Another excellent article by Gail Tverberg! Thanks for posting.
Her article is a Rubik cube of possibilities. I will add comments to Gail's conclusion section that further clouds institutional, company and individual decisions.
"My expectation is that the general direction of oil prices is likely downward, especially if interest rates rise. A major financial disruption of any kind would have a similar effect. Gluts of oil can be expected with lower prices."
With past quantitative easings driving bond rates down, the bond values rose enough to prompt fund managers to switch from bonds into stocks to take advantage of stock market run-ups. Now with interest rates going up, the bond values will go down, possibly resulting in the end of the huge bond market bull market. Bond managers might switch to shorter term bonds, pocket interest gains upon maturity, and then either keep the gains in cash upon maturity or reinvest in new lower, but short term priced bonds, or a combination of both new bonds and cash. This would be a conservative approach because the P/E ratios are now outlandish.
"Many groups, including the IEA, have been warning about oil shortages because of inadequate investment in new production. Oil shortages, and energy shortages in general, have a multitude of adverse impacts on economies. One of them is loss of jobs, because jobs require the use of energy, for example, to deliver goods in a truck. If many more people are unemployed, there is less demand for oil."
For the above reasons, it is crazy that the fracking companies resume their recent increased operations. I see more of them collapsing for good once the stock markets crash and they must crash due to black swan events and/or the overpriced securities and accompanying too high price earnings ratios, as earnings cannot maintain the high prices.
"Thus, it is not at all clear that a shortage of oil leads to high prices; it may very well lead to lower prices. Many people are confused about this issue, because the word demand gives a misleading impression of the mechanism involved. Lack of demand comes from part of the population not being able to afford cars and homes. It also comes from cutbacks in government spending and from failing businesses. In an interconnected system, even failing banks tend to reduce oil demand."
Brilliant and obvious by Gail. Low oil prices cannot create automatic demand by people without money.
"Another adverse impact of oil and energy shortages tends to be fighting and wars. The fact that the US seems to be raising its energy production, in apparent disregard for countries that have been trying to cut back, is likely to make some oil exporting countries quite angry. It could sow the seeds for another war."
I can only pray that Gail has overemphasized this point, but the increasing oil supplies can create resentment. I think the resentment will be short lived with an economic collapse and glue of oil, again for the reason that people who cannot afford to drive will not pay at the pump.
"Economists do not seem to understand that GDP growth rates don’t tell very much about the well-being of individual citizens in an economy. A major issue is wage disparity. If there are many very low wage people, there is likely to be downward pressure on the sale of automobiles, and on the purchase of petroleum products. Economists are likely to think everything is fine, up until a major crisis occurs."
Many economists do not deal with the realities of the world. They can write up a storm to publish papers, but they are seldom correct. One of the past economists who was on the correct side was F.A. Hayek.
Gail could not cover everything in her article. I'm worried about the continued replacement of people with robots. Something tells me that 4% of our population feeding the other 96% is a dangerous situation!
Thanks Howard
