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The Reagan Play

2012 December 10
by Ian Welsh

The Reagan play, in the last period of high oil prices was this: crush the economy and bring new sources of hydrocarbons online.

This is also Obama’s play: fracking and  other unconventional hydrocarbon sources are being ramped up massively, while austerity crushes resource demand.  China is  buying a lot less resources.

I called for falling oil prices before and was wrong about when it would happen, but I remain convinced it will happen.  The hardest thing to do is to predict not what, but when.

This does not mean that hydrocarbon prices in the long run are going to drop, they aren’t.  But in the mid terms, for a few years, they will.

This won’t do much good for ordinary Americans, because they won’t see almost any of the gains, their lords and masters will take most of it.

This crash will lead to challenges for many countries, most interestingly South American countries like Venezuela and Argentina which have been riding the resource boom and engaging in resource socialism.  They need to diversify their economies.  I doubt Venezuela will manage it, Argentina may, if the people running Argentina learn some humility.  This will also hurt the oil patch up here in Canada (primarily Alberta) and upset the political calculations of our Conservative party.  Russia, various Middle Eastern countries and so on will also have their problems.

All resource booms end.  All of them.  The question is only when.  The widespread slowdown, and especially the Chinese slowdown (which is hitting S. America hard), indicates we are likely close to the end of this boom period.

16 Responses
  1. December 10, 2012

    interesting, somewhat surprised to see the prediction of cheaper oil, because i don’t see how we get there. my understanding* is that the vast majority of new oil coming online is predicated on ~$80-90/barrel, and that the price has been kept fairly stable with the non-OECD countries happy to buy up whatever OECD countries may not be consuming due to weak economies. so when all the oil the companies are in a mad rush to develop right now comes online in a few years, let’s say oil dips down below $70, how long can it really last? at that point the big players stop, or at least slow down development of new resources. won’t the incentive be to hold oil off the market to keep prices up?

    *my “understanding” of the oil market is pretty limited.

  2. December 10, 2012

    i should add, the obvious route to cheaper oil is, as you said in your post, is attained via crushing the economy. i’m just having trouble seeing the interplay between unconventional supplies of oil needing a ~$80+/barrel price, and the economy needing oil at much cheaper (maybe half that?) in order to enable the reagan play to come to fruition.

    i’m probably missing something…

  3. Steve from Calgary permalink
    December 10, 2012

    AFAIK GDP growth and Oil consumption go hand in hand, so I expect Oil prices to go down, especially in Canada where we’re just going to get punched hard from falling home prices, which in turn reduces consumption. I also expect as the Boomers leave the workforce, consumption of Oil will also drop as people over 65 drive less every year. This long term trend will be reversed when people start to see Oil again as a surplus energy input and start leaning on it heavily for more GDP growth.

    What’s interesting to note here in Alberta is the glut of Oil coming online, and nowhere to easily export it. Also of note if the increased efficiency of some of the majors with their costs. Oil can dip below $70 or $80 and money can still be made. But for the Alberta government, less royalties are going to hurt. That said, new lifted heavy trucks used by operators in the Oil patch have never been more prominent.

  4. Ian Welsh permalink*
    December 10, 2012

    They’ll try to keep the market up, but a lot of new capacity is coming online in the next few years, plus we have slowdowns in Europe, China, Japan and all the economies attached to those countries.

    It worked when Reagan and Volcker did it, it will work this time, I expect, but we won’t get even as good an economy out of it as Reagan did.

    But it won’t work for long. 4 to 6 year cycle at most, I expect. Good buying opportunity for resource/hydrocarbon companies etc…, I suspect.

  5. jawbone permalink
    December 10, 2012

    Yes, I was thinking that crushing upstart producers will allow the Big Petro and other large resource corporations to them out at lower prices. More consolidation will lead to more price increases eventually.

    Intersting. And my understanding of this all is probably way lower than peter cowan’s.

    Which is why I treasure Iand and the smart commenters here and other places.

    And I have never forgotten a piece he wrote when the Obama mania was getting started, that no matter who won the the Dem nomination in 2008 voters would end of being terribly disappointed. I may not have the wording right — Ian, do you recall that post? I think it was before you started your own blod here.

  6. Formerly T-Bear permalink
    December 11, 2012

    This ‘new’ petroleum independence is a political chimera 2012, made of feel-good, hope, and future wealth. If there was petroleum to be found, it certainly would be counted in the known reserves and proudly trumpeted from every oil company prospectus for the last 50 years. Where fracking has occurred, the production curve is inordinately short, most lasting less than a decade at most before the well is depleted of resources. This activity is a fools gold delusion and a scheme to financially wring scarce dollars from the ignorant and provide an illusion of a rapidly expanding bubble of expectations for speculators. The worst part is the environmental disaster threatening groundwater supplies forever. These deals being offered are Faustian.

  7. Julien permalink
    December 11, 2012

    A long time ago, back when I was in grade school, they’d have the usual anti-drug program, and part of that program was to have recovering addicts come and talk to us about what life is like on drugs.

    I remember this one guy that came to talk to us. He’d been addicted to crack. His method of predilection was smoking it in a glass pipe. And I vividly remember him explaining how the need for a hit was so powerful, so overwhelming, that he couldn’t even wait for the pipe to cool down before smoking the hit. It would burn his lips and hurt like hell, but that wouldn’t matter to him. He needed that hit so much and it overwhelmed every other instinct.

    When I see tar sands, ultra-deep oil, shale oil, shale gas… When I hear people salivating at the prospect of arctic oil… I can’t help but to think back to that man, and that burning pipe.

    Ground water pollution? Lake-sized ponds of untreatable waste water? Massive oceanic oil spills? Burned lips that don’t have time to heal? Doesn’t matter man, I just need that next hit, just one more, man, and it’s going to be alright.

  8. Everythings Jake permalink
    December 11, 2012

    @Julien

    Funny, I was thinking about the addiction aspect myself last night – same level of denial and same prospective problem (albeit on a global scale) as to how low your “bottom” might get.

  9. Bruce Wilder permalink
    December 12, 2012

    I’m sure you’re right that the resource boom will end, as (you say) all such booms do end, but I’m think the always-difficult-to-predict timing is the less important uncertainty: the more interesting thing will be the shape of how it ends. We are on the lee side of peak oil, now, and, in the decades ahead we will find ourselves on the lee side of several other “peaks”, where depletion matters. For the entire 250 years of the industrial revolution, and for another 300+ years before that — basically since the Black Death’s devastation of population prefaced the Quattrocento, the Western world’s economy, and its appetite for resources, has been growing. We premise everything on growth. The whole history of the oil industry, worldwide, has been about growth, about finding new sources of supply to fill a growing infrastruture of refining and distribution.

    This time really will be different. Not “different” as in a “new plateau” that prevents the crash from coming — I am not endorsing an end to human folly; only a continuation by other means. There may be a rocky plateau for a while, but a different sequence, a different teleology drawing the cycle forward will emerge. We are about to discover a new pattern, in the coming end of this resource boom, a pattern that will contrast with what we have known for decades, if not for centuries.

    The Hollywood hack script writer’s fantasy of fantastically high prices for oil driving the apocalypse is, of course, completely unrealistically. Oil prices are capped, ultimately, by usefulness of oil in transporation. The transporation net is the foundation for an economy of extreme specialization, huge economies of scale in production, and vast networks of information flows and trade. Movements across the net have to be cheap, cheap, cheap, and the net will morph to make those movements cheap, no matter what, because the net only “works” (is productive, has scale) to the extent that transaction movements from node to node, are cheap. And, there’s plenty of scope, for that morphing, that the morphing, itself — the capital investments — will entail demand for oil, and investment demand may be better able to pay.

    No, the apocalypse comes from congestion costs and depletion, particularly depletion of opportunities to externalize costs. Congestion costs means that crowding-in of resources, seeking increased output, can be self-defeating. Where additional investment, through most of the industrial revolution, could surf on the curl of a virtuous wave of additional economies coming from increasing scale, experience, and the frisson of the first use of virgin resources, the ground will be sinking away, through most of the 21st century. And, this, this end of the first resource boom on the lee side of peak oil, sets the new pattern. [It is one of the bitter ironies of the fight over the Keystone Pipeline that the pipeline be re-routed away from the Sand Hills, to supposedly protect the Ogallala Aquifer of fossil water, which may well be gone in 20 years, leaving Great Plains to become, as it was in the great heat wave of the 1930s, a vast desert.]

  10. David Kowalski permalink
    December 15, 2012

    The situation is entirely different from “morning in America” and its era. The inflation rate for 1979 was 13.3%. By 1980 it had fallen to 12.5%. Unemployment, despite Republican claims, was not a problem at the time. By comparison, the inflation rate for the last 12 months is 1.76%, down from 3.0% for 2011. Unemployment, not inflation , is the problem.

    Reagan’s engineered recession lifted unemployment over 10% for 10 months but that was a real number that counted all discouraged workers. Using the current method (introduced by Reagan in 1986) would have given a number closer to 7% or less. The effect was to reduce inflation to 3.8%.

    Obama currently has an inflation rate below Reagan’s and a real unemployment rate higher than Reagan’s. Further crushing the economy is certainly not called for.

  11. Celsius 233 permalink
    December 16, 2012

    Hope this is found somewhat relevant; it’s from my brother and I found it relevant for the present, erm, oh, I don’t know, whatever;
    “This is so easy, a kid can easily understand it… The Fiscal Cliff Explained: Lesson # 1: * U.S. Tax revenue: $2,170,000,000,000 * Fed budget: $3,820,000,000,000 * New debt: $1,650,000,000,000 * National debt: $14,271,000,000,000 * Recent budget cuts: $38,500,000,000 Let’s now remove 8 zeros and pretend it’s a household budget: * Annual family income: $21,700 * Money the family spent: $38,200 * New debt on the credit card: $16,500 * Outstanding balance on the credit card: $142,710 * Total budget cuts so far: $38.50 Got It ????? Lesson # 2: Here’s another way to look at the Debt Ceiling: Let’s say, You come home from work and find there has been a sewer backup in your neighborhood….and your home has sewage all the way up to your ceilings. What do you think you should do …… Raise the ceilings, or remove the waste?”

  12. Formerly T-Bear permalink
    December 16, 2012

    @ Celsius 233

    How about removing whatever obstructed the sewage to the ceiling, sending the bill for attorneys, damages and cleanup to whomever constructed the obstruction with a court order to cease and desist.

    Actually that is a piss-poor way to look at the debt ceiling which is nothing more than a leftover from the prior commodity based monetary system Nixon ended 1972 (IIRC). Its purpose was to prevent more dollars being created than could be covered by the backing gold supply. That debt now only reflects the total amount of money in circulation. Cut the debt, cut the money in your pocket. That simple.

  13. Celsius 233 permalink
    December 17, 2012

    @ Formerly T-Bear

    …cut the money in your pocket. That simple…
    ~~~~~~~~~~~~~~~~~
    That gave me a bit of a chuckle; here in LOS I live a comfortable, but far from extravagant, lifestyle. Thanks to our illustrious government and their war on the elderly, I’ll rarely have a baht more than I need. Inflation is outstripping income by a wide margin and by intention will continue to do so.
    As the time passes I see less and less reason to even discuss a system so broken and corrupt; the late, great U.S. Oligarchy.
    Always enjoy your comments…

  14. Formerly T-Bear permalink
    December 18, 2012

    @ Celsius 233

    … U.S. Oil-a-garchy.

    As your comments are enjoyed as well.

    The experience whilst growing up of listening to father, family and friends discuss ‘important’ matters of current public affairs is a treasury of memory and a model to pattern one’s life after. I’ve suspicions today’s children have no such exposure and are missing a valuable gift one generation gives another.

    That said, little evidence presents that the public discussion about economic matters is founded upon theoconomics, a belief system allowed to prosper and thrive in order to keep the public discourse in ignorance and therefore without effect. The antidote is public discourse on economics, much like we’ve just had, that shows there are other answers than the given choices. It is far too late in the day to try to overcome the corruption of the present system, the special interests of wealth have loosened the constraints of governance upon themselves and will now do as they will, they see not their feet of clay. These interests are ‘too big to fail’ but they are not ‘too big to fall’ and that is the only option available. Maybe if discussion of public affairs had been on the public agenda things would have been different; now the course is into uncharted territory, unless there is a memory of history, this has happened before.

    Appreciate your situation there; my frypan to fire launch place is Spain. The ignorance of public officials is not an amusing sight. No one without a doctorate or postdoctorate in public administration or economics should be let into public office. Political ignorance, however appealing, should be eliminated (as Iranian wisdom suggests) from the pages of history.

    All the best……..

  15. Celsius 233 permalink
    December 18, 2012

    @ Formerly T-Bear:
    Appreciate your situation there; my frypan to fire launch place is Spain. The ignorance of public officials is not an amusing sight. No one without a doctorate or postdoctorate in public administration or economics should be let into public office. Political ignorance, however appealing, should be eliminated (as Iranian wisdom suggests) from the pages of history.
    All the best……..
    ~~~~~~~~~~~~~~~~~~~~~
    Ah, I wondered where you landed. “Your” politicians sound as corrupt and incompetent as those here. A joy to behold, not! I always knew the Persians were a smart bunch; explains the U.S.’s dislike of them; they know the game better than we do; invented it maybe? We’re poor players at best.
    I see Olibama is going to cave on a readjustment of SS inflation guide lines; the fucking bastard! Two years, no raise in bennies; then insult to injury; the asshole gives 1.7% for 2013. A big fuck you from the pres. Further screwing us old geezers.
    Keep growing, posting, and best wishes for the NY. I’ll drink one to/for you.

  16. Celsius 233 permalink
    December 18, 2012

    @ Formerly T-Bear:
    The experience whilst growing up of listening to father, family and friends discuss ‘important’ matters of current public affairs is a treasury of memory and a model to pattern one’s life after. I’ve suspicions today’s children have no such exposure and are missing a valuable gift one generation gives another.
    ~~~~~~~~~~~~~~~~~
    Re-read your post; a lot of good stuff. Your comment above (c&p) really struck a cord; I grew up with massive dinner conversation covering all the goodies; politics, religion, racial issues, and life in general.
    I can’t imagine it other; so your post is a poignant reminder of good things past and likely gone forever as is family in America.
    I’ve heard the funeral dirge for many years and it truly brings tears to my existence/life.
    But things change and history unlearned is a lesson missed and life wasted on crap!
    So, once again, best to you and yours…

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