Boom Goes The Dynamite: The Crashing Price Of Oil Is Going To Rip The Global Economy To Shreds

Boom Goes The Dynamite - Public DomainIf you were waiting for a “black swan event” to come along and devastate the global economy, you don’t have to wait any longer.  As I write this, the price of U.S. oil is sitting at $45.76 a barrel.  It has fallen by more than 60 dollars a barrel since June.  There is only one other time in history when we have seen anything like this happen before.  That was in 2008, just prior to the worst financial crisis since the Great Depression.  But following the financial crisis of 2008, the price of oil rebounded fairly rapidly.  As you will see below, there are very strong reasons to believe that it will not happen this time.  And the longer the price of oil stays this low, the worse our problems are going to get.  At a price of less than $50 a barrel, it is just a matter of time before we see a huge wave of energy company bankruptcies, massive job losses, a junk bond crash followed by a stock market crash, and a crisis in commodity derivatives unlike anything that we have ever seen before.  So let’s hope that a very unlikely miracle happens and the price of oil rebounds substantially in the months ahead.  Because if not, the price of oil is going to absolutely rip the global economy to shreds.

What amazes me is that there are still many economic “experts” in the mainstream media that are proclaiming that the collapse in the price of oil is going to be a good thing for the U.S. economy.

The only precedent that we can compare the current crash to is the oil price collapse of 2008.  You can see both crashes on the chart below…

Price Of Oil Since 2006

If rapidly falling oil prices are good economic news, that collapse should have pushed the U.S. economy into overdrive.

But that didn’t happen, did it?  Instead, we plunged into the deepest recession that we have seen since the Great Depression.

And unless there is a miracle rebound in the price of oil now, we are going to experience something similar this time.

Already, we are seeing oil rigs shut down at a staggering pace.  The following is from Bloomberg

U.S. oil drillers laid down the most rigs in the fourth quarter since 2009. And things are about to get much worse.

The rig count fell by 93 in the three months through Dec. 26, and lost another 17 last week, Baker Hughes Inc. data show. About 200 more will be idled over the next quarter as U.S. oil explorers make good on their promises to curb spending, according to Moody’s Corp.

But that was just the beginning of the carnage.  61 more oil rigs shut down last week alone, and hundreds more are being projected to shut down in the months ahead.

For those that cannot connect the dots, that is going to translate into the loss of large numbers of good paying jobs.  Just check out what is happening in Texas

A few days ago, Helmerich & Payne, announced that it would idle 50 more drilling rigs in February, after having already idled 11 rigs. Each rig accounts for about 100 jobs. This will cut its shale drilling activities by 20%. The other two large drillers, Nabors Industries and Patterson-UTI Energy are on a similar program. All three combined are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ,” said Oilpro Managing Director Joseph Triepke.

Unfortunately, this crisis will not just be localized to states such as Texas.  There are tens of thousands of small and mid-size firms that will be affected.  The following is from a recent CNBC report

More than 20,000 small and midsize firms drive the “hydrocarbon revolution” in the U.S. that has helped the oil and gas industry thrive in recent years, and they produce more than 75 percent of the nation’s oil and gas output, according to the Manhattan Institute for Policy Research’s February 2014 Power & Growth Initiative Report. The Manhattan Institute is a conservative think tank in New York City.

A sustained decline in prices could lead to layoffs at these firms, say experts. “The energy industry has been one of the job-growth areas leading us out of the recession,” said Chad Mabry, a Houston-based analyst in the energy and natural resources research department of boutique investment bank MLV & Co. in New York City. “In 2015, that changes in this price environment,” he said. “We’re probably going to see some job losses on a fairy significant scale if this keeps up.”

If the price of oil makes a major comeback, the carnage will ultimately not be that bad.

But if it stays at this level or keeps going down for an extended period of time, it is inevitable that a whole bunch of those firms will go bankrupt and their debt will go bad.

That would mean a junk bond crash unlike anything that Wall Street has ever experienced.

And as I have written about previously, a stock market crash almost always follows a junk bond crash.

These are things that happened during the last financial crisis and that are repeating again right in front of our eyes.

Another thing that happened in 2008 that is happening again is a crash in industrial commodity prices.

At this point, industrial commodity prices have hit a 12 year low.  I am talking about industrial commodities such as copper, iron ore, steel and aluminum.  This is a huge sign that global economic activity is slowing down and that big trouble is on the way.

So what is driving this?  The following excerpt from a recent Zero Hedge article gives us a clue…

Globally there are over $9 trillion worth of borrowed US Dollars in the financial system. When you borrow in US Dollars, you are effectively SHORTING the US Dollar.

Which means that when the US Dollar rallies, your returns implode regardless of where you invested the borrowed money (another currency, stocks, oil, infrastructure projects, derivatives).

Take a look at commodities. Globally, there are over $22 TRILLION worth of derivatives trades involving commodities. ALL of these were at risk of blowing up if the US Dollar rallied.

Unfortunately, starting in mid-2014, it did in a big way.

This move in the US Dollar imploded those derivatives trades. If you want an explanation for why commodities are crashing (aside from the fact the global economy is slowing) this is it.

Once again, much of this could be avoided if the price of oil starts going back up substantially.

Unfortunately, that does not appear likely.  In fact, many of the big banks are projecting that it could go even lower

Goldman Sachs, CitiGroup, Societe General and Commerzbank are among the latest investment banks to reduce crude oil price estimates, and without production cuts, there appears to be more room for lower prices.

“We’re going to keep on going lower,” says industry analyst Brian Milne of energy manager Schneider Electric. “Even with fresher new lows, there’s still more downside.”

OPEC could stabilize global oil prices with a single announcement, but so far OPEC has refused to do this.  Many believe that the OPEC countries actually want the price of oil to fall for competitive reasons…

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want — and are achieving — further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.

The oil producing countries in the Middle East seem to be settling in for the long haul.  In fact, one prominent Saudi prince made headlines all over the world this week when he said that “I’m sure we’re never going to see $100 anymore.”

Never is a very strong word.

Could there be such a massive worldwide oil glut going on right now that the price of oil will never get that high again?

Well, without a doubt there is a huge amount of unsold oil floating around out there at the moment.

It has gotten so bad that some big trading companies are actually hiring supertankers to store large quantities of unsold crude oil at sea…

Some of the world’s largest oil traders have this week hired supertankers to store crude at sea, marking a milestone in the build-up of the global glut.

Trading firms including Vitol, Trafiguraand energy major Shell have all booked crude tankers for up to 12 months, freight brokers and shipping sources told Reuters.

They said the flurry of long-term bookings was unusual and suggested traders could use the vessels to store excess crude at sea until prices rebound, repeating a popular 2009 trading gambit when prices last crashed.

The fundamentals for the price of oil are so much worse than they were back in 2008.

We could potentially be looking at sub-$50 oil for an extended period of time.

If that is indeed the case, there will be catastrophic damage to the global economy and to the global financial system.

So hold on to your hats, because it looks like we are going to be in for quite a bumpy ride in 2015.

8 Economic Threats That We Were Not Even Talking About At The Beginning Of The Summer

In the crazy times in which we live, it helps to expect the unexpected.  Sometimes you can think that you have it all figured out and then this world can throw a real curveball at you. Very few people anticipated that we would see a massive outbreak of the West Nile Virus in Texas this year or that the Mississippi River would be in danger of drying up after experiencing historic flooding last year.  Who would have thought that we would see the worst drought in more than 50 years or that horrific wildfires would burn nearly 7 million acres of land?  This is why economic conditions are always so hard to predict.  A single “black swan event” can come along and change everything almost overnight.  Our world has become incredibly unstable, and so who really knows what the rest of 2012 will bring?  Will we see a stock market crash?  Will the hurricane season be unusually bad?  Will war erupt in the Middle East?  Will we see a major earthquake on the west coast or even a volcanic eruption?  Will the upcoming election cause an eruption of anger and frustration in America?  We don’t know the answers to those questions yet, and the truth is that we will probably see some things happen that very few of us are anticipating at this point.

This is an exciting time to be a “news junkie”, but unfortunately the vast majority of the news these days is bad.

It is almost as if a “perfect storm” is developing.  Our weather is going crazy, our financial system is on the verge of collapse, our politicians seem more insane than ever, there is evidence of social decay all around us and the drumbeats of war in the Middle East grow louder with each passing day.

As strange as 2012 has been so far, I fear that things are about to get a whole lot stranger.

Not that we haven’t had some very unanticipated events happen this year up to this point.

The following are 8 economic threats that we were not even talking about at the beginning of the summer….

#1 West Nile Virus

What is up with all of the strange disease outbreaks that we have seen so far this year?

Flesh eating disease and the bird flu have both been making global headlines this summer, but in the U.S. right now it is the West Nile Virus that is getting the most attention.

So far more than 1,100 cases of the West Nile Virus have been diagnosed in the United States and more than 41 people have died from it.

More than half of the cases so far have been in Texas, but we have also seen people come down with West Nile Virus in Mississippi, Louisiana, South Dakota, and Oklahoma.

If you live in any of those areas, you might want to do your best to avoid mosquitos for the rest of the summer.

#2 Historic Drought

This summer, the United States has experienced the worst drought that it has seen in more than 50 years.

This weather has been absolutely crippling for farmers and ranchers all over the nation.  As I wrote about the other day, about half of all corn being grown in the U.S. is currently either in “poor” or “very poor” condition.

As the drought has dragged on, many farmers and ranchers have become increasingly desperate.  In fact, one farmer has even been feeding his cows candy in an attempt to deal with rising feed prices.

Needless to say, this drought has been causing commodity prices to soar.

On Tuesday, the price of corn closed at a record $8.38 a bushel, and the price of soybeans closed at $17.30 a bushel.

#3 The Mississippi River Is Drying Up

Thanks to this drought, rivers and lakes all over the United States are drying up.  In fact, there have been reports that millions of fish have been dying because water levels have gotten so low in many areas.

Even the mighty Mississippi River has dropped to dangerously low levels.

At this point, the Mississippi is lower than most people living along the river can ever remember.  If it drops much lower, it could potentially have an absolutely devastating impact on the U.S. economy.

A recent NBC News report described what is at stake….

About $180 billion worth of goods move up and down the river on barges, 500 million tons of the basic ingredients for much of the U.S. economy, according to the American Waterways Operators, a trade group. It carries 60 percent of the nation’s grain, 22 percent of the oil and gas and 20 percent of the coal, according to American Waterways Operators. It would take 60 trailer trucks to carry the cargo in just one barge, 144 18-wheeler tankers to carry the oil and gas in one petroleum barge.

If all traffic along the Mississippi was forced to stop, it is estimated that it would cost the U.S. economy about 300 million dollars a day.

And already there have been stoppages along one 11 mile stretch of the river….

Nearly 100 boats and barges were waiting for passage Monday along an 11-mile stretch of the Mississippi River that has been closed because of low water levels, the U.S. Coast Guard said. New Orleans-based Coast Guard spokesman Ryan Tippets said the stretch of river near Greenville, Miss., has been closed intermittently since Aug. 11, when a vessel ran aground.

So what happens if the Mississippi gets even lower?

#4 Wildfires

The extreme heat has also been responsible for the horrific outbreak of wildfires that we have seen in the western United States this year.

So far in 2012, nearly 7 million acres have been burned up.

That is an area about as big as the states of Maryland and Delaware combined.

#5 The Global Elite Hoarding Gold

In the past, the global elite and the mainstream media would mock those who are hoarding gold in anticipation of a major financial collapse.

But now it is the global elite who are hoarding gold.

In a previous article, I discussed how men such as George Soros and John Paulson are investing mind-boggling amounts of money in gold right now.  The amount of money that these two individuals are investing in gold is difficult to comprehend….

There was also news last week in an SEC filing that both George Soros and John Paulson had increased their investment in SPDR Gold Trust, the world’s largest publicly traded physical gold exchange traded fund (ETF).

Mr Soros upped his stake in the ETF to 884,400 shares from 319,550 and Mr Paulson bought 4.53m shares, bringing his stake to 21.3m.

At the current price of about $156 a share, these are new investments of about $88m of Mr Soros’ cash and more than $700m from Mr Paulson’s funds. These are significant positions.

Combined, Soros and Paulson dumped more than three quarters of a billion dollars into gold during the second quarter of 2012 alone.

So what are they anticipating?

The central banks of the world have been very busy hoarding gold as well.  According to the World Gold Council, global central banks were net buyers of 157.5 metric tons of gold during the second quarter of 2012.

Over the past 20 years there has never been a time when global central banks have accumulated that much gold during a single quarter.

So just what in the world is going on?

#6 Recession In The UK

Everyone knew that Greece was in deep trouble.

And everyone knew that Italy and Spain were in deep trouble.

But it was a surprise to see the UK economy plunge deep into recession.  During the second quarter of 2012 alone, the UK economy shrunk by 0.7 percent.

At this point the British economy has contracted for three quarters in a row.

Hopefully things will not get even worse over there.

#7 Major Economic Slowdown In The United States

Considering the fact that the U.S. economy never even came close to recovering from the last recession, it is a bit disheartening to see that it looks like we are headed for another major downturn.

According to Michael Panzer of Financial Armageddon, measurements of economic activity compiled by the Federal Reserve Bank of Philadelphia indicate that the U.S. economy is rapidly heading into another recession.  If you doubt this, just check out this chart.

And for a lot more reasons why the U.S. economy is entering another recession, check out this article.

#8 Hauled Off To A Mental Institution For What You Believe

Do you ever worry that what you post on Facebook could get you involuntarily committed to a mental institution?

Well, that is exactly what happened to one military vet recently.

A former Marine named Brandon Raub was hauled off to a mental institution because of what he posted on his Facebook page.

This is how the Economic Policy Journal summarized what happened to Raub….

The muscle used to grab Brandon Raub was local Chesterfield County, VA police. Also present during the grab were agents of the FBI and of the Secret Service.

Both the FBI and the Secret Service claim that they were only observing and not participating in the grab. The Chesterfield County police initially stated that they were only carrying out a request from the federal agencies.

The police also claim Raub is not under arrest, even though he was led away in handcuffs and is not permitted to leave the psychiatric ward of a hospital—even though it appears that Raub is not in  any way in need of psychological care.

I note this happened in the United States of America, with local police, FBI agents and Secret Service taking part.

The claim that Raub is “not under arrest” is completely and totally ridiculous.  The authorities came to his door, slapped handcuffs on him and are holding him in a mental institution against his will.

And now he has been transferred to a facility that is 3 hours away from his family, his supporters and his legal team.

What in the world is America turning into?

The Rutherford Institute is defending Raub, and the following is an excerpt from a statement about this case on their website….

“This is not how justice in America is supposed to work—with Americans being arrested for doing nothing more than exercising their First Amendment rights, forced to undergo psychological evaluations, detained against their will and isolated from their family, friends and attorneys. This is a scary new chapter in our history,” said John W. Whitehead, president of The Rutherford Institute. “Brandon Raub is no different from the majority of Americans who use their private Facebook pages to post a variety of content, ranging from song lyrics and political hyperbole to trash talking their neighbors, friends and government leaders.”

This is the kind of thing that we have seen under brutal totalitarian regimes in the past.  Dissidents are grabbed by authorities and taken to mental institutions where they are conveniently “disappeared”.

This kind of thing is not supposed to happen in America.

But it is happening.

And you know what?  Before the authorities start attacking people for exercising free speech on Facebook perhaps they should clean up their own house.

It turns out that thousands of DHS employees have been convicted of crimes in recent years.  The following is from a recent CNS News article….

There have been 2,527 Department of Homeland Security (DHS) employees and co-conspirators convicted of corruption and other criminal misconduct since 2004, according to a federal auditor.

Our world is becoming a very crazy place.

One thing that most people did see coming this summer was the continuing economic decline in Greece.

At this point Greece is experiencing a full-blown economic depression and it gets worse by the day.

If you can believe it, 1,250 companies have shut down in the second largest city in Greece in 2012 alone.

Ouch.

And many in the financial world believe the the situation in Greece is going to go beyond the breaking point fairly soon.

In fact, analysts at Citibank believe that there is a 90 percent chance that Greece will leave the euro over the next 12 to 18 months.

90 percent?

They sound pretty sure of themselves.

Not that the rest of Europe is in such great shape either.

According to Bloomberg, it looks like Europe will soon be losing about half a million auto industry jobs….

Efforts by PSA Peugeot Citroen (UG) and Fiat SpA (F) to end losses in Europe could cost more than 500,000 people their jobs as automakers and parts suppliers grapple with the effects of the European sovereign debt crisis.

We live in very unusual times.

Things are falling apart all around us and we seem to be rapidly approaching another major economic crisis.

Central banks, governments and Wall Street insiders all seem to be preparing for the worst.

Are you?

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