the oil price down off a positive supply/demand imbalance from $80 to $60 just before the global economy takes off?

The conversation about the oil price drop has largely been confined to an over-supply story (excess U.S. production and Saudi production) or a under-demand ("hidden" or impending global recession) story.

I think that when this is all over we will find that the truth was more nuanced, that the oil price trend started off as over-supply and the boyz, being good at what they do, have ridden that to the nth degree. Then they'll ride it back up again.

See Unraveling the Mess at CFTC for details.

[porter]

Re: A "Flood" of new oil..........

Does all of this complexity support the "random walk hypothesis" that this really, at the end of the day, is not predictable?

[EJ]

Re: A "Flood" of new oil..........

Does all of this complexity support the "random walk hypothesis" that this really, at the end of the day, is not predictable?

Despite this complexity we were still able to accurately forecast the timing and extent of the crashes 2000 - 2002 and 2008 - 2009.

The challenge today for anyone in the crash forecasting business is that there is no boom to go bust, no 7% nominal GDP growth and 5.5% inflation for the Fed to tame with 4 full points of rate hikes in parallel with an asset bubble like we had last time. Today we have asset bubbles but without the economic growth that has in the past been conflated with asset inflations themselves. They are largely the result of asset price inflation policy and which policy was undertaken to reflate the real economy, to stimulate demand via wealth effects.

Chairman Bernanke’s Press Conference June 20, 2012

ZACH GOLDFARB. Thank you. Mitt Romney recently said that QE2 had a relatively little impact on the economy. He said that was in part because of the President’s policies, and he said that QE3 was unwarranted and could have negative effects. Do you agree that QE2 had little effect on the economy?

CHAIRMAN BERNANKE. Well, I’ll just say first that we think that both of the asset purchase programs, so-called QE1 and QE2, did have significant effects on asset prices and financial conditions.

Today we have major economies that are running on a perverse admixture of organic and inorganic growth inputs compliments of central banks, bond markets that aren't really markets because fixed income market participants have to judge the risk of underestimating the willingness of central banks to put their magical balance sheets to work to get the bond yields they want, and a global economy that is moving forward with so little momentum that the Fed might knock over just by saying the wrong thing.

That leaves us to concentrate on those long-term trends that we have confidence in, such as PCO and Fortress Americas policy, to describe a 10-year portfolio strategy without trying to time the inevitable crashes and reflations that will occur, more or less at random from a forecasting standpoint, along the way.

[vinoveri]

Re: A "Flood" of new oil..........

As we warned about here in December 2007 with a forecast of a massive recession and 40% decline in the stock market in 2008, the Fed's attempt to manage inflation and economic growth collapsed the home mortgage credit bubble, crashed the markets, and produced the American Financial Crisis and resulting global recession. The oil price rise did cause gasoline prices to rise, but this only cut consumer spending by around $60B per 50 cents increase, not enough to push the economy into recession

.

And where did this consumer money go? Consistent with your correct assumptions highlighted below, into the hands of financial speculators and market manipulators who have access to Fed or primary broker lending and (as we now know), are backstopped by the Fed as well. This is why we need reform; speculators are needed for the liquidity they provide, but when true price based on supply and demand is obscured via practices of leverage enabled skimming and market manipulation, then the market and consumers in general are ill served.

It is a now generally accepted fact even in the mainstream business media that the run-up in the oil price from 2007 to mid 2008 was primarily driven by Wall Street speculation in the paper oil market.

...
Here's my argument: The rise from $58 to $100 was due to supply/demand economics and from $100 to $140 was due to speculation in the paper oil markets. Similarly, the recent decline from $106 to $80 was due to supply/demand economics but the decline from ~$80 to, what, $65? $60? will turn out to have been due to speculation in the paper oil markets.

Logically, if the boyz on Wall Street can spike the price of oil off a negative supply/demand imbalance from $91 to $140 during the first six months of the worst global recession 80 years why can't they jam the oil price down off a positive supply/demand imbalance from $80 to $60 just before the global economy takes off?

...

I think that when this is all over we will find that the truth was more nuanced, that the oil price trend started off as over-supply and the boyz, being good at what they do, have ridden that to the nth degree. Then they'll ride it back up again.

See Unraveling the Mess at CFTC for details.

Am glad to see iTulip acknowledge the unfortunate role of destabilizing speculation in the commodity and financial markets.
This is the essence of the a point I made five years ago on this forum - that supply and demand alone did not set the price of oil; a drop from $147 to $35 per barrel in a span of 5 months reflects speculation, not supply and demand. Experts here insisted that it is the marginal price on that "last barrel" that sets the price. Of course with all the news over the last several years of collusion in the markets (e.g, Libor, aluminum, etc), we all have been enlightened to the rigging of the markets and toleration of same by regulators.

The Boyz couldn't operate w/o Fed backstops and failure of regulatory enforcement.