Oil at $50/barrel? Bye bye to Chavez & Putin & Ahmedinejad for a While

Energy & Capital has an excellent analysis of the world economy as it makes a flight to quality, making the yen and the dollar the two most desirable currencies right now in the world. Driving all this is the price of oil, denominated in US dollars and the weakness of the dollar made prices vault above $100. As the dollar strengthens, the converse is true and today's price of $65 may still have more juice to be squeezed before it hits what writer Chris Nelder says is a natural floor of $50/barrel.

Believe it or not, the US & Japan are the best placed countries right now, though bonds rather than equities may be the best bet for the next two years. And there is bad news for America's enemies, including [in my p.o.v.] Vlad the KGB Empoisoner, who has financed his aggression in Georgia [and perhaps next in Ukraine] due to windfall profits from the oil trade.

Also, if the US suffers from an Obama victory, this demagogue in short pants will be unable to inflict punitive taxes on oil profits, as they will have shrunk to the size of a peanut farmer's brain. No more Corinthian columns or grandiose trappings of POTUS redistribution of wealth, unless this clown wants to make a bad situation worse!

Legendary oil man Charles Maxwell, in a recent interview with The Money Show, noted that much of the world has fairly high breakeven cost points, which he cited as follows:

Saudi Arabia at $55/barrel; Russia at $70; Most of OPEC at $70-90; Iranians and Venezuela at $90

Therefore, at the most recent range of $62-65, oil is already at or below the breakeven cost for most of the world's remaining oil reserves!

It is not inconceivable that producers might produce at a loss for a short while. For example, some drillers will need to keep the cash flowing in order to meet regular payments on their next order of rigs, or risk losing their place in the rig delivery queue, with significant impacts on their future production schedules.

But at some point, oil producers will have to see profitability return, or they will lay down their rigs. (Numerous natural gas drilling rigs are already being idled in North America, due to the similarly depressed price of natural gas.) Eventually, the reduced supply will put the fire back under prices.

When that might happen, though, is hard to say. We must be somewhere near to a floor in oil, if we're already under the breakeven costs. If oil went back to $50, it couldn't stay there for long.

Read the entire article for an insightful excursion through the world's oncoming economic woes over the next few years. The strong dollar will keep oil prices down, And as the banks hoard their cash, rather than allowing the credit with the new infusions from DC to be the emollient of world trade, a seizing up may occur which is already leaving grain on the docks of US & other exporters as letters of credit [things Democrats don't understand] lose cred. As world trade continues to dwindle due to US protectionism [no Colombia FTA], the Dems archaic nineteenth c. economic philosophy will prolong the recession, allowing a rational economic administration to be elected in four years, unless by then the US has devolved into an authoritarian populist banana republic [Fairness Doctrine & other absurdities ensuring a tyranny of the minority].

Trial lawyers, media moguls politicos and other fingerpointers will predictably try to blame the productive part of the U.S. economy, ballooning the parasitic constituencies and dependencies of the Dem lumpenprole left. In sum,

What this all points to is a vicious feedback loop. As emerging economies struggle with trade deficits and reduced liquidity, borrowing costs rise, leading to more credit defaults, higher interest rates, and even tighter credit, which in turn slows down growth even more, causing businesses to shrink, and their creditworthiness to be further impaired.

This feedback loop will continue to drive down the price of oil and other commodities for the near future. This is why I have been saying for roughly the last two months that the trade in energy and commodities is simply broken, having more to do with the mechanics of global big money flows than fundamental business considerations.

Lower US and European demand for Asian goods will continue to put the hurts on Asian economies. Depressed growth expectations for China and India will feed back to the US and Europe in the form of lower equity prices, particularly in energy and commodities.

The withdrawal of European investors from emerging markets will slow them down even more. European banks lent $3.5 trillion to these economies—roughly 7 times what the US lent—and accounted for three quarters of loans to China and India, according to Stephen Jen, chief currency strategist at Morgan Stanley in London.

Yes, a world recession, and all caused not at all by the insane mortgage lending policies of Fannie Mae and Freddie Mac, husbanded into their CRA lunacies by Barney Frank's husband-of-the-moment back in the early '90s. Call the current recession around the world a delayed herpes irruption from that gift that keeps on giving, the Clinton Administrations of the late '90s!