by Federico Pieraccini
There are two central issues related to the devaluation of the ruble and the dollar depreciation to keep in mind: the preservation of American hegemony and the speculative bubble of derivatives linked to industry of Shale Gas. Without these elements, it is impossible to understand what are the reasons and the consequences of these artificial economic actions.
This case must therefore necessarily be addressed from different perspectives, a geopolitical one and a purely economic one.
The depreciation of oil seems to be a strategy implemented by mutual agreements between the US State Department and the Royal House of Saudi. As you can read in the article, the meetings in September 2014, between Kerry and Prince Abdullah laid the foundations for a decline in crude oil prices (compared to the market value) and at the same time a denial in the reduction of daily production. An artificial manipulation of oil prices in all means. This seems to be the central reason why, despite a collapse inside the stock market in the UAE (losses between 8% and 20% in a single day on the 16th of December), there aren’t any short-term intentions to decrease the daily output of oil production.
The immediate effects of this situation are tangible in countries where the break-even point (“The break-even point is a value that indicates the amount, expressed in volume production and sales, product sales required to cover the costs previously incurred, in order to close the reference period without profits or losses.”) for extraction of crude oil varies over 90$ a barrel. From Iran to Venezuela, passing through Russia, all these countries are affected by the collapse in the value of crude oil. Riyadh is less effected, since it’s break-even point is around 65$.
It’s a situation that for some countries is not sustainable for much longer, of course we are not speaking about Russia that has a good economic base (low debt, high gold reserves, much foreign currency liquidity), but rather about countries like Venezuela ( break even in a range 140-160$) which receive much of their income from gains on oil export. Combining this situation with the sanctions imposed on Caracas and we could be facing an economic collapse in Venezuela (Zero Hedge has placed at 93% the chance of a default ). Not to mention that even the Iranian oil is affected by these declines (break-even between 120- 140$), with great satisfaction of Riyadh, the regional competitor.
Flood the market with something that has a very low demand ( are we at the peak for demand of oil ?) and what you get is deflation and this is tangible even to the less attentive observers. If the world economy slows, thus also the need of energy will fall contextually. If this decline is not matched by a decrease in production (as required at OPEC two weeks ago), then the price will collapse to the current value. In a sense, the ordinary citizen could argue that the price per barrel today is much more in line with market values at this stage of the global economy .Unfortunately, it is only one of many points of view from which to observe this scenario and certainly does not offer a complete explanation.
Undoubtedly there is a strong correlation between the fall in crude oil prices and the collapse in the value of the ruble. But this theory does not offer a sufficient explanation. There are other factors that cannot be ignored.
The economic sanctions imposed by the United States and the European Union prevent lending to Russian companies, with payment terms beyond 30 days. Given that Russian companies get cheap money from the West banks since the end of the Cold War, the sanctions currently prevent a restructuring of previous loans and refinancing more of the same. The consequences are that these companies must now buy Euros and Dollars to take care of their loans, thus creating more demand for foreign currency in the Russian market and thus weakening the ruble. From a purely business point of view, the Russian companies would like to see a different behavior of the Russian central bank, as explained by Alexander Mercourius:
“What I suspect, about what is happening, is that major speculators against the ruble are just the banks and Russian companies that have a large amount of dollar loans to be repaid before the end of the year. Instead of paying these debts with their reserves, they are putting pressure on the government and the central bank converting rubles into dollars and speculating against the ruble. And this aspect is much more important than any other factor that caused the recent defeat of the ruble. Judging from what Ulyukaev says, the government and the Central Bank have essentially capitulated and decided to help banks by giving them some of the reserves of the Central Bank. This may explain why the rate increase on the 15th of December was so ineffective and why in the last days the ruble has strengthened.”
Indeed analyzing the side effects of the Bond issued by Rosfnet on December 12th, 2014 (625 billion rubles – amounting to 11 billion dollars to 15/12), it seems that in the end the Russian central bank bought this bond, letting Rosfnet refinance loans, with Western banks. One could argue that the United States applies the same tactics using the Fed to simply print money and give them out to American business in trouble, in change of bond emissions. The behavior of the Russian central bank, similar to the Fed’s, has been an obligated one. The problem is that the global system is calibrated on the Dollar, not on the ruble. Russia used a Western method to create money and pays the consequences. These same consequences are the mother of all frightens for Americans with the process of De-Dollarization and the Dollar losing credibility.
“We could of never imagineed what is happening, it is the materialization of our worst nightmares. And in the next few days I think the situation could be comparable to the most difficult period of 2008 ” – Sergei Shvetsov, First Deputy Governor of the Central Bank of Russia.
The most interesting question to ask is: could of the Russian authorities predict this combined attack oil-ruble-sanctions? The answer is yes and they did. Too bad no one could of imagined a so immediate acceleration of this strategy. Not even in the deepest nightmares of the Russians, in 6 months, the oil would be reduced to half of its value and the ruble of more than 50% in 12 months. This American tactic requires an extremely high risk factor and that endangers the ‘entire global economy, as we shall see .
Why then have the United States and its partners come to take this path so full of unknowns? Even in this case there are multiple answers. Certainly the main thrust concerns the geopolitical strategy of ‘regime-change’ in countries such as Venezuela, Iran and Russia ( in fact the most affected by the collapse of the price of oil). If using normal methods of softpower obtained not very significant results (Iran is heading to the agreement 5 + 1, Assad is increasingly solid in Syria, Putin is becoming increasingly popular at home and Maduro was able to regain the reins of the country after a period of instability following the death of Chavez and the artificial protests in the summer), in this way the key is an economic leverage. Never the less, there are many risks in this strategy. The collapse of the currency, the decrease in revenues from crude oil, rising prices, rising inflation, declining purchasing power and so on are the weapon with which America is convinced that it can continue its role as a hegemon in the world. The order is to lead to a collapse of domestic rival nations thanks to a combination of factors: sanctions, oil and currency.
After analyzing the motives and methods used to pursue this Kamikaze strategy, we can analyze certainly a more interesting but also more disturbing issue: the risks that these methods implemented by the west could trigger. The crisis in Ukraine, the Eurasian Union, the de-dollarization and the mega agreements between BRICS countries led to a backlash in Washington, with a game of risking everything.
The factor that carries the major unknowns but also the major concern is the market of the Shale Gas in America. Raised as a banner of American energy independence, coveted as a weapon to transit from the Middle East towards Asia (part of the strategy of “Asian Pivot”), it has undeniably played (and still plays) a primary role in the plans of policy makers in Washington.
Yet what is cleverly concealed by the mainstream media are the side effects that the market of shale gas suffers at the current low oil prices. The break-even point for these new methods of extraction is between a range of 60-80$ per barrel. Given this, it is easy to understand that with a prolonged period of low prices, the effects will be devastating for the whole market of Shale gas in the US (the first case of this kind has already happened, the Red Fork Energy Australia yesterday went into controlled administration ). If these were the only consequences, we could simply consider them irrelevant. The problem comes when we focus on the lending process to these companies that fail to return the credits to banks if they go bankrupt. A default in this industry sector could trigger a cascade mechanism which would ultimately affect the mother of all bubbles: the derivatives well hidden in Western banks.
The big global risk that the United States are taking to maintain their global hegemony is not much different from a preemptive nuclear attack (seems a doctrine of first strike in an economic sense). If the price of oil (artificially manipulated) drags into the abyss the Shale Gas Industry of America, all loans that should be repaid to the US banks would go in smoke. With them, potentially, all the derivatives:
Let’s give some the numbers to these words and see how many of these crazy financial instruments, the US banks have:
JPMorgan Chase
- Total Assets: $ 2,520,336,000,000 (about 2.5 trillion dollars)
- The total exposure to derivatives: $ 68,326,075,000,000 (more than 68 trillion dollars)
Citibank
- Total Assets: $ 1,909,715,000,000 (just over 1.9 trillion dollars)
- The total exposure to derivatives: $ 61,753,462,000,000 (more than 61 trillion dollars)
Goldman Sachs
- Total Assets: $ 860,008,000 (less than a trillion dollars)
- The total exposure to derivatives: $ 57,695,156,000,000 (more than 57 trillion dollars)
Bank Of America
- Total Assets: $ 2,172,001,000,000 (a little ‘more than 2.1 trillion dollars)
- The total exposure to derivatives: $ 55,472,434,000,000 (more than 55 trillion dollars)
Morgan Stanley
- Total Assets: $ 826.568 billion (less than a trillion dollars)
- The total exposure to derivatives: $ 44,134,518,000,000 (more than 44 trillion dollars)
A useful comparison to fully realize what numbers we’re talking about: the US public debt amounts to 18 trillion dollars. The derivatives markets, only of the six largest banks in America, amounts to almost 16 times the US debt!
We are faced with yet the same dilemma already of the 2008 financial crisis: let banks fail or save them? Can the banks fail or are they “to big to fail”? In this case there are two possible ways: Print money (the Feds way of solving every problem) without worry of the increasing public debt (the example used so sustain this theory is Japan with 300% of debt) or let banks fail.
Taking for granted that the manipulation of the oil market and consequently the ruble affair are geopolitical moves, then what is the winning strategy that Washington hopes to obtain, without causing a collapse of the global economy? Foster a regime change in Venezuela, Iran and Russia in a short time or compel these nations to come to terms with the dictates of the West. It’s important to note that the time is NOT on the side of the West. The reason is related to the arguments set out above: an oil price so low would send down the drain the market of Shale gas, causing a chain reaction that would destroy the major US banks and could trigger the biggest speculative bubble in human history, the derivatives, which would cause an economic crisis in the face of which what happened in 2008 would be remembered as something easy.
There is one factor that matters more than any other and is considered by the US as the real key to this strategy. If the market of the Shale came to collapse and US banks have to be saved again ( as they are asking the government since December 11th ), the solution would be to simply print more money from the Fed and increase the US public debt. One might object that this would decrease significantly the credibility of the dollar itself. It’s a matter of debate and no one has a definite answer. Surely in the US, they are convinced that if this tactic would be successful and lead to a regime change and economic collapse of Russia, China would be forced to “return to the fold” (having lost here number 1 ally), thus ensuring the good solidity of US Treasury (the credibility of the dollar is very dependent on China because of the amount of American Treasury Bonds detained by the Chinese) and confirming the credibility of the dollar itself (even in a situation where the public debt were to move from 16 to 36 trillion dollars).
The basic problem remains geopolitical. The hegemonic view that the US need and want to keep . They currently have no other means to fight a global change that is transiting humanity in a stage no longer unipolar (in which the Americans is the only super-power) but multipolar (more actors on the world stage). We are reckoning and current drift presents an incalculable risk for the entire global economy … it really worth it?
President Putin said that Russian economy will be weak for 2 years. Y’all forgot N Korea.
http://www.opednews.com/populum/pagem.php?f=US-escalates-campaign-agai-by-Patrick-Martin-Hackers_Intelligence_North-Korea_Provocation-141220-137.html
http://theweek.com/speedreads/index/273275/speedreads-hackers-sent-sony-extortion-email-before-security-breach
http://marcrogers.org/2014/12/18/why-the-sony-hack-is-unlikely-to-be-the-work-of-north-korea/
7 Lies In Under 2 Minutes: http://youtu.be/UErR7i2onW0
This is the huge gamble is it not?
Hoping Russia ( and Iran, venezuela all three garrotted by Western sanctions) collapses before the American shale collapse
Now you know why Obama was so pleased to get the Omnibus spending bill passed with the codicile of America using FDIC(?) to guarantee the deriivstive losses which Zero Hedge said amounted to 303 trillion. Nearly 5 times the 68 trillion mentioned is this chilling article
Think of the staggering reality
Bush took us from a surplus to 10 trillion debt. obama has matched that to 18 trill in 6 years
If it explodes to 68-303 with legislated bank bailouts there will be riots in the streets
Hillary Clinton might as well just stay home. Anyone attached to the Obama Administration in any way will become political ebola
If you believe an artificial surplus was beneficial for the American economy and the public good then you have much to learn about economics. A government surplus results in a negative for the private sector. That is fact. Why on earth would you think that a monetary sovereign would need to accumulate it’s own currency which it can create at any time. If proper legislative initiatives are in place. The premise becomes even more ridiculous when the sovereign first owes it bills in a currency it creates and secondly floats it freely without it being pegged to another currency or in the most ridiculous of cases to some commodity or basket of them. So many of you have swallowed the “Biggest of Lies” hook line and sinker. It is why the .01% are able to brain box and control you. Open your damped mind and just think about the above. The clues are all there; all you must do is use that grey blob stuffed inside your thick skull.
1. It’s a stretch to assume that the entire American economy will collapse just because the shale industry collapsed.
2. The Fed, buys the lions share of American government bonds, which is to say they just print more dollars whenever it suits them. Therefore, China divorcing themselves from the U.S economy will not destroy the U.S economy.
3. If all the BRICS nations agreed to dedeolarize tomorrow, it still wouldn’t destroy the dollar or collapse U.S hegemony. What guarantees The dollars hegemony is the dominance of the U.S military and the American Navy’s stranglehold on the highways of global commerce ( control of such choke points as waters around the Horn of Africa etc), not China’s investments in the American economy. The Euro bloc’s coexistence with the dollar, puts to rest the potency of that threat to U.S hegemony.
If the Americans have truly decided to bet the house, as it appears they’re doing, it is a diabolically cynical strategy, but they are likely to outlive the competition by a long mile.
It’s one thing to discuss this theoretically and pretend somehow dedolllarizing and setting up the BRICS will collapse American dominance of the global space, but I hope Venezuela and Russia, didn’t really just attempt to implement this theory, without first guarranteeing their own survival outside the American system. Because they’ve unleashed a chaos which will consume all, and sadly end with the Americans still sitting atop the wreckage, we’ll all just be poorer and less prosperous when the smoke clears, just like the Arab Spring’s tragic conclusion
This article is like a goulash made from all the ingredients left over on the world stage. And this is today’s reality I think.
I have read somewhere, and it makes great sense to me, that the world will have to “manage down” the debt of the US. I don’t think the US just “crashes” one day and the magic wand waves for a new world. Everything is much too interconnected. Every nation that is not the US will have to absorb and manage the impact of this coming change in some way.
The US is a chronic debtor, a debt-a-holic if you will. Russia and China appear to be the leading countries at the moment who show the way to calm down the excesses of the US – the withdrawal hallucinations you might call it – as the reality of the turning world gradually shapes a new multi-polar order – one in which the US dollar needs to be revalued against all other currencies. What true and fundamental assets, one will then ask, can come to be placed on the ledger of US value versus all other nations of the world?
Those with no patience for the details of this kind of operation might do better to find a different preoccupation. The geo-strategic imperatives, I think, have all manifested clearly to those of us here who see how the wind blows. The details may resemble sausage making, but in the end, lunch is served.
There are two central issues related to the devaluation of the ruble and the dollar depreciation to keep in mind: the preservation of American hegemony…
I’m sorry but this is complete nonsesne.
Something has happened at Saker blog (Insiders I’ll bet) and we are now being consistently and intentionally directed away from the Anglo-Zionists and their 5th column minions in Russia who are themselves the sole enemy of all people alive on the earth today.
America has been destroyed — politically, culturally, economically — by the same people who now wish to destroy Russia — the second biggest threat to the long planned 1000-year Anglo-Zionist Reich of the psychopathic post human elite.
Their primary ally today is the equally psychopathic Chinese elite with whom they have raped the industrial, intellectual and technological heritage of Western Civilization, especially since the time of Deng.
The Chinese ‘Communist’ (read Jewish-Marxist) elite have been working with the Anglo-Zionists since the time of Mao. We all know who funded the Bolsheviks in Russia but for some reason almost no one ever imagines the same could’ve happened in China.
Guess what?
It did. Learn about the Burma Road. Without help from Roosevelt and the Bolsheiviks the Chinese Communists would’ve been crushed by Japan and/or the Nationalists.
The Chinese have been promised the world — including a fully functional NWO system in which they are by far the biggest player.
What the hell can Russia offer as a counter? Even now the Chinese are swimming in US petrodollar cash and that was before the price of oil was cut in half.
It should be clear to everyone that had China so much has lifted a finger against the West in Syria or Ukraine, the Anglo-Zionists and NATO would have been stopped dead in their tracks. Instead Russia was left to carry the fight on its own and is now withstanding a masssive assault with ZERO help from the Chinese except in the form of worthless symbolism and a few PUNY energy deals.
Along with the Anglo-Zionist hegemons who sold out all of Western civilization they (Chinese leaders) believe all inferior species of humanoids (Europeans, Africans, South Asians, Americans, Uighurs, etc.) must be cleansed from the face of the Earth so that a new Chinese technocrat worker-bee/robot Utopia can be fully instituted — with the Anglo-Zionists planning the role of brain for themselves.
To further back my thesis, I am reminded of Saker’s recent pathetic attack on Alain Soral — on sexual moral grounds for g-d’s sake. Not only was this attack out of character for Saker, I strongly believe, it also attacked the strongest and most credible voice of common people against the Anglo-Zionist Ubermenchen who see themselves not merely as a class apart, but again, as an entirely different species. This attack and subsequent continuous misdirection away from the Anglo-Zionists and onto the USA has convinced me that either Saker is no longer with us or he has made his peace with the devil (at gunpoint maybe) and is abandoning all weak and stupid people such as yourself.
Pay attention folks. We’ve been had.
Oh and Ann, you sweet and lovely creature, the reason I don’t start my own blog or submit my work to professional sites like Russia Insider is because people like me can NEVER be allowed to speak openly unless we are so obscure as to be irrelevant. I have appreciated Saker’s tolerant attitude to speculative dialogue and have held him to the standard he espouses but that does not mean he is either a martyr or a saint.
As I’ve said before, either you’re with the Anglo-Zionists or you’re dead. If you serve their agenda in some way you will be permitted to speak so as to misdirect opposition (like ‘Libertarians’ who push Anglo-Zionist economics) but otherwise you WILL BE silenced.
These people are always two steps ahead of you — until you learn to think like they do — so put that in your oh-so superior Orthodox slav(e) pipe and smoke it.
First of all, no one has convinced me that the Central Bank of Russia and Rosfent lost Roubles as to the initial rate to the Dollar as Rosfent said that they did not loose any rubles and they got only Roubles from CBR. One up for Rosfent as I suppose they paid their obligations from cash currency that they had (at the end of the trading day). Now did they start this grand downward slide. Why certainly and they knew that it would go crazy, but so did CBR, so they let it slide to the bottom that they deemed acceptable and then picked up the remains in picked up the fallout with the bottom that was almost a 2 to 1 from the beginning of the day. Well how much did Rosfnet use, well at least $2billion in Rubles, that probably equated to $3-6billion in roubles from the start of the day, then they had to start the recovery of roubles with some of the gained dollars, but not fast enough to stop the slide. It was the CBR that had to stop the slide, as when it came in, it could pour on the reserves and drain the rouble from the market place, but it didn’t have to as the western banks got scared and didn’t have enough real roubles available for the total collapse stunt that the thought they could precipitate. So the oil company walked making a profit. CBR made a profit, the rouble at this point lost 20%, inflation went up and the little banks had to be bailed out by the Central Bank of Russia with some of that profit. It is the rich Russians that are going to pay the most through the loss of Russian stock value and the outside, foreign investors, but the people that are in the mix, the still soviet economy get their inflation wage hike (this is gone in the US) and the relative parity is regained in a year. The Chinese love it and they still haven’t had to use their big stick (US bonds). Now when O’Bomma made claim that it was the UAS that tanked the rouble, that was part of the coverup that the Central Bank of Russia had made a killing and paired down the outstanding Roubles that could destabilize Russia… Do you want to bet that there was a very big player out of Brussels? That Super Secret Player with a huge cash wallet? Saker.. you don’t have to print this you know.. some one in Belarus might get unhappy.
I used to like this site. It was a welcome alternative for the MSM, also as I’m quite aware of the propaganda we’re all exposed at.
But the articles and comments have fallen to a very low quality level and recently the blog displays mostly ideoligical, paranoia and even hateful content.
We can approach a problem through evaluation of facts and translate them in possibilities and probabilities. We often never know the truth, but the best we can do is stick to rationale and try to be objective. And this has little to do with being wrong or right.
One can have an excellent reasoning and still be wrong and one can have a very lousy reasoning and still be right (for the wrong reasons).
A second way is to depart from your own ideology, dogma or religion. Normally that is the stage where reason ends. From that point people build a theory that has an outcome that suits their basic premisse. In fact the outcome has been fixed right from the beginning.
Our world is far more complex and players have more than one reason to act as they do.
For numbers (derivative exposure in this case) the same goes. Two figures do not tell us anything. We need to understand what it is all about: where the risk lies, how big the risk is (notional value is not a reference for the risk measurement of mainly vanilla interest rate swaps),…
Sad article, truly sad!
The strategy of the USA is simply crazy. The gains don’t outweigh the risks. The question is, what factions in the US are behind this and will there be any major political blowback from the shale oil industry/financiers? That’s a key to how this plays out.
Derivatives were illegal for almost 100 years for some very good reasons. You outlined several of them. The subprime mortgage market had about 3 trillion worth of derivatives when it collapsed. That’s nothing compared to the figures now. They have to go and the people who peddle these useless financial instruments.
I’ll try to explain a bit my musings on what is happening in the oil market.
We all need some premisses to start from and mine are greed and self-interest.
The Arabs (here Saudi-Arabians) only worry about THEIR wallet. True they have religious and geopolitical aims but those are subdued to their addiction to money. After all money allows them to pursue their goals and since 2007 they have enjoyed a flood of that drug called “money” (imagine cost of exploration $20-25 that was sold at §90-100 a barrel, almost disgusting).
A second assumption is that the oil-Arabs are smart. They don’t give us that impression but they are. And in case they aren’t, they have enough money to hire the best advisors in the world.
They have seen the price drop slowly since June – July 2014 a drop that suddenly speeded up.
They noticed that demand from Europe dropped and demand from China slowed down. They lost market share in the US which imports far less.
On the supply side: a glut of tight oil, Libya’s production of light sweet high quality crude increase (which puts pressure on Nigerian production, of the same high quality) and other increases in production which sometimes comes cheap to the market (Iraq, Iran, IS, …).
To match the budget a country takes in account the total amount of oil income and this has two variables: price and volume. If you think that price will lower then you can still match the budget by lifting the volume or keeping it high).
We may assume today that 2015 looks difficult for the world economy. Lower oil demand is a signal, Europe will go into a recession or is in one, and so will Russia, … and much more. On top we’re far in the business cycle. In this case demand for oil can drop more.
The Arabs are not going to cut production and receive less as a whole while other producers enjoy the same total income. Certainly not in an environment where we will see lower prices for quite some time in the future.
In this long term view it is better to deny your competitors their profits right away. Preferably eliminate them if possible, as to seize enough market share and keep your total income at the highest level possible during the recession.
It doesn’t matter who your competitors are. If frackers need to go, good; if Venezuela or Nigeria will go bust, the better; if Russians need to suffer, not our problem; if deep waterdrilling comes to a screeching halt, excellent they can restart after the recession.
Is it possible that the Arabs made a secret deal with the US to hurt Russia and maybe trigger a regime change?
Quite possible but if the Arabs promised to do so, it was nothing more than a veil for their real goal. A promisse that fits your strategy. Think about it, you’re helping the US out and you screw them at the same time. Life cannot get any better.
To the Saker
The are three points that need to be considered in any reflection on this situation.
1) Much of the hope for energy independence in the US centred on the huge and unexploited Marcellus play in California. Two problems emerged directly linked to the fracking process: first are the earthquakes, second the nature of the formation that meant fracking would provide so little return that it was not an option. Loosing the Marcellus play meant the existing plays would peak in 2018 and would be in a significant decline just at the time that the US would need it most if predicted timelines for a confrontation with China are to be believed. This was unnerving to planners.
2) Coincidentally? – and much more murky, are developments in Saudi Arabia. Saudi and Kuwaiti oil fields are loosing productivity. Huge volumes of salt-water are being pumped into one major Kuwaiti field to maintain pressure and production. Likewise Saudi Arabia faced declining production in one large field. In one reliable and largely unacknowledged report, the Saudi’s – encouraged by some US factions, fracked the field. To understand what happened you need to know that there are two and sometimes three levels to the oil resource in these Saudi fields. The fracking broke the barrier between the layers and released the pressure of the lower levels into the upper field – so much pressure that if the oil is not pumped, it will be forced into the surrounding material of the upper layers and lost.
The Saudi’s could not stop pumping if they wanted to. It is either pump it or loose it – I read an estimate of 5 years!
This is why futures and analysts are setting benchmarks of 60 and 70 for 2015 and 2016 respectively.
So what started as a punch (knock-down blow) to Russia and Iran has turned into a slow-brewing fiasco. While the US does not mind a slow-down in the shale plays, it did not intend a collapse. While much is said about the boost low oil prices give to the economy, Nov house sales are down 6% in the US.
3) The fact that China is coming in on the side of Russia (and more indirectly Iran) means that Russia and Iran are protected and now prepared to keep their own production up and so force the full fiasco on those who first put this in motion.
I hope someone has time and funds for Maduro (Venezuela) in all of this.
It seems things will come to a head sooner rather than later.
As the angels said “Peace to men of good will”
The Turkish side has suggested that Gazprom’s new gas pipeline project be named “Turkish Stream,”
Читать далее: http://en.ukraina.ru/news/20141223/1011594832.html
“This case must therefore necessarily be addressed from different perspectives, a geopolitical one and a purely economic one. “
As part of obfuscation activities during the 19th Century, political economy was bifurcated into politics and economics, and the point of bifurcation hidden.
If challenged this bifurcation was held to be a necessary division of labour in an increasingly complex world.
Geo-politics and economics are therefore false binaries underpinning the ideological/practical interests of the opponents.
“We are reckoning and current drift presents an incalculable risk for the entire global economy … it really worth it?”
The world and phenomena on/within it are laterally inter-dynamic with in which change is constant, the main variable being the velocity of change.
The notion of “global economy” is normally defined as the presently existing linear paradigm of interactions within which a modicum, if differential, mutuality of interest exists.
As a consequence of lateral inter-dynamics the notion that a modicum, if differential, mutuality of interest exists is being highlighted, tested and generally found wanting.
The question, “ is it really worth it?” is therefore not beside the point, or is the point, as there cannot be a point in any laterally dynamic system.
The strategic purpose therefore is to transcend the opponents, reform within the present linear paradigm being insufficient to facilitate transcendence.
Aside from the TBTF banks Derivatives total which officially is at 280 Trillion? but the oil deri’s are supposed to be only 3-4 trillion? but yes everthing could fall apart in the house of cards thing if even oil deri’s go right? also – if your derivatives are based on oil NOT going as low as it is for X amount of time – won’t these banks also create MORE derivative to hedge the first ones? I am no wall st. guy but my reading tells me that yes the low oil price can now come back and bite the big TBTF fail banks, also the usa shale oil scam and in the meantime Russia is NOT over leveraged on money – but we all know who is… the usa and the big banks… so if Saudi keeps oil low and the derivatives crash that will bring down the whole house of cards maybe? so is this a Kamikazi stunt then or total desperation on the part of the west to try to kill Russia? doesn’t seem like it is going to work in my humble opinion
also thanks Saker for the great articles and blog… hard to believe I get to post first as you have some real awesome posters on the comments… I am making your blog my #1 go to first site now…
Stevev Blunder – Thailand
Aside from the TBTF banks Derivatives total which officially is at 280 Trillion? but the oil deri’s are supposed to be only 3-4 trillion? but yes everthing could fall apart in the house of cards thing if even oil deri’s go right? also – if your derivatives are based on oil NOT going as low as it is for X amount of time – won’t these banks also create MORE derivative to hedge the first ones? I am no wall st. guy but my reading tells me that yes the low oil price can now come back and bite the big TBTF fail banks, also the usa shale oil scam and in the meantime Russia is NOT over leveraged on money – but we all know who is… the usa and the big banks… so if Saudi keeps oil low and the derivatives crash that will bring down the whole house of cards maybe? so is this a Kamikazi stunt then or total desperation on the part of the west to try to kill Russia? doesn’t seem like it is going to work in my humble opinion
also thanks Saker for the great articles and blog… hard to believe I get to post first as you have some real awesome posters on the comments… I am making your blog my #1 go to first site now…
Stevev Blunder – Thailand
Aside from the TBTF banks Derivatives total which officially is at 280 Trillion? but the oil deri’s are supposed to be only 3-4 trillion? but yes everthing could fall apart in the house of cards thing if even oil deri’s go right? also – if your derivatives are based on oil NOT going as low as it is for X amount of time – won’t these banks also create MORE derivative to hedge the first ones? I am no wall st. guy but my reading tells me that yes the low oil price can now come back and bite the big TBTF fail banks, also the usa shale oil scam and in the meantime Russia is NOT over leveraged on money – but we all know who is… the usa and the big banks… so if Saudi keeps oil low and the derivatives crash that will bring down the whole house of cards maybe? so is this a Kamikazi stunt then or total desperation on the part of the west to try to kill Russia? doesn’t seem like it is going to work in my humble opinion
also thanks Saker for the great articles and blog… hard to believe I get to post first as you have some real awesome posters on the comments… I am making your blog my #1 go to first site now…
Stevev Blunder – Thailand
The development costs of the existing shale wells are sunk costs. These wells will continue to produce oil and gas until the market price falls to the level of the operating and distribution costs. Even if the operating companies go bankrupt, the lenders will continue to operate the wells.
The $60/bbl figure applies to new developments, and it is pretty much certain that the current price is preventing new wells.
@Where-Wolf:The Chinese ‘Communist’ (read Jewish-Marxist)
That is just about the dumbest thing I have read in a long, long while.
Anyway, I let this post of yours through as a parting gift to you, so you couldn’t whine that you were being censored, but having done that, I am also happy to show you the door and wish all the best: mazel tov and don’t come back!
Shalom,
The Saker
Saker
I used to like this blog, but the way you treat people put me off.
You do not really understand economics, and get very defensive and nasty when people disagree with you.
This is not the Russian way. We are not like that. We can get angry, but we forgive.
Good luck,
A
Greetings from France:
Anybody seriously interested in the economic crisis research should read this:
http://yanisvaroufakis.eu/2014/01/28/is-the-world-re-balancing/#more-4993
Here you have a serious & modern marxist approach.
Rgds
Mario Medjeral
Varoufakis is more keynesian than Marxist.
Federico Pieraccini said,
“Taking for granted that the manipulation of the oil market and consequently the ruble affair are geopolitical moves, then what is the winning strategy that Washington hopes to obtain, without causing a collapse of the global economy?”
The world is suffering global stagnation with no escape except collapse or devaluation of USD denominated assets and the implied loss of Washington’s economic and geopolitical hegemony.
For a moment consider another interpretation of your observations….the oil price collapse was used to collapse the USSR in the 1980’s. The Washington hegemony interpreted this event as winning the cold war and proceeded to assert one world hegemony. World hegemony is a disaster…we are witnessing the stench of a decaying empire!
I think the intended target of the oil price manipulation is Washington hegemony, not Russia, China, and Iran. The status quo is wrecked by oil and currency war! Whose status quo would be vulnerable to destabilization in oil and currency war?
It appears to me the monetary and economic war is orchestrated by the IMF + BIS, supported by China, Europe, Russia, Iran, and a USA Fifth Column which needs political and legal cover to dismantle a decaying empire without triggering thermonuclear war. Welcome to the SDR Multi-polar World Order(SMWO)!
Video 2 days old. Bratislava, capitol of Slovakia, Central or Main Station ( railroad ). This is not Slovak militarty.Looks like germany in full steam pushing forward drang nach osten- lebensraum. Some conspiracy theorists say Merkel is daughter of Hitler. No matter. But she is pushing
his policy of Lebensraum.
http://youtu.be/hKPe7X9jwUQ
Congratulations chumps! You are now on the hook for $303 Trillion in Derivatives
http://www.dailykos.com/story/2014/12/12/1351389/-Congratulations-chumps-You-are-now-on-the-hook-for-303-Trillion-in-Derivatives
It will be somewhat maddening to watch an economic collapse in Venezuela, Iran or even Russia knowing that all they need to to is diversify the kinds of money allowed to circulate and then their populations will be fine.. is it really impossible for anyone to imagine alternatives to debt money that creates artificial scarcity and a list of other bad things?
Romandiere and les’s comments were spot on.
Watch this clip where t. boone Pickens slams the CNBC presstitutes
He says peak oil happened in 2005 and only american shale lessened that reality
But the corporate meme is that the low price comes from over production. Pickens counters that it is a factor of low demand
He thinks as many as 1000 wells will come offline until at least 2016
1. Obama’s only economic gains come from this energy boon (no pun). Those high paying blue dollar jobs and six figure engineering jobs will dwindle pushing up unemplyment and lowering consumer spending
2. While many big players can weather the storm. Others will defaull and the leveraged banks will collapse as everyone bet the farm on 90$ bbl not $60 or as low as $25.
You have a perfect storm event of 2008 proportions
While Kerry meeting with the Sauds in Sept. Makes for a great cynical cause and effect, the blame could better be blamed on Euro sanctions, Chinese economic downturn and the Saudis need to pump or lose billions of barrels to spoilage
http://www.zerohedge.com/news/2014-12-23/t-boone-pickens-rages-cnbc-i-am-expert-not-you-says-oil-down-due-weak-demand
Might have forgotten this link in my comment
T. boone Pickens arguing with the CNBC shills that low demand not oversupply is what is dropping the oil price
Which strips bare the fiction that the economy is improving
@Anonymous (23 December, 2014 14:12):
Congratulations chumps! You are now on the hook for $303 Trillion in Derivatives
What? Like we weren’t already “on the hook” for the big banks? This measure just makes Wall Street bailouts statutorily automatic, so they don’t have to go the Treasury or Congress during the next crash and demand ad-hoc votes on specific bailouts. Down deep, nothing essential has changed.
In fact, by ‘legalizing’ their theft in this way, they could actually end up doing us all a favor by waking up the public to the essentially corrupt nature of the system.
But only if the public wants to wake up.
I have two questions:
How could it be that american shale has a break-even of $60-80,
considering all the stuff and logistics needed to extract, while Iranian oil has a break even beyond $100?
Why would Amerika accept such a decline and devastate its business AND the risk of a derivatives nuke?
Thanks for going where angels fear to tread. I was getting worried for the Saker; seemed like hired hands were trying to bring down his house. I was relieved when he responded to Where-wolf.
Bob Kay brought a new perspective and a smile to me. What if? What if the big, big players in Transylvania really want to bring down the loose cannons in Washington? And get back to business as usual. In other words, they are being played by even bigger players, like love.
Anyway, I can dream. Dream of a world where sakers fly free.
Here’s a better article: the latest museletter from Richard Heinberg
https://www.blogger.com/comment.g?blogID=4046811478707691837&postID=7138326472980800050
Here the Richard Heinberg link that Romandière accidentally got wrong:
http://richardheinberg.com/museletter-271-the-oil-price-crash-of-2014
Russia, China, Iran, Kazachstan and others should officially abandon the dollar!
thelovegovernment said, “Bob Kay brought a new perspective and a smile to me. What if? What if the big, big players in Transylvania really want to bring down the loose cannons in Washington? And get back to business as usual. In other words, they are being played by even bigger players, like love.”
The world is a mysterious place! I read a Jon Rapoport interview with an anonymous, highly placed psychological operations specialist; where the specialist said they could have a perfect operation, but it was always met by a higher intelligence either diverting or utilizing their control efforts to unexpected and beneficent ends.
I find a better view when not confined by subjective(good/evil, master/slave, love/hate, black/white) judgement. The Tao of the world is a dance of the opposites and the human mind is not capable of seeing objectively, through the subjective lens.
Real influence is based on understanding, not money and power. Those material levers are necessary to maintain the world evolution in the direction of love, but that may be 10,000 years of suffering and joy in frail and short human span of time. Life is always a perfect balance, even though we may not understand or experience such with our smallness.
I spent a year contemplating Rembrandt’s great work…The Prodigal Son. There I found that chaos and order are both loved by God. They are the engine of the evolution of man’s consciousness. The world we find is a reflection of our inner world conflict. Humanity as a whole loves its slavery, as it relieves us of responsibility and effort. I like the metaphor of my ancestors, “The highest life for a man is to die in battle….whether that be war or just showing up to wash the dishes.
This is a really weak article. It is a goulash, but not in a good sense.
The author doesn’t cite his sources for the break-even estimates of price of oil vs. cost of production for the various countries he lists. How can Russian break-even price be $90, when oil was never that expensive before Sep 2007, and by then Russia has paid back most if not all foreign loans with the revenues from exporting energy and minerals? How can Iranian break-even be $120-140, when oil has only been above $130 between May and Aug 2008?
The author doesn’t provide any sources for the claim that US shale production is financed by bank loans. Halting that production if the oil price drops too low is at some point certainly better and cheaper than producing at a loss, so it would take much more serious analysis to show the exact exposure of the banks to the falling oil price.
The author then throws derivatives into the mix, again without showing any connection to oil price. The author doesn’t seem to understand that notional value of derivatives does NOT equal total exposure to derivatives. Please pick any college textbook on financial engineering and verify for yourself. It would be possible to create a swap (a type of derivative) between the author and me with a notional value of 1 billion dollars where our actual exposure is near zero. But $1B sure seems like a scary number, especially if one doesn’t know what he’s talking about.
Saker, I have enjoyed your blog (daily) since I discovered it last spring, but the articles of this type just distract from the main message. The effect of articles of this type is binary: they are either really good and contribute to the blog and the community, or really bad and do the opposite (as in this case). Which, btw, doesn’t have anything to do with the goodwill of the author. He may simply be unqualified for the topic. If I were in your shoes, I wouldn’t post articles on topics that I know nothing about and can’t quality check. But your blog, your call.
Overseas Serb
There has been massive confusion over so called break evens.
People tend to confuse two completely different things.
A) The break even oil price where the price of oil is equal to the cost of extracting it. Russian break even points are far lower than most of the world’s. Definitely much lower than Canadian tar sands, US light tight oil, deep offshore etc. The only major producer that is more cost effective than Russia is Saudi Arabia.
B) The price of a barrel of oil required to balance the budget. This applies to countries that are major exporters of oil (Russia, Saudi Arabia, Iran, Venezuela, Iraq, Kuwait, Emirates, Nigeria etc)
The fact that some of these countries require very high oil prices to balance their budgets does not mean that their production is not profitable. It just means that they are using a lot of the oil revenue in order to balance their budgets. They can of course adjust to this but not without pain.
I hope this answers your question.
Perhaps an even more interesting
article:
http://www.commondreams.org/views/2014/12/19/russian-roulette-taxpayers-could-be-hook-trillions-oil-derivatives
Though you, (Saker) have laid out a methodical postulation with some well thought out research/linkage..
you ‘left out’ a critical point that should have been part of authenticating the ‘vulnerability’ of these 5 banks!!
That is:
You failed to mention/research the ACTUAL EXPOSURE.
In other words,
WHAT are the SIZE of these ‘loans’ from the big 5
to
the U.S. Shale Gas industry?
THESE
would be the ‘first domino’ to your hypothesis regarding the derivatives.
Leaving this information ‘blank’ to the reader
is a rather large ‘hole’ in your article/research.
Other than that…
I loved the way you put this together.
Cheers!
@ les
” In one reliable and largely unacknowledged report, the Saudi’s – encouraged by some US factions, fracked the field.”
I read that report too and I’ve wondered ever since why nobody seems to acknowledge it (sorry I didn’t keep the link) – because it would offer a serious element of explanation for this unyielding and destabilizing oil price attack.
Romandiere said, “Two figures do not tell us anything. We need to understand what it is all about: where the risk lies, how big the risk is (notional value is not a reference for the risk measurement of mainly vanilla interest rate swaps),…”
If what you are calling “notional value” doesn’t give an indication of risk, then what– in your view– actually does? And ARE the derivatives in question “mainly vanilla interest rate swaps”?
I’d be interested in you answers; I’m not being snotty or challenging, just interested.
Thanks.
les, your thesis that the Saudis could not stop pumping in one field even if they wanted to– due to its condition– is interesting. Do you have a reference for it? If reliable info it would give us a reliable predicter at least regarding one field. Can you designate the particular field?
Wm Engdahl, a specialist in oilgeopolitics maintains that US fracking BEFORE the price fall wasn’t profitable. He says costs exceeded the value of product in 2013 for the industry as a whole, and that it’s being financed as a Ponzi scheme which is viable only because of low-cost money. Mr. Engdahl has several articles online which are chockful of figures.
He is right. The fracking firms were losing serious money even with the oil price at one hundred bucks per barrel.
http://www.zerohedge.com/news/2014-12-24/dangerous-economics-shale-oil
That is a good break down of why that is so. Of course the fact that frackers were losing money even with a high oil price does not tell us the whole story because those firms were at the same time borrowing to expand operations.
What is even worse for the US oil industry is the fact that in at least some of their largest shale plays there already seems to be exhaustion. In simple terms, the sweet spots have already been drilled.
http://oilprice.com/Energy/Crude-Oil/Latest-Numbers-Reveal-The-Bakken-Is-Close-To-Peaking.html
Anonymous, thank you for the Ellen Brown link. http://www.commondreams.org/views/2014/12/19/russian-roulette-taxpayers-could-be-hook-trillions-oil-derivatives
It’s right on topic.
Saker !!! A Merry Christmas to you !! and here, this stupid comment…I want to make a comment about this stupid comment so here it is again…Anonymous said…
Saker
I used to like this blog, but the way you treat people put me off.
You do not really understand economics, and get very defensive and nasty when people disagree with you.
This is not the Russian way. We are not like that. We can get angry, but we forgive.
Good luck,
A
Saker, I can hardly wait until your next rant at some stupid comment…believe me, when I read in the above comment that there might be a rant from Saker, I quickly started scrolling to find it….they are like sweet candy to all us here at the Saker community….don’t stop….
But I hope you have a peaceful and happy Christmas holidays.
Romandiere…what a nasty thing to say to Saker….that you thought this blog used to be good but now its so sadly lousy…
Buddy, this is the first time I’ve ever seen a comment by you…so this “terrible example of the depths to which this blog has fallen” has finally roused you to say something with even a name attached…Romandiere…whatever that means….
so, all’s not lost, and you can always feel free to go somewhere else, because as far as this person…myself…goes…I don’t appreciate reading your mean nasty insults to a person who works hard to keep us in touch with each other. Think of Saker, just sitting there reading and then posting our comments…how do you think your comment made him feel ??? What do you think Romandiere ???
I hope you have the Christmas that you deserve
Might China face similar financial problems as Russia? This article suggests the countries are more similar than we think:
http://www.bloomberg.com/news/2014-12-23/ubs-raises-flag-on-china-s-1-trillion-overseas-debt-pile.html
The Western press has been negative on China for decades now. Just to give you an example. Google “Dragon out of Puff” from the Economist circa 2002.
Ann said…@ 25 December, 2014 08:36
” Romandiere…what a nasty thing to say to Saker….that you thought this blog used to be good but now its so sadly lousy…”
If memory serves I believe you are based in one of the Anglo-Saxon cultural zones and perhaps the issues alluded to in Romandiere’s contribution appear obtuse to you, partly as a consequence of your own ideological integration into the “norms” of the Anglo-Saxon cultural zones.
Romandier was drawing attention to differences in cultural orientations and how this is often reflected in practice.
In Anglo-Saxon societies some people feel that they “have” a right to express opinion on matters outwith their experience/knowledge, and that often they over-extrapolate on the data. These are also often functions of lack of patience and abhorrance of silence.
For practitioners these are opportunities to be acted upon, but perhaps Romandier had unwarranted expectations on what a broadcast medium such as a blog could deliver, and how this broadcast could be used to transcend the opponents.
In many societies, including ones in Anglo-Saxon cultural zones, “knowledge” is used to re-enforce advantage and bludgeon opponents.
In many societies, including ones in Anglo-Saxon cultural zones, insecurities as vectors of social control are encouraged; these include but are not limited to insecurities subsumed within notions such as “private property”, “intellectual property”, “the individual” and “expertise”.
In many societies, including ones in Anglo-Saxon cultural zones,when any or all of these assumptions are challenged, precipative actions follow as a consequence – which was Romandiere’s thesis.
As to your exposition of defence perhaps a necessary caution and purgative could be found in consideration of Mr. Neil Sedaka’s track The Queen of 1964.
“Romandiere…whatever that means….”
By your remarks it would appear that you have proven Romandiere’s thesis, in addition to showing a level of cultural arrogance to a commentator whose first language may be French.
Anonymous. Maybe I was wrong about Romandiere…I didn’t understand much of what you said in your post…it seemed to go on and on…
But I feel defensive for Saker when people attack him in any way, because he’s the one that is doing all the work with the comments. And people couldn’t post their comments on this (wonderful) blog if it wasn’t for Saker, so to criticize him for anything is rude.
Instead people could just go elsewhere and come again another day…not to put Saker down, just because the article was not up to your standards….
that’s all, and sometimes I do regret what I say.