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Friday, January 15, 2016

Federal Reserve Responsible for Oil Glut...China Responsible for Weakening Oil Demand

The Fed's Cheap Money Was Responsible for the Current Oil Glut

The chart below highlights since 2005, US production has risen by 6.6mbpd compared to OPEC's 1.6mbpd increase.  However, US consumption has fallen 1.5mbpd while OPEC nations are utilizing 2.8mbpd more oil than 2005.  So, net net, the US needs 8.1mbpd less oil while OPEC is exporting 1.2mbpd less than 2005.  So who's responsible for the collapse in oil prices???

US oil production bottomed in 2005 at 8 mbpd after falling since the early 1970's.  Since 2005, US production rose 80% while OPEC rose 5%. 

Meanwhile, US consumption of oil fell 7% while OPEC consumption rose 41%

And finally, the correlation of the US (and Canadian) shale miracle to the Fed's zero interest rate policy allowed a highly levered, marginally profitable enterprise to record high prices.  However, once the combination of the US / Canadian oil glut and diminishing Chinese demand came together, prices tumbled and the shale miracle was exposed for what it was...just another Fed bubble and bust.  90% of global new supply had come from the US and Canada while OPEC had decreased net exports. 

And the bankruptcy's will flow and all those billions and perhaps trillions of dollars loaned at ZIRP are set to cease performing.  Rather than subprime, it will be energy drillers, producers, etc. going bust that will be the next financial blowup rocking the global economy.

50% of all '05-'15 Growth in Oil Consumption Was China

It was China that saved the world from global depression in '08-'09 til now by quadrupling their credit / debt ($7 T to $28 T...this was 40% of all global credit over this period compared to the paltry 10% created by US over same time...almost entirely as Federal debt). China built 50-100 million excess apartments, ghost cities, 50% of all new global retail sq/ft, represented 55% of all global oil consumption growth (likewise for copper, steel, etc. etc).

Massive public works (3 Gorges dam, infrastructure galore...all for a population whose 0-64yr old population is now falling and will fall for decades).

This was an entirely unrepeatable, one off. Are there any more one offs or rabbits to be pulled from the hat??? No one knows the future but there are no visible sources for new credit but governments printing and spending...

And China's demographics, debt, and overcapacity suggest an economic collapse is very likely...maybe Janet will get her chance to quadruple US debt to save the world over the next 7 years.

The Fed and China, both created unsustainable trends which are now in self reinforcing freefall. 

***All energy data via EIA, demographic data via OECD.


  1. A sobering post, this one. The concern for me, as a saver, is whether governments and CB's will take the pain... Or resort to devaluation to manage their debts. I'm especially worried by the talk of withdrawing cash, as that way, the currency could be called anything and have any relative value, perhaps already true, as so much of it is now electronic. They just need to cross that river once and we could have s period of successive currencies, each with a higher degree of devaluation. Is any other choice open to them? Perhaps not....

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  3. Chris,
    Another interesting to read and educational post.

    I did not know that US oil consumption in the past 10 years is down 1.5 mbpd.

    That usage coupled with increased North American production explains to me why we import less oil from OPEC.

    Another factor of why there is over production of oil is there are more oil fields today than there were 10 years ago: More fields in the Gulf, South America, Mexico, Russia, South China sea, and now Iran will be adding to the world production glut. All these countries / rigs continue to produce to earn $$$ for their economies.

    Even as Saudia Arabia continues to produce, the other produceers also need to pump, pump, pump, and over produce to maintain their economies and oil fields.

    I was surprised to learn the US is consuming less. I wonder why? Perhaps one of the reasons the US is consuming less oil is associated with an article you posted a couple weeks ago about the aging population.

    As you pointed out in a reply comment, the post WWII baby boom is not just a US population bulge. It is world wide as survivors of WWII reestablished their lives.

    And now the WWII baby boomers are retired / retiring. Retired people don't commute to work every day.

    Besides fuel efficiencies, it is interesting to see how much the average miles per year have decreased.

    Here is one article that's now two years old:

    It states "...miles driven per American peaked in 2005 and have since declined 8.8%... after rising for decades, the number of prime-driving age Americans plunged by 2.8 million over the last eight years as baby boomers age into their 60s. The number of prime-age drivers peaked at the exact time miles driven per capita peaked:.... Remember, Americans drove 918 billion fewer miles over the last eight years than they would have if 2006 driving trends hadn't changed. If a car has a lifespan of 200,000 miles, that ultimately means demand for vehicles over the last eight years was about half a million cars per year lower than it would have been at old driving rates."

    This is very interesting. Less oil is consumed, because fewer miles are driven. And fewer cars are needed because they last longer less driving, causing auto production to decrease- which will cause other ripples in the economy.

    So is there happening a perfect storm of less oil consumed due to aging population and more oil produced as there are more oil producers in play today-- as well as the Saudi want to drive non OPEC oil producers out of business?

    As a side bar-- I think the increase in auto sales in the last two years are due to a couple factors: Low interest rates and a auto purchases people put off in 2008 - 2010 job uncertainty, now compelling auto owners to replace the high mileage car. It'll be interesting to see how auto sales do for 2016 & 2017.

    Back to oil discussion. I think the US economy is between a rock and hard place related to oil prices.

    If the price continues to drop or stays low, more banks will be left holding the bag on large loans as North American oil producers go bankrupt-- much like they were left holding the bag on defaulted home loans in 2008.

    If the price of oil increases, consumers will have less take home pay and price of goods-- plastics, fertilizers, shipping, transportation-- will increase causing a economic slow down.



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