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Why Should We Care If Oil Giants Are Getting Crushed?

3 comments

With the whole world rubbernecking at the scene of crude oil’s crackup, you could lose sight of why it matters. Listening to Trump fret about it tells us nothing. He has endorsed collusion by energy suppliers, the better to push prices back up to…whatever. But he hasn’t said why this would be a good thing. It’s not as though we’re all feeling sorry for the likes of Exxon and BP just because the value of their inventory has imploded. Unfortunately, the benighted hacks who invent the news are too lazy to give us the real story. They’ve never been able to explain, even, why the price of gasoline sometimes fluctuates violently over a range of $1.00 or more, or why natural gas prices can crash without reducing our heating bills by a dime.

Paper Shufflers Rule!

Anyway, in case you missed an earlier commentary published here, crude-oil assets are the very real collateral for much of the aggressively leveraged borrowing that has taken place in global financial markets. The $1.5 quadrillion dollar derivatives market, for example. Just what percentage of this excrescence was seeded by oil in the ground is open to speculation. Suffice it to say, its dollar value would likely dwarf the approximately $100 trillion value of goods and services produced on this planet. So why do we need a financial edifice that is more than ten times the transaction value of actual things? The simple answer is that the main business of these times is not making things or performing tasks for a fee, but shuffling paper. Mostly, this shell game comprises hyperleveraged financial instruments whose relationship to the collateral from which they’ve sprung is as inscrutable as string theory.

So there you have it: The collapse of oil prices matters because, along with real estate, energy assets underpin most of the world’s debt. Receivables are just a rounding error. The Fed may be able to pump out enough funny money to keep the Dow from falling straightaway to 5000. But prevent a global debt bubble with a notional value 50 times the size of the U.S. stock market from collapsing? No way.

Please do not ask trading questions!

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  • John Jay April 22, 2020, 12:37 pm

    I never could quite understand why the 600 Trillion Dollar Derivatives Market is such an existential threat to anyone other than the guys at GS, JPM, DB etc. that paid 5 cents for an option and now think they absolutely must be paid the $1000 an option the trade is now “Worth.”

    If the counter party does not have the money to pay off that “Bet” shouldn’t they just declare bankruptcy?
    And GS, JPM, DB, etc. get in line and maybe get back the 5 cents an option which is all the money they are really out. Or have a Court declare the trade “illegal gambling” and unenforceable under the law?

    And if the counter party is a retail bank in the USA, the FDIC pays off the insured deposits, and the rest eat the loss.

    And after the trillions created out of thin air, and just gifted to Wall Street, no one can say with a straight face that that can’t be done to save Main Street’s FDIC insured deposits, or Social Security for that matter!

    The entire 600 Trillion Dollar Derivatives problem is just a MSM propaganda story ordered up by the member banks of the Federal Reserve.
    And they will likely get away with it in the end, because the last guy to defeat them was Andrew Jackson!

    &&&&&

    The loss would be collectivized and sufficiently huge to wreck the global economy and financial system. You and I are bit players, but it would wreck us, too. I think you’ve overestimated the capabilities of the FDIC. It could bail out — just maybe — 1.5 banks in good times, but in a collapse it would be vaporized in under an hour, on its way to becoming a punchline for some wiseacre historian. RA

    Reply
    • John Jay April 22, 2020, 2:10 pm

      If what you say is true, then, once again, why payoff a 5 cent bet that is now “Worth” $1000?
      The Derivative market does not need to be a financial suicide pact.
      If you Collectivize that meme, all that is lost from the financial system is the total of 5 cent bets, correct?
      The rest is just imaginary profits, there is no need to collapse anything.

      To put it in a Kentucky Derby context, I believe the record payoff for a long shot was the 50 to 1 paid when Mine That Bird won the 2009 Kentucky Derby on a sloppy track.
      I think his previous race saw him finish last in a field of 16 horses, which is pretty bad!
      But I would say the pari-mutual pool limits the long shot odds so that if the 3 longest odds horses come in 1-2-3,
      the bets can be paid off.
      Long shot horses never go off at 100,000 to 1 do they?

      Explain why the Hedge Funds, Banks etc. will collapse if all the derivative winners just get their initial “Bet” back,
      and no one wins a 100,000 to 1 long shot bet that is impossible to payoff in any case.
      And my fall back position is declare the 500 richest people in the world “Public Enemies” confiscate their assets, and zero out the 600 trillion they are owed.
      Which makes more sense, doing that or collapsing the entire planet?
      None of those profits they are “Owed” has any basis in reality. The most they can own is everything on the planet which is a finite number, correct?
      Declare it a Ponzi scheme or whatever it takes instead of trying to come up with 600 Trillion Dollars that does not exist.

      Reply
  • Ben April 22, 2020, 2:09 am

    “So why do we need a financial edifice that is more than ten times the transaction value of actual things? The simple answer is that the main business of these times is not making things or performing tasks for a fee, but shuffling paper.”

    And that’s why our food supply is disintegrating, as workers drop like flies. I’d like to see how the main business carries on, by time that vicious cycle completes! But for now, here’s an article about that, as well as the easy-to-see solution…

    https://www.breitbart.com/politics/2020/04/14/costco-meatpacking-virus-migrant-labor/

    Trump could and should use the DPA, to upgrade these foreign-owned disease pits and turn them
    into clean, efficient producers that once again employ American citizens. That would save the food supply chain and solve some of the problem of people desperately needing to get back to work.

    Those other jobs they’re seeking to “liberate” from “democrat governors” are mostly gone and never coming back. Why even focus on them? If we put the focus on our own agricultural, medical, and industrial needs, those other things will come back, in their own time.

    But no. Because paper shuffling, as Rick put it. Because, as Redwilldanaher put it the other day, managed lines on a chart. What a rotting zombie we’ve become…

    Reply


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