a had posted an important developing relationship between the bubble and the real economy a few days ago. He may have deleted it. The link describes what is coming to the surface with the integrated oil companies and how they are having to (or choosing to) sell off assets to pay dividends because the bubble has increased the cost of extraction beyond what the consumer can pay for the oil. Therefore, the projects are no longer economic and burn up their cash flow. For years we have been noting that the cost of extraction is far outstripping wage inflation, and vehicle miles traveled have been falling. Hussman doesn't talk about that specifically. He sees it as just another Fed induced bubble blowing episode, but a really big bubble blowing episode, with typical misallocation away from production.gerald wrote:Maybe H ---- Things are bubbling, the question is --- what comes to the surface first the good or the bad? an indication of possibilities?
I think this was the link; it describes it as "Beginning of the End? Oil Companies Cut Back on Spending" actually. That seems like an appropriate title.
http://ourfiniteworld.com/2014/02/25/be ... -spending/
Gail wrote:Steve Kopits recently gave a presentation explaining our current predicament: the cost of oil extraction has been rising rapidly (10.9% per year) but oil prices have been flat. Major oil companies are finding their profits squeezed, and have recently announced plans to sell off part of their assets in order to have funds to pay their dividends. Such an approach is likely to lead to an eventual drop in oil production. I have talked about similar points previously (here and here), but Kopits adds some additional perspectives which he has given me permission to share with my readers. I encourage readers to watch the original hour-long presentation at Columbia University, if they have the time.
Imagine trying to sell the idea to the public that the oil companies are in trouble and we need to help them out.Steve wrote:People in the industry thought, “Capex has been going up and up. It will continue to do very well. We have been on this trajectory forever, and we are just going to get more and more money out of this.”
Now why is that? The reason is that in a Demand constrained model for those of you who took economics–price equals marginal cost. Right? So if my costs are going up, the price will also go up. Right? That is a Demand constrained model. So if it costs me more to get oil, it is no big deal, the market will recognize that at some point, in a Demand constrained model.
Not in a Supply constrained model! In a Supply constrained model, the price goes up to a price that is very similar to the monopoly price, after which you really can’t raise it, because that marginal consumer would rather do with less than pay more. They will not recognize [pay] your marginal cost. In that model, you get to a price, and after that price, there is significant resistance from the consumer to moving up off of that price. That is the “Supply Constrained Price.” If your costs continue to come up underneath you, the consumer won’t recognize it.
The rapidly growing Capex forecast is implicitly a Demand constrained forecast. It says, sure Capex can go up to a trillion dollars a year. We can spend a trillion dollars a year looking for oil and gas. The global economy will accept that.