dailyimpact | On what planet does an oversupply of two percent for a machine burning 90 million barrels a day lead to a 50% drop in prices?
Exactly one month later, on February 7, the Bank for International
Settlements (the bank for the world’s central banks) said that it had
looked at the numbers– really looked at the numbers — and had
compared the most recent conflagration with oil-price declines that
occurred in 1996 and 2006. Unlike the previous two, the bank said, the
current collapse of oil prices cannot be explained as an effect of
supply and demand because supply was only slightly elevated and demand
only slightly depressed.
What we are seeing instead, said the Bank for International Settlements, are the effects of hedging, speculating and high debt. Not, in other words, the law of supply and demand, but the law of gambling: only the house wins.
Hedging is to oil drillers what crop insurance is to farmers;
you pay a premium for a guarantee that a specific buyer will give you a
specific price for your product when you get it to market. Most drillers
bought those hedges, which is why they are still pumping oil — they’re
not going to get the current market price, but their hedged price. But
the hedges will be running out soon. Or, the sellers of the hedges will
be running out of cash. Either way, production hits the wall. (Fracking
billionaire Harold Hamm has become famous among his peers for cashing in
all his hedges to save money just before the price of oil began its
precipitous drop. He won’t be a billionaire much longer.)
Speculating is what sets the prices of the things we need to
buy. The price of every commodity, every share of stock, every bond and
derivative is set by a bunch of whiz-kid traders (there don’t seem to be
any old ones ) who spend their days betting on what the rest of their
kind are going to do that day. Are they going to love Ali Baba because
it’s huge and kind of like an Asian Amazon? If so we all go long on its
stock and we all make a lot of money. Are they going to hate it because
it’s huge and like Amazon never makes any money? Then we all short the
stock and we all make a lot of money. As to what Ali Baba is actually
doing — who cares? These speculators — especially oil speculators —
usually buy and sell not the product, or even the stock of the
companies, but futures: contracts to sell in the future at a high price
if you think the price will be lower, or to buy in the future at a low
price if you think it’s going up. (Lately, however, Masters of the
Universe have actually been buying and taking possession of crude oil,
and renting huge tanks to store it in until it goes back up to $100 a
barrel. Greed springs eternal.)
Borrowing is what really runs the engines of our world. There
is no housing industry without mortgages, no auto industry without “zero
down, zero interest” loans, no consumer industry without credit cards
and no fracking industry without junk bonds and leveraged loans. When
it costs $10 million to put up a well that’s only going to produce for
three of four years, your business model has better include access to
unlimited cheap credit. And so it did: last year before prices started
their freefall in October, frackers issued $50 billion worth of junk bonds, no problem. Since 2010 they put out more than half a trillion dollars worth. Their debt now is double the amount of debt that was involved in subprime mortgages in 2008. Bonds mature, loans run out, and lines of credit have to be reviewed — in April as a matter of fact, watch that month.
Defaults will start coming in clusters by midyear, and since much of
the money that was lent was, itself, borrowed money, the dominoes are
going to fall for a long time.
0 comments:
Post a Comment