Oil prices

The Collapse of Oil IS the Economic Boom

Don't listen to the pundits

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"We fail to remember, for instance, that it was the internal combustion engine that gave oil its present value, and not the other way around."—Warren Brookes, The Economy In Mind, p. 30

Back in the late 1970s when a weak dollar last authored an illusory commodity boom, Zaire was one of the world's richest countries in the resource (commodities) sense. At the same time poliitical economist Warren Brookes described Japan as "144,000 square miles of some of the lowest-resource territory in the world."

Despite the massive distance between the two countries in terms of commodity wealth, Japan was exponentially wealthier than Zaire. There were and are many reasons for the massive wealth gap between them, but the biggest by far per Brookes was that "a nation's wealth has far more to do with people than with territory."

19th century economist Carl Menger, realistically the creator of Austrian School economics (Ludwig von Mises said Menger's Principles of Economics turned him into an economist), arguably would have agreed with Brookes's analysis. A major focus for Menger was the difference between "high order" goods and "first order" goods.

Applied to commodities, while essential to economic progress they're nowhere close to first order goods in economic importance. Oil is a crucial high order input, but per Brookes again "it was the internal combustion engine that gave oil its present value, and not the other way around." The world would be awful without oil, but it's first order products like automobiles and planes that gave oil value in the first place.

This is of course why it's not important that rich countries (think Japan, Switzerland, Singapore, etc.) be resource abundant. Figure commodities are easily importable at the market price, and as plentiful oil exports from economically backward countries like Venezuela, Iran and Equatorial Guinea constantly reveal, commodities in a normal world free of currency distortions would largely be exported by less developed countries to developed ones full of entrepreneurs creating the first order advances that give the prosaic (commodities) life.

Let's also not forget the tax implications of wealth that is essentially of the earth, as opposed to metaphysical wealth. Brookes called the metaphysical the wealth of the mind. Human beings are the greatest source of economic advance (nothing else comes close), and humans are mobile. Hong Kong has long been one of the richest locales in the world precisely because the wealth on this resource-bereft island was and is human. In that case, any attempt by its political class to overtax its citizens would have led to an outflow of the "barren rock's" source of abundance. Conversely oil, or wealth that springs from the earth, is easy to tax. It's not mobile. Bakken, Eagle Ford and Prudhoe Bay are places, not mobile people. That oil companies are nearly always the most heavily taxed companies in the U.S. shouldn't surprise us. 

We also can't leave currency devaluation out of the commodity discussion. Commodities like oil have never been expensive in modern times; rather during periods of dollar devaluation they've become dear in the way that one's height would 'soar' if the length of the foot were cut in half. If the latter weren't true then there wouldn't have been mass layoffs in the oil patch in the '80s and '90s when the price of a barrel plummeted, nor would sick-inducing layoffs in the oil patch be taking place now. Industries that relieve scarcity are always and everywhere rewarded. That "cheap" oil in dollar terms is occurring alongside a bloodbath in the sector is a certain signal that a lack of oil supply was never a problem to begin with.

If readers are still not convinced, consider how U.S. oil production alone rose to record levels from 2009-2015. Despite a U.S. surge that saw daily oil output increase by 4 million barrels, the price of oil tripled from 2009-2014. For analysts to then say that the oil industry solved a supply problem is for those same analysts to say that the oil industry is the only one in the history of mankind that is rendered much worse off when it's fulfilling a market need.

All of the above is important in light of all the commentary suggesting that oil's collapse is the source of U.S. economic malaise. Leaving aside the unsung good of natural downturns (more on them in a bit), the downcast talk about oil's weakness infecting the broader economy defies basic economics. Readers should ignore the pundits.

To see why, readers need to first remember that an economy is not a blob. It's just a collection of individuals. As individuals are we made better off when a market good is cheaper? Are we hurt when the gasoline we purchase costs less? The answers to the two questions are fairly easy. Taking it one step further, were Americans better off when the dollars they were earning were in freefall alongside gasoline prices that reached nosebleed levels? 

Some will point out that the plunge has led to mass layoffs in the energy space. While true, a recession for an energy sector whose profit margins rank 112th among U.S. industry sectors is hardly a negative for the rest of the U.S. economy. Investment that once flowed to what is globally plentiful and not terribly profitable in a relative sense will now flow to more promising economic ideas. Figure oil plummeted in the '80s and '90s, yet the U.S. economy boomed. So did the stock markets. Compare this to the health of the U.S. economy and stock markets in the 1970s and 2003-2014 when oil surged.

Furthermore, even if readers choose to ignore the historical correlation between stock-market/economic booms and falling oil, they can't ignore the basic truth that says even if falling oil is helping author the correction/downturn, this is healthy. Just as recessions lead to lousy companies being relieved of capital so that well-run firms can access more of it, so do stock-market corrections gift us with the same outcome. Applied to oil, assuming what's unlikely (that oil's collapse is pushing markets down), the present market correction is the happy signal of a looming bull as market forces starve the bad to the betterment of the good.

Away from oil, arguably a better explanation for the gimpy markets is that political uncertainty of the Donald Trump and Bernie Sanders variety has investors scared. I made this argument as early as last September, and also last week.

Some worry that the falling oil price is not transmitting to the "consumer." This may be the dopiest (but least surprising) argument of all from an economics profession and pundit class almost uniformly informed by the teachings of John Maynard Keynes. But back in the real world no serious economic thinker would ever consider or worry about consumption. Indeed, as individuals we're wired to consume things. We have infinite wants. Consumption is the easy part.

What's important here is that if we're producing we're as a rule consuming. Even better is that the more we produce, the more we consume.  That's true even if the productive individual is saving every dollar earned from production. Short of the individual stuffing dollars earned under a mattress, money saved is lent to those who have near-term consumptive needs. Money saved is also lent to or invested in business and entrepreneurial concepts, thus boosting production even more.

Most important of all for the purposes of the U.S. economy is the notion of high order versus first order goods talked about by Menger. Oil is once again an essential economic input, but it's ably provided by some of the least economically and culturally developed countries in the world. Figure even Saudi Arabia brings abundant oil to the marketplace.

The beauty of cheap oil is that it will make it more likely that U.S. economic actors import it, and at the same time more and more U.S. investment will migrate toward the Mengerian first order goods that give oil and all manner of other commodities life. Back to Brookes, this is once again what he meant by an economy of the mind. Predicting a broad economic boom amid a "commodity recession" in 1981, Brookes was arguing that falling commodity prices would be brilliant for a country like the U.S. populated by the greatest minds on earth in need of cheap inputs to drive true innovation. From a consumption standpoint, it will surge thanks to cheap oil simply because our production will surge as fewer Americans extract already plentiful oil, and more focus on creating the first order goods that render oil marketable to begin with.

What worked for Menger in the 19th century, and for Brookes in the 20th, will also work to the betterment of the U.S. economy in the 21st. Without dismissing the impressive engineering feat that is fracking, it has been an advance that led to enhanced extraction of what was already well supplied. The oil boom authored by a weak dollar signaled not even a stationery U.S. economy, but instead one moving backward as the most advanced nation in the world pursued a commodity capably provided by the third world. Rich countries import the prosaic as opposed to extracting it.

While the world would be bleak without oil, it can't be stressed enough that per Brookes, oil's value springs from the much more advanced first order goods like cars and planes that gave it value in the first place. Oil's weakness will free up abundant U.S. investment that will flow back into the creation of first order goods that very few advanced minds can make. In short, oil's recession signals the liftoff point for an impressive U.S. economic boom.

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53 responses to “The Collapse of Oil IS the Economic Boom

  1. the downcast talk about oil’s weakness infecting the broader economy defies basic economics

    Christ….THIS!!!!!!!!!!!!!!!!!!!!!!!

    Now if you can convince CNN. But cheap oil is killing Gaia.

    1. Well, if you can argue with a straight face that cheap labor is a market failure and laws to increase the price of labor are a good thing, arguing that cheap gas is bad isn’t that hard.

  2. The fucking junkhead gerbils at CNN can’t stop ratcheting their goddamn jawbones about breaking up our American banks. Great move, you goddamn mentally-retarded dynasty of swash-bucking imbeciles, the fucking Chinese banks make American banks appear as baby-dollar midgets and those motherfucking stone-faced Apparatchinks are on the star-spangled threshold just drooling at the opp to become America’s next great goddamn motherfucking bank.

    I understand that Commies running the American banking system makes modern progressives sweat cum and shit pearls but I sort of cry.

    1. Apparatchinks

      I about pissed myself, I laughed so hard.

  3. Figure commodities? Figure oil? Figure even Saudi Arabia?

    WTF? (What the figure?)

    1. For a nice figure D cups are a good starting point.

    2. 36-24-36? Ha ha, only if she’s 5’3″

      1. I enjoy prodigious posteriors and about this I cannot Hillary Clinton.

  4. Without dismissing the impressive engineering feat that is fracking, it has been an advance that led to enhanced extraction of what was already well supplied.

    Fracking still gets credit for the price reversal. While oil was well supplied, it was supplied without competition. Hence the high price. Fracking introduced competition forcing the price lower. So you’re right, there wasn’t a supply issue, there was a lack of competition issue.

    1. I dunno. We’re talking about a commodity here. The price is the price. It’s not like company A goes and sells their oil for less than company B, creating competition that drives down prices. It’s more like company A finds a way to get oil out that couldn’t be extracted before, driving up supply, which then drives down the price.

      1. You think OPEC wasn’t manipulating supply to keep prices high? It took a supplier outside the cartels to break that stranglehold. That’s exactly what fracking did.

        1. I think domestic oil production has been a factor as well. We’ve had attempts at fracking before and the Saudis would just drop oil down below $40 and shut it down.

          1. The very best frackers in the best locations claim a marginal cost of about $25 a bbl. They also claim they can get a new well producing in 60 to 180 days. Conventional oil takes 720 days. This will reduce market excesses. Less volatility from faster response to market conditions.

        2. You think OPEC wasn’t manipulating supply to keep prices high?

          Holding on to a non-renewable natural resource for the long term isn’t “manipulation”, it’s simple economic common sense.

          That is, the progressive world view is that greedy oil producers and corporations simultaneously manipulate supply to keep prices high and drain the planet dry without concern for future generations and conservation. That’s the hysterical and sinister world view.

          In reality, rational economic agents use up natural resources gradually, striking a balance between current needs and future needs and demand. That is, the free market solution accomplishes exactly what progressives claim we ought to accomplish.

  5. Took me a while to realize this wasn’t ENB.

  6. “If readers are still not convinced” – Convinced of what? Obviously cheap oil is great for everyone but the oil companies and Saudi princes. Who’ve made tons of money in the last decade so they have nothing to complain about. (FYI, this is why they fund ISIS – so that western powers bomb them and destroy their ‘terrorist funding sources’ LOL.)

    1. Obviously cheap oil is great for everyone but the oil companies and Saudi princes.

      Depends on the margin. As long as they can produce it more cheaply than they can sell it, they’re making money. The ones who are getting hit are government-run producers, like Venezuela for example. Because government is by definition inefficient and incompetent, those producers are less able to find ways to cut costs. So they get hammered when the price of oil falls. Companies that can easily shed workers or invest in better equipment are much better able to adjust to lower prices while maintaining a profit.

      1. Are you trying to imply that communism doesn’t respond well to changing economics? Sorry I’m just not convinced. Please, post more facts and figures to support your contention:

        1. Yeah. Cite needed.

          1. See 20th century for details.

        2. + 5 year plan

          1. + starving populace even when unintended

    2. I thought it was Obama and the Saudis conspiring to open the Saudi oil spigots, to crush Russia (for invading Ukraine) and ISIS (for being ISIS) and North Dakota (for being Republican) with lower oil prices.

  7. Good article

  8. “Oil’s weakness will free up abundant U.S. investment that will flow back into the creation of first order goods that very few advanced minds can make. In short, oil’s recession signals the liftoff point for an impressive U.S. economic boom”.

    The facts appear to directly contradict this assertion. They said it would spur consumer spending, it has not yet. Does not look like it will. Which means the lower oil price is an indicator. World wide demand fell of a cliff two years ago and no one cut production to match the decline. That is the reason for the decline in price. The Baltic Dry index has been hammered lately which is an indicator of a major worldwide slowdown. Caterpillar has had no growth for a few years now, another indicator. The Saudis have taken advantage of the situation to knock off competition. Their debt rose 10% last year as they try to outlast the competition. And of course you have to factor in inflated dollar denominated oil. And you can’t forget Goldman, they are the biggest paper oil manipulators out there.

    Honestly, I could write volumes here on why this article is wrong on multiple levels but have no time or space.

    1. HAHAHA I am laughing all the way to the gas station.

      1. And now I’m laughing too! Thanks!

      2. Great response. But allow me to retort. I scoff at your silly laughing. I fawt on you…I fawt in your general direction.

    2. As someone who works in an industry that is severely negatively impacted by high oil prices and is currently watching said industry bracing for impact, I’ll call BS as well. While in general the price of oil being low is good thing, the bottom falling out on the price has not been good. The idea that the price could shoot back up at a moments notice should the Saudi’s decide that their little stage show is hurting themselves more than it’s hurting Iran makes the low prices almost irrelevant… but the consumers feel better with the extra fifty bucks in their pockets so…

      Saudi is playing chicken with everyone else, at best this will end with them cranking up production before the revolution minus some competition… at worst ISIS gains another toehold and WWIII becomes that much closer.

      1. “minus some competition” – What? Like who? So you think US & Venezuela and Iraq will say “Whelps, this oil business is too crazy for me, I’m out. Gonna go into solar.” No they will just hop back in when prices are higher. The fact that you would say this benefits ISIS and precipitates WWIII demonstrates the scare tactics that people will stoop to to protect Saudi oil. And going a step further shows that it’s well within the realm of possibility that SA is funding ISIS for the purpose of provoking Western assault on oil fields in Libya, Iraq and Syria to restrict production and increase prices. You people are so transparent. Seriously you make it too easy for me.

      2. The idea that you can get rid of competition by underpricing your products doesn’t work in the real world. Sure, your competitors may temporarily mothball their production facilities and stop exploring, but as soon as you raise your prices again, they’ll start all that up again. And at that point, you have given away a lot of non-renewable resources at bargain basement prices, money you never get back.

    3. The China bubble burst, and worldwide growth forecast revisions, are not related to falling oil prices– if anything, they are a delayed reaction to the much higher prices of a couple of years ago. Don’t conflate the two by claiming the growth slowdown was caused by falling oil.

      There has been a fundamental change in the supply stack for oil, and that is all thanks to fracking. It has brought something much closer to perfect competition back to the oil supply market, and that is a huge chunk of creative destruction.

      It will take another couple of years for the oil industry, the lenders to the oil industry, and all other industries peripherally related to oil & gas (read: everything) to adjust to this new reality, but Tamny is absolutely right: in the long run, this is nothing but good for the U.S.

      1. “Don’t conflate the two by claiming the growth slowdown was caused by falling oil”.
        I didn’t conflate anything. Not one word written by me claimed slowdown in growth was a result of falling oil.

        The larger point of the authors opinion is that this will spur some kinda boom. Facts say different, wildly different. It’s great that I can go and fill up for 1.50 a gallon. We all dig that. This is beside the point. The bigger picture is the monetary aspect that the author ignores or is just ignorant about. I like price deflation as I’m sure you do too but deflation means default. Government default on unsustainable debt equals bad things happen to citizens. The only way to sustain this level of debt is through inflation and growth. The opposite is happening. Deflation also means job loss. I’m not trying to claim the end of the world is near just that this is far more complicated than ‘oil low means economic boom’. Trillions and trillions of QE and nothing to show for it except an even larger bubble.

  9. if only we had drilled here and drilled now back then instead of listening to those who said it wouldn’t work. by the way, who were they saying that?

  10. drill baby drill,no wait,could it be a world wide economic slow down led by china??with new oil from iran coming onboard the world market soon we may see lower fuel prices..imagine the potus was skewered for 4$ a gal for gas.where is the praise??

    1. Led by China? Trillions in CB easing and nothing to show for it but a deflationary spiral. Way to go guys, way to go!

    2. the potus was skewered for 4$ a gal for gas.where is the praise??

      Are you saying the President conspired with the Saudis? If so, I don’t think praise is the right word…

  11. So, with the gas rewards from the grocery store, my wife put 23 gallons of gas in our Ford Expedition for $10.56.

  12. One of my Facebook friends was bitching because the state wouldn’t give them a big tax break for buying their new hybrid car.

    Of course, they waited to find out after they already bought it.

    In their mind, they felt that the government should give them whatever tax break it took to make buying a hybrid car economically advantageous, whatever oil was doing. They were somewhat put out that it only amounted to a couple of hundred bucks or so.

    Of course, these people desperately need Bernie Sanders. Before they go chain smoking and jumping off of cliffs, literally, only to discover that they don’t get Medicaid in their 20’s.

  13. Fed artificially kept interest down, OPEC and Fed dollar creation kept oil high, result is 5 trillion or more in loans made to frackers, which wont be repaid now that oil is below production cost for frackers. Time to bail out the banks again and time for the “owners” of the banks to step in and buy distressed frackers just like they got bailed out and stepped in and bought property in 2008. Any one else see the pattern here?

    1. Yep, some really bad paper on the frackers. Really, really bad investments. Watch Deutsche Bank, they are holding a lot of bad notes.

  14. My roomate’s sister makes $86 an hour on the internet . She has been without work for 5 months but last month her pay was $17168 just working on the internet for a few hours. linked here…..
    Clik this link in Your Browser……..

    http://www.Wage90.com

    1. I made your roomate’s sister. For free.

      1. Pics or it didn’t happen.

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    ??????????? http://www.Wage90.com

  16. My roomate’s sister makes $86 an hour on the internet . She has been without work for 5 months but last month her pay was $17168 just working on the internet for a few hours. linked here…..
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  17. My roomate’s sister makes $86 an hour on the internet . She has been without work for 5 months but last month her pay was $17168 just working on the internet for a few hours. linked here…..
    Clik this link in Your Browser……..

    ??????????? http://www.Wage90.com

  18. My roomate’s sister makes $86 an hour on the internet . She has been without work for 5 months but last month her pay was $17168 just working on the internet for a few hours. linked here…..
    Clik this link in Your Browser……..

    ??????????? http://www.HomeSalary10.Com

  19. Despite the massive distance between the two countries in terms of commodity wealth, Japan was exponentially wealthier than Zaire.

    And by “exponentially”, you mean “orders of magnitude”?

  20. 103 year old Nazi war criminal makes $8998 an hour on the internet….

    http://www.rawsewagerecipes.ussr

  21. ..that follows the economic collapse.

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