Is the price of oil a tolling bell?

Oil_barrel The price per barrel is now approaching $42.  We should consider the implications.  If the price of crude continues to fall, then at some point there will be widespread shut-downs of production and exploration.

OPEC will meet soon to seek a solution to the decline in their resource basis that is inherent in the massive price decline.  There has been so much destruction of demand in the course of the world economic crisis that it may not be possible for OPEC to enforce restraint on the financial "hunger" of its members for the funds that come from high levels of production.  In other words, this decline in price may be beyond the power of OPEC to reverse. The decline in the oil market has become emblematic of the larger economic decline.   Is the world headed for another Great Depression and is the oil industry leading the way down into "the pit?" 

Comments?  pl

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37 Responses to Is the price of oil a tolling bell?

  1. Andy says:

    I read something yesterday that oil could go as low as $25.
    While such prices are great for consumers, they will mean a lot of lost jobs in the US domestic oil sector, which is something we don’t need right now. And it doesn’t end with the energy industry. For example, I have family in the domestic steel industry and the low energy prices and weak economy have essentially killing domestic steel production until the spring at least. This summer when oil was expensive, US steel plants could hardly keep up with demand because imported steel was expensive because of high transport costs. Now imported steel is cheaper than ever.
    So I think there is such a thing as oil being too cheap and I hope the industry is able to moderate the price decline to a reasonable level.

  2. Bill W, NH, USA says:

    For us the decline has been a Godsend. We’ll just hope the layoffs will end soon.

  3. srv says:

    It is at the point that I’m sure someone in the WH/DoD will leak a bomb Iran rumor to the WSJ and make another serious profit for their friends.
    Too bad the Saudi’s were incapable of dealing with the ealier commodity bubble. Now they’ve got nobody buying cars and people talking about huge subsidies to alt energy. They can no longer starve long-term competition out of business.

  4. par4 says:

    Print more money then burn it instead of oil

  5. b says:

    Is the world headed for another Great Depression and is the oil industry leading the way down into “the pit?”
    Yes on the first part.
    No on the second. The financial industry is leading down with stock price declines bigger than the decline of oil.

  6. jonst says:

    ” Is the world headed for another Great Depression and is the oil industry leading the way down into “the pit?” “.
    Yes, to both questions, I am afraid.

  7. J says:

    remember all these many months i have been saying that anything over $35 was ‘inflated’? well watch as oil drops to $20 barrel even surpassing Merrill Lynch’s prediction of $25, and big GOP money’s Feb 09 nymex $30 speculation bets.
    as the economic doldrums increase on china so will go the downturn of the barrel of oil.
    those big oil ceos/cfos/boards of directors had a chance to stop the london based speculation loonacy, but chose to encourage it for their personal profits sakes robbing everybody in the process, are now and will be crying in their soup even more in months to come. they did it to themselves as well as hurting our nation’s well being. IMO all u.s. based big oil ceos/cfos/boards of directors need to be criminally prosecuted for their wanton damage to our nation’s well being.

  8. MTJ says:

    Col – The old Chinese proverb/curse comes to mind…”May you live in interesting times”.
    Who knows what events will be triggered by this downturn?
    Maybe a post of potential scenarios is warranted? Your crystal ball seems to work very well.
    I’ll throw a couple down the gauntlet.
    Economic turmoil in China will cause a return to some long lost communist ideals. A possible second cultural revolution might be in the making?
    Declining oil revenues will cause regime change. Where?
    A new nation or nations in North America. Mexico, Canada?

  9. Old Bogus says:

    I don’t think the oil industry is “leading the way” but is just “enjoying” the same “circling the drain” economy we all are.
    Some of the tar sands in Canada have already shut down production because it costs more money to produce petroleum from them than they make. And refineries which were designed for heavy crude (like Venezuela’s) are being mothballed for the same reason. This is Valero’s specialty so they will be returning low fourth quarter earnings.
    And of course small oil producers in the US can’t get financing to keep drilling so they are shutting in new production efforts.

  10. Curious says:

    99c/gal gas. we need that bad. (so that would be $30-ish oil)
    btw, all economic indicators are cliff diving. 8-10% unemployment at the peak is very possible.

  11. Watcher says:

    Hopefully oil will stay below 30 long enough to roll Hugo Chavez and his pals out of office and convince the Russians there’s no money to be found in arms sales in South America.

  12. charlottemom says:

    CNBC reporting and cheering on the dramatic fall of oil prices. They say this is great news as all this extra money will collectively awaken our inner consumer. I, however, think oil price collapse is the canary in the coalmine. The cold winter winds are blowing in a depression. We have yet to know how severe it will be but if thought today’s jobless numbers are bad, wait til after Christmas.
    As our esteemed prez said, “This sucker’s going down.” I don’t think he meant oil, but rather our economy.

  13. zanzibar says:

    Since the comparison with the Great Depression is the topic du jour we should have some yardsticks. During the early 30s our GDP contracted by around a third and unemployment hit 25% by the mid-30s. Subsequently both GDP and employment grew. Another over looked factor in todays media chatter is that the US was a creditor nation and ran large trade surpluses then – more like China in todays context. Britain and Germany were debtor nations then with the deficits. Much like the US today. The 2 decade stagnation of Japan since their credit bubble peaked in 1989 is yet another yardstick. Of course Japan had huge household savings and trade surpluses when they embarked on their zero interest rate (ZIRP) policy as well as policies of fiscal stimuli and quantitative easing. Yet today their stock market and housing prices are around 70% below their peak 20 years ago.
    Today the broad U6 unemployment that includes discouraged workers is 12.5%. GDP contraction is still in low single digits. So we have some ways to hit the painful economic conditions of the 30s.
    What is interesting however in todays context is that there is unanimity around the world and across political parties that the response to the hangover from the credit binge is even more credit. The economic wizards who hold all the high offices in every major capital of the globe who were cheerleaders and instigators of the credit binge now claim that to prevent the next depression we need even more debt. Consequently the whole world is embracing ZIRP and throwing unlimited paper money at the perceived problem of preventing the next depression.
    Our fearless leaders have as of now pledged more than half our GDP in various bailout schemes to assist our billionaire bankers. Total credit market debt is now over 350% of GDP and exploding higher. At the height of the Depression in the early 30s with a collapsing GDP this ratio only got to 300%. For comparison in 1950 this ratio was a measly 130%. Bernanke working off his research of the 30s depression is buying longer dated Treasury and Agency securities with abandon dramatically growing the Feds balance sheet over the past 3 months which he has stuffed with a cornucopia of dubious Wall Street assets . Now that debt is the vehicle for supporting lifestyles it seems that the undisputed theory is more the better. No one seems perturbed that it takes around $7 of debt to generate a dollar of GDP growth when as recently as the mid-90s it took only $3 of debt. We have long ago abandoned ideas that our standard of living and the prices of homes we could afford was dependent on our wage incomes. Notions of thrift and prudence are outdated and irrelevant. We also forget easily that the proximate cause of our current troubles was the universal acceptance that to alleviate any short term economic pain from the dotcom bust we must pursue easy money and fiscal stimuli. Greenspan gave us 1% interest rates and George Bush gave us tax cuts and more deficit spending. Today Bernanke gives us zero percent TBills as well as exploding monetary base and bank reserves while Obama pledges to borrow & spend until we have nipped this “depression” in the bud.
    We have been on this road that credit is the elixir for several decades. Lets hope for the sake of our grandchildren who will inherit this Himalayan debt that we are truly at the gate of economic Defcon 1 and the unanimous opinion that the printing press shall not rest is correct.

  14. Perfect time for a new federal tax on oil products to finance recovery from the economic collapae and stimulating infrastructure improvement related to transportation and going green in that important sector. After all most were moaning over $4/gal prices but now that they have dropped we could at least afford a $.50 or $1.00 tax per gal. No real indication of reform from Obama yet just appointing those who will continue Bush policies but still hoping. My worry is that the financial world and oil companies in the US will reorganize as non-profits and the exutives will continue to be paid huge salaries without having to worry about government regulation or taxation. The non-profit sector is as out of control as the financial and energy sector. My guess is that we have at least 18 months more before any kind of stablization in oil/gas and that is the window of opportunity for reform of policy.

  15. R Whitman says:

    After 50+ years around the “awl bidness” I can say with great accuracy that you cannot predict the price of WTI more than 90 days in advance.
    Try this experiment: write down on a piece of paper right now, your prediction for the next month future price of a barrel of WTI as of April 1, 2009, June 1, 2009 and August 15, 2009.
    If you get within 5% of the closing price on those days you are a winner. If you are very lucky you will hit on one of the three.

  16. otiwa ogede says:

    the greater the decline in the price of oil the greater the imperative of OPEC members to stop squabbling and coordinate a production cut. Such a cut is inevitable imho and will herald a steeper economic plunge in certain sectors of industrialized countries,eg manufacturing, but might actually help to brake deflationary pressure in the food/groceries sector. Political strife btw developed and developing world societies, a concerted effort btw OPEC and Russia to hold oil at the $50 pb range, the formation of a Gas OPEC, are predictable.

  17. rcthweatt says:

    There can be little doubt that this price collapse could cripple oil&gas development; it has already begun- Keppel Offshore, the worlds’ largest builder of offshore oil rigs, is facing $781 M in cancellations. The same thing occurred in the 1980s(which I personally experienced). The result is likely to be that an eventual recovery will result in real, not only projected, shortages; the renewed calls to “Drill, Baby, Drill!” will find nobody much left to drill, and nothing much left to drill with. And oil is hardly unique- the question is, how can any long term planning be done in a market economy with such wildly fluctuating prices? Our system is now so dysfunctional that it is committing suicide.

  18. @MTJ,
    While your cultural revolution might be in the offing, I am more concerned about good ol’ nationalism making a long awaited return appearance in the Chinese mainland.
    And when it does, its going to need some victims. First on the hit parade? I predict those pesky little breakaway boys offshore. Next? Perhaps some of those “ethnic” Chinese living up north in the frozen Siberia where all kinds of other needed resources lie.
    Indeed, it IS interesting to live in interesting times.

  19. Curious says:

    Israel is rumored readying an Iran strike.

  20. EL says:

    For a perspective on the deterioration of international trade, take a look at the Baltic Dry Index on and tell me where we are headed. The cliff dive of this index which has charted the international shipping of bulk commodities such as iron ore, copper, etc. since circa 1750 makes the stock market losses, the plunge in oil prices and our job losses look insignificant. It has plunged from 11,600+ to 688 (sic) in about the last six months. Is the Baltic Dry Index’s historic plunge the sign of a coming world wide depression? What would demand destruction for oil look like in a world wide depression? I think I’ll go to bed.

  21. They say this is great news as all this extra money will collectively awaken our inner consumer.
    I think it would do us all some good to let that little fella take a long, long nap until the credit hangover dissipates.
    No Depression Redux since we have some of the old safeguards still in place. It will be a very, very bad recession. Since we’re officially a year into it, I expect 2009 to be bottom, and 2010 we’ll start seeing the light.
    Of course, I was predicting oil would be at $90 bbl right now a few months ago.
    What does that tell you?

  22. Kevin says:

    This is a cold sharp dagger being thrusted into iran.

  23. eakens says:

    There seems to be a great deal of panic here. But taking a step back and looking around, one will notice that:
    a) interest rates are down
    b) commodity prices are crushed
    c) gasoline/oil is down, and headed down further
    d) home prices are down
    e) tax cut might be around the corner
    What we have is a combination of falling expense categories coupled with an increase in the disposable incomes of consumers (those with a job at least).
    The makings are there for a return to growth. It’s difficult to see right now, but it’s there. We probably have 1-2 more quarters of recessionary activity, then we will start to level off.
    The reality is that you have solid, solid companies selling for P/E’s of 10 or even less, which equals returns of 10% plus. The spigot will begin to open to allow for the big boys at first to begin purchasing those assets. As that takes place, other buyers will jump in.
    As prices stabilize, and begin to increase, all those markdowns which were taken to get assets “marked to market” will be followed by markups. Those markups will stabilize the capital base and reserves of our lending institutions and get them to open up the lending spigots further, driving asset prices up. The same spiral ladder we took to get where we are is the same one that we will take back up.
    The issue we will face once again is inflation. Sitting on the sidelines with cash won’t save you.

  24. Nostradamus says:

    You all seem to have great points. You can debate how and why all you want, truth is we are all F#@ked. Hope you all have strength and stability to endure storm….

  25. jonst says:

    WRC wrote: “Perfect time for a new federal tax on oil products to finance recovery…”
    You are correct. Plus, it would put some predictability into investing in new energy sources. But it would take political courage. Do you see that around?

  26. Fred says:

    The great collapse was created by the same conditions that caused the great increase: unrestrained ‘free market’ finance. Expecting any change in Washington while conservative still ‘rule’ is like asking the devout to abandon their one true god.
    Watching CSPAN was educational. The bankers bailout – Wall street Welfare – no plan, no oversight. As Michael Moore pointed out the only thing missing was the photographer from Cigar Aficionado.The auto sector loans on the other hand, to paraphrase Senator Shelby: ‘We all got ours, screw you.”
    Great points but don’t worry. If you listen to Newt Gingrich lately you’ll know the conservatives have no intention of paying off this debt, this will be a permanent income stream to the mega rich holders of our debt.
    Mr. Cummings has an excellent suggestion. Tax oil; that would place a floor price on oil preventing a collapse of domestic production and allow funding of infrastructure projects to generate employment and improve a long neglected sector that is an important backbone of the domestic economy. I agree and would also propose a two items: a ‘Detroit Project’ for energy research aka the Manhattan Project. And a requirement that all non profits make public their executive leadership pay and benefits.

  27. Steve says:

    Tom Whipple makes some good points.
    Also, keep in mind that the fact that the world drilling fleet average age is 27 years. Cheap prices will put on hold orders for new drilling equipment. Matt Simmons has been harping on the seriousness of the decrepid condition of the world drilling fleet for the last three years.

  28. J says:

    It’s all going to boil down to two categories of those who can and those who can’t — produce their own food supplies to provide for themselves and their loved ones.

  29. eakens says:

    “It’s all going to boil down to two categories of those who can and those who can’t — produce their own food supplies to provide for themselves and their loved ones.”
    This is an amazing statement and sentiment. You will be disappointed if that is where you think this country is headed in our lifetimes.

  30. zot23 says:

    When they finally inflate the last bubble, we will recover from this crisis. They’ve inflated housing, tech, land, financials, and finally commodities to no avail. Each grew, topped, and burst. Hell, if you can’t make a bubble out of oil that doesn’t last longer than 2-3 yrs, you know you are up s*&^ creek without a paddle.
    But the last bubble, the most crucial bubble, is ready to go. This bubble is labor wages and allowing the working class to make a real living wage. American workers, when priced for inflation, haven’t seen a real wage increase since the 1970s. We can either: increase the money they take home, or make the paymnet burden on them lighter. Or best is to do both.
    The day after this country embraces Universal Heath Care not as a cross to bear but as a moral and economic obligation that is crucial to our standards of living, and when labor must be paid a wage that is fair compared to management, this recession will end. What else is there that can bring us back (without ensuring another, nastier bubble?) Workers are tapped out, broke, foreclosed, and soon to be starving. How can you possibly resurrect a consumer society on the backs of such a poor rabble? You cannot.
    The only way out of this is to embrace the spirit of FDR’s programs at the end of the last depression. The programs will have to change (information superhighways instead of auto highways?) but the spirit of that effort needs to be revitalized.
    The funny thing is you don’t even have to believe in it. We can wait as long as as we like and things will just get worse and worse until we deal with the source (and not symptoms) of our ailment. How much pain can we stand before we’ll do what is right? How much pain did FDR, Lincoln, or the founding fathers take before they made up their minds?

  31. John says:

    Merrill Lynch guestimated oil could fall to $25/ barrel.
    Gulf oil states express concern that oil could drop to single digits per barrel.
    Gulf Oil CEO predicts that gas could fall to $1/gallon in 2009.
    Expect OPEC to “severely” cut production quotas at their 19 Dec meeting.

  32. John says:

    The price of oil has to be in a range whereby exploration is economically viable – now. Otherwise we only increase amplitude of the price pendumlum, assuming the economy recovers. If the oil price is allowed to fall to the 20s or lower – forget the right wingnuts clamor to “drill-baby-drill” (some of which, of course, must occur as a bridge to life after oil-based life); and well, Sister Sarah’s subjects in the Peoples Republic of Alaska will really have an opportunity to show their mythical self-sufficiency when oil funds no longer fill the welfare state’s coffers.

  33. J says:

    that is where it is heading on a global scale, thanks to far too many nation’s not looking out for their fundamental interests first (a.k.a. protectionism) and their giving way to the ‘globalism’ fad of fascist trade a.k.a. free trade where corporations set the rules, not nation states.
    look at what monsanto has been doing to crop seeds, for one example. monsanto doesn’t want crop seeds on the market that can germinate past one planting season.

  34. J says:

    a question as i’m curious — if it came to a worst case scenario and all the food in supermarkets nationwide were no more, would you be able to still feed yourself and your loves ones?

  35. rjh says:

    From an economic perspective don’t forget that the commonly quoted price for crude is the one month future. This price includes risk insurance and does not reflect long term contracts.
    The actual amount paid is reflected in the landed oil cost, which includes both spot and long term contractual deliveries, or the refiner’s cost, which includes local transport. These figures are not available until a couple months later. The most recent is $96/bbl (landed) or $97 (refiners import) in September, with an estimated refiners cost of $70/bbl in October. Landed cost peaked at $125/bbl in June and July.
    Those give you an indication of how large the variation can be between 1 month future and actual price. The oft quoted $140/bbl was a futures price, to be compared with the actual $125/bbl paid. The future price is biased high (insurance component) but the 1 month future will both overestimate and underestimate the actual costs.

  36. 777guy says:

    The current price of oil is an indicator,of economic “alarums and excursions”, roughly the same thing as a tolling bell. Five months ago, as the price of oil was headed toward $200 per barrel, it was accurately said on this website that the price was a result of rampant speculation and had nothing to do with the actual supply. It seems that just as speculation was factored out, demand took a nose dive and the price is now diving downward. The demand for oil’s evaporating as the problems of the American economy ripple through the world. Conclusion: A tolling bell, but just one of the bells in the carillon.

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