Oil Slides as the Debt Crisis Looms

Oil Slides as the Debt Crisis Looms

by | published July 25th, 2011

Brace yourselves; this is shaping up to be a very rocky week.

Inside the Beltway, the children we call our “leaders” continue to hold their breath and throw temper tantrums in opposite corners.

While the gridlock continues, Asian and European markets are already sending clear signals that the combination of party games in Washington and continuing debt problems on the Continent is eroding asset value and confidence – and fast.

We are beginning to run out of time.

We're at A Political Deadlock

Congress needs to reach a compromise this week. If it doesn't, there is no time left to avoid a default.

(Hell of a way to run an operation, by the way. If this has been a business, it would have been in receivership long ago.)

That these idiots allowed it to get this far simply reflects one truth about the current political scene in Washington: Ideology is now the driving force. And that undermines the one thing essential for a democratic system to survive – compromise.

As we approach Niagara Falls from the wrong side, the morons on the boat are arguing over who misread the map.

Those who can't see the politics in all of this simply are not looking.

The Republicans want to pass a stopgap measure that guarantees this issue will be a pain in the anatomy during an election year.

The White House, meanwhile, wants a decision that “solves” the issue until well into 2013 – in other words, one that pushes it back until after the election.

Either way, there will have to be a combination of significant spending cuts and new revenue.

Today, as expected, the New York market opened with a downslide. Oil has gone along in the same direction, reflecting the overall market slide rather precisely. While prices began leveling off mid-morning, absent any signals that a debt ceiling accord is coming, the downward movement will intensify.

If we reach

next Tuesday (August 2) without an agreement, we are all going over the Falls.

I still don't think that will happen. Nor do I believe the current Washington political climate will result in any genuine resolution.

We'll just kick the can a bit down the street and live to fight another day.

Great News for Energy Investors

Now, the underlying dynamics in the market have not changed. The decline today of about half a percent only reflects what is happening market wide.

The indicators continue to point toward a tightening of supply, and that would normally mean a rise in price.

However, the calculus being applied sees a debt default as the cause of economic contraction, another round of employment losses and plant closures, and corresponding suppression of demand.

That means a sluggish economic recovery reverses, the feared double dip returns as a likely outcome and another recession hits.

The debt ceiling issue is not an ideological issue. It is a technical one.

Raise the damn thing and balance the budget in the course of a serious legislative session. If nothing happens, the asset destruction that is about to hit issuing from the short-sidedness and folly of these political prima donnas will be damaging, painful, and unnecessary.

This is not a grand game of “gotcha.” This is a real economy affecting real people.

But, as I still maintain, this will pass. Something will be worked out.

Given the current dimensions of the oil sector, there will be a swift upward response in both crude prices and share values once the accord is announced. Even with the ongoing debt uncertainty, the sector has exhibited a strong recovery over the past month.

That's great for us.

Now we just need the children to behave themselves.



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  1. July 25th, 2011 at 15:01 | #1

    Compromise? It is compromise instead of standing up for principles that got us into this debt crisis. More compromise will only make things worse. Better to take our medicine now than defer it to later when taking it will be far far worse.

    Significant budget cuts? The debt is planned to increase by over $10 Trillion over the next 10 years and our pols are talking about cuts of $4 Trillion. So they want to plan to continue driving off the cliff.

    Best regards, Ben

  2. Rick Baylens
    July 25th, 2011 at 15:06 | #2

    Let it default. It is the only real solution to our problems. we would soon learn that we can live without big government and that life would be better without it. Lots of near term pain, but a much more vibrant future.

  3. Paul Dueweke
    July 25th, 2011 at 15:19 | #3

    Why does everybody keep talking about default? There will be no default—with or without a debt ceiling rise. As old debt matures, just roll it over into new debt, with no consequence to the debt ceiling. As spending requires new debt, either: 1) cut back on spending enough to reduce the new debt requirement to zero or 2) have the Fed write more funny QE-type checks. But #2 can be done for only a short time more before the debt markets start rejecting our debt.

    The only way for default to occur is if Obama instructs the Treasury to not pay off maturing debt. That is inconceivable because: 1) Obama would be locked out of re-election and 2) the new debt wouldn’t sell because the of the default on the old debt.

    THERE WILL BE NO DEFAULT. That’s just more sky-is-falling hype.

  4. July 25th, 2011 at 15:29 | #4

    It is increasingly apparent that whoever is elected to a 4 year or 6 year federal office will see a dissolution of the USA union during his or her “service”.

  5. jack gordon
    July 25th, 2011 at 15:45 | #5

    you see what lack of adult supervision in the sandbox leads to.
    i have lived in the just barely united states of a. for most of a lifetime.
    if teddy roosevelt were here he would knock some heads together.
    > jack

  6. July 25th, 2011 at 15:49 | #6

    I fully agree to the report. For the children of the WWII veterans in EU to behave well means they have to work to be real in this world and straighten out matters that they would not want to pass on to their own children, as they don’t have any clue to that… Zeitgeist matter. – That is how the ‘beat’ goes on… avoid ignorance, be truthful, don’t interpret stuff you have no clue about, as it might end up in the wrong alley.

  7. July 25th, 2011 at 16:03 | #7

    Increasing oil prices are not a thing to look forward too, nor even promote like you are by encouraging investment therein.

    There are an increasingly large number of pundits who are saying that there is no reason for oil to be as high as it is other than plain simple greed by resource holders. We as a world should not allow these resource holders to dictate the amount released of such an essential resource to our economic success.

    It is time that the customers of oil and oil based products come to the table and lay out a maximum we will pay for oil and present it to the resource holders and tell them to take it or leave it, we are not paying any more.

    Research shows that a reasonable profit could be made by resource holders if oil was around $75 a barrel and this is the price we should offer. Speculation could be eliminated by this managed approach to oil thus getting rid of a value-added premium contained within the cost of oil that adds no real value to the product under a managed price system.

    Yes, I am talking about price controls. Such a valuable resource should be globalized for the benefit of the world and not be under the control of a small group of nations.

    The very fact that the price of oil changes from month to month is harmful to the majority of the business world because of that uncertainty. Sustainable growth would be much easier to create if economists, governments, business, and consumers knew what costs would generally be for the next 1,5,10 years.

    Within a few years, as the electric vehicle manufacturing and consumer base grows, this industry will have a negative impact on the oil usage numbers that will allow the amount of oil in the ground to start recovering and the wells to start filling up again as more is created than is pulled from the ground. This will have a negative impact on the price of oil in the midterm with that price stabilizing and then slowing moving to a profitable point as oil becomes only one of many global sources of portable high-density energy.

    Oil is at its most important an industrial chemical used for a variety of reasons and it was only because of necessity that we use it for transportation. New technologies will change that in the coming decades and oil will become less of a factor in global policies.

    We as a world need to make sure we are able to continue toward that future without oil resource holders bankrupting us during the process.

    For those of you who think what I have suggested is distasteful, do you have any better ideas? Is the free market really benefiting everyone you know better than this solution would?

  8. George
    July 25th, 2011 at 16:28 | #8

    Anyway this works we are in for another recession, (if fortunate and all is properly managed) and a Depression if not. Individuals, corporates, governments all all levels just refuse to face the fact that too much was promised to too many with too little set aside to bck all this up. Thus,at all levels each of us must take less, expect less and prepare to get less, period. It is time to fix up (our facilities) clean up our business and give away practices and pay up debt at all levels. It starts with each of us cutting up the cards, spend only what we have (less 10% to save) and for business to stop playing acquisition games and taking risky positions and government to just realize the game is over and state definitely all the goodies are gone.

  9. Farok Ardesher
    July 25th, 2011 at 16:46 | #9

    Now let me see. The President had TOTAL CONTROL OF BOTH HOUSES FOR 2 YEARS. WHY DID HE NOT RAISE THE DEBT CEILING TO 20 TRILLION.First they all raised expenditures by as much as 40% in many programs,now they want to cut 10% and they say its such a BIG CUT.LET ME BE PERFECTLY CLEAR(WHO DO I SOUND LIKE???), CONGRESS HAS NEVER DECREASED EXPENSES EVER. THE GROWTH RATE HAS BEEN CUT FROM SAY 10% TO 8% AND THAT MY DEAR FRIENDS IS THE ANATOMY OF A CUT. GET IT.

  10. Robert Page
    July 25th, 2011 at 17:37 | #10

    There is ideology involved, but mostly on the side of the Democrats. Not only has Obama been President for two-and-a-half years, but Democrats have controlled Congress for more than four years. Passing a worthless Keynesian stimulus package that mostly benefitted union thugs was ideological. Passing Obamacare that will explode annual deficits was ideological. Dodd-Frank will paralyse businesses. The EPA is harming the energy sector. Obama behaves daily like the ignorant, petulant, man-child that he is. The only serious way to balance the budget is to eliminate the $1.5 trillion deficit in two years by repealing Obamacare and the stimulus law and begin the budgeting process at F2008 levels. Anything short of that will lead to Greece in 3-5 years.

  11. kelly cranston
    July 25th, 2011 at 17:44 | #11

    Well I’m glad to see that Dr. Kent is not as clueless as his readers.

  12. John Rosling
    July 25th, 2011 at 18:23 | #12

    You commented about Fracking a week or so ago. You comments lead me to believe that you are unaware of the GasFrac technology. They are a Canadian well service company wth a very environmentally friendly patented process.
    I am sure your readers would like you opinion on GasFrac. I would appreciate your take on the company.

    John Rosling

  13. July 25th, 2011 at 18:32 | #13

    I hope for the sake of all people, he is a one term president.

  14. Bassboat
    July 25th, 2011 at 20:38 | #14

    Kent, Compromise is what got us in the mess that we find ourselves in today. I applaud the ones who stand on principle regardless of the side that they represent. The people can vote in another group of people to do their bidding if they are unhappy. No compromise, just leadership.

  15. Bassboat
    July 25th, 2011 at 20:39 | #15

    Be glad we got obama and not mcCain. obama is the best thing that ever happened to the conservative movement. @Robert Page

  16. Wren Hyder
    July 25th, 2011 at 22:48 | #16

    The giving away of America is very costly. We simply can’t afford to be all things to all people. Some of it must be earned.

  17. Ed Nichol
    July 25th, 2011 at 23:22 | #17

    Its like 9-11. Obama didn’t say it wasn’t real, he said its over and that we shouldn’t get side tracked. So what thing is he really trying to do? Health care for all? It may not mean US style health care, but look up Weil, Mercola, and Atkins? Energy? Solar, wind, nat gas, North slope, tar sands equal No War! Housing? A serious, stylish, co-op housing program would solve just about all of that. Food? Corn is for pigs and soy makes good paint. Real food production would revive small town USA. Remember it is just paper money, and Obama likely will not make the same mistake that Kennedy made with real USA government dollars. Every time that you empower the individual American the world becomes a safer place. Educate, inform and take back your country.

  18. WChope
    July 26th, 2011 at 01:25 | #18

    I think that there is more than just petty politics involved. Debt slavery is very real. Look at what the Greeks are having imposed on them by the big outside banks. What do the young in the US have to look forward to. We baby boomers have been like the Greeks. We’ve had a great party, spent more on ourselves than we produced, and now its payback time. Yes, de-leveraging is going to be painful but all the mal investment has to be corrected. Better we should do it sooner and quicker. But politicians don’t seem to have what it takes to go that route.

  19. Boodsoaked
    July 26th, 2011 at 02:07 | #19

    @jack gordon
    Teddy Roosevelt? He launched the dambed Boat. What we need is a Lincon or a Kennedy. Can’t we extract some D&A? Were’s Doctor Frankenstien. We can grow an ear on a Rats Ass. We have the technolagy. LOL

  20. T Zeletineanu
    July 26th, 2011 at 04:59 | #20

    Dr. Moors wrote well what a national crisis has been created by those irresponsible, ill-begotten politicians. I wish them to be ousted out of their elected offices for their arguments are their individual or possibly party-aligned empty ideology that has no place in making our country sound and to prosper into the future.

  21. Ellen Schug
    July 26th, 2011 at 10:49 | #21

    I appreciate Dr. Moors’ comments on all aspects of our energy situation — especially this week. My heart is breaking. My brother died last Tuesday. Very fast moving pancreatic cancer blocked his bile duct. He was a mechanical engineer, responsible for the operation of an electrical power generating facility in the US midwest. It was an around the clock job and he did it thoroughly through all conditions. He was a worker, a stockholder, and a union representative as well as a husband, father and brother. He began the job before fly ash scrubbers were installed on stacks.

    His medical disability retirement (for emphysema) began by finally being carried out of the power plant on a stretcher. After recovering somewhat and moving to a different climate, he continued community service — from serving as Assistant Fire Chief and keeping the fire trucks operating to repairing the community club water heater and regularly cutting firewood for senior citizens. Not usually paid, but one time he and a friend were paid with a loaf of homemade bread and half of a pecan pie.

    His environmental awareness grew — made more acute by the growing drought in Texas and their increasing fire danger.

    With the same concentration, his energy stock portfolio grew, though he was sometimes baffled by conditions and frustrated by the political machinations that Kent described so well here.

    Kent, you’ve kept me going. And your perspective keeps me going. Thank you for sharing it with us. Thank you, everyone, for listening and hopefully for understanding. It would be a better world if environmental regulations were not needed, but I don’t know any one of us who doesn’t need clean air, clean water and clean food.

    Ellen Schug

  22. July 26th, 2011 at 13:48 | #22

    @Al Broadman
    Has Broadman read any of your previous articles? The ability for some producers to make a profit on existing product is not the problem. Future supplies require enormous expenditures to find and recover and this must be paid out of current revenues.
    Price controls? The surest way to shortages and black market prices is price control. The developing world does not care if Americans refuse to pay market prices, it will simply pay more than we are willing to, and we will have to do without.

  23. Rick Sweet
    July 29th, 2011 at 16:15 | #23

    Rick Sweet

    I have Gas Frac to and I would like to know what MR moos thinks about Gas Frac

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