Based on historical gold-oil ratios, oil appears extraordinarily cheap right now.
One way to establish if a commodity or asset is relatively expensive or inexpensive is to price it in something other than a fiat currency–for example, gold. Gold goes up and down in value relative to other commodities and fiat currencies, so it is itself a volatile yardstick. Nonetheless, it provides a useful measure of the relative value of gold and whatever is being measured in gold–in this case, oil.
It is these unforeseeable and uncontrollable consequences that are poised to wreak havoc on the global financial system.
Here’s the thing about risk: it bursts out of whatever is deemed “safe.” It wasn’t accidental that the Global Financial Meltdown originated in home mortgages; it was the perceived safety of the mortgage market that attracted all the speculative debt and leverage.
All the analysts chortling over the “equivalent of a tax break” for consumers are about to be buried by an avalanche of defaults and crushing losses as the chickens of financializing oil come home to roost.
The pundits crowing about the stimulus effect of lower oil prices on consumers are missing the real story, which is the financialization of oil. Financialization is another word that is often bandied about without the benefit of a definition.
Here is my definition:
Given the presumed 17% expansion of the global economy since 2009, the tiny increases in production could not possibly flood the world in oil unless demand has cratered.
The term Black Swan shows up in all sorts of discussions, but what does it actually mean? Though the term has roots stretching back to the 16th century, today it refers to author Nassim Taleb’s meaning as defined in his books, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets and The Black Swan: The Impact of the Highly Improbable:
The domestic energy boom is behind the expansion of Industrial Production.
In contrast to other measures of economic activity that are stagnant or declining, U.S. industrial production has been rising: Industrial Production and Capacity Utilization (Federal Reserve data)
Is this evidence that manufacturing is on-shoring, i.e. returning from overseas? While there is anecdotal evidence for on-shoring, it appears that energy production (classified as part of mining in government statistics) is the big driver of rising industrial production.
Just as we can’t eat iPods, we can’t subsist on official reassurances that the Fed and inflation are both benign.
There is a great divergence between the conventional financial media and the public who goes to the supermarket: the financial media swallows whole the official artifice that inflation is near-zero while J.Q. Public sees his/her grocery costs, health insurance, etc. rising by leaps and bounds.
Stacy Summary: Of course, to speak of this would invite oneself to be called, ‘Putin’s puppet’ for only American puppetry is allowed when discussing geopolitics; nevertheless; it’s, as Zerohedge points out, an utter farce. Between Victoria Nuland’s husband having lobbying relations with Cargill and other BigAg corporations buying into Ukraine; to now Joe Biden’s son and Ukraine oil. Fine, America wants oligarchs, go for it. But just stop mocking and condemning other nations for doing same . . . including the propaganda around overthrow of elected government of Ukraine on basis that it was oligarchical. One major problem for Biden’s bid for Ukraine gas is that the company “holds a portfolio with permits to develop fields in the Dnieper-Donets, the Carpathian and the Azov-Kuban basins.”
Do note that the Dnieper-Donets field holds 90% of Ukraine’s oil and gas reserves. And then do look at the map below for the slight problem they now have:
Uh, Houston, we have a problem.
Interesting tweet from Jim Rickards.