Thursday, September 27, 2012

Oil Prices Set to Collapse

There are a lot of oil producing countries that depend on oil dollars to pay the bills. With oil at 100 dollars a barrel, they have to pump x barrels of oil to be able to pay to run the government. If oil were to drop $11 like it did last week, and an oversupply surplus is announced of 11%, these countries will fall short of meeting their planned budgets. The prime directive of each country is now to pump more oil to make up the shortfall. Short term, this solves the problem. Only now, the oversupply might be 15% and the price could drop another 11 dollars. The oil producers will quickly realize that the increased production is cutting their own throats. The trouble is, the respective governments need the dollars, not the oil. These countries can’t cut their budgets anymore; their only option is to pump more oil.

With world unemployment at around 20 percent, energy consumption has to drop. This is where people will cut. No air conditioning, no heat, no cooking. A heating bill in California is about zip, but in Colorado, it could be about $200 a month in the winter time. I have seen senior citizens cut off the heat and sit in a stack of blankets to keep warm because they couldn’t afford to pay their heating bill. And of course, Obama the white knight will fix that--more blankets please!
Gasoline consumption stateside could drop from 20 to 50 gallons a week for a family of 4, down to possibly 10 to 25 gallons a week. Multiply this drop in consumption by millions of people, and the lack of demand for product becomes very noticeable.

Look for oil production to continue at present production levels, and for world consumption to drop another 10 -15 percent. The price of oil could collapse and drop below $60 per barrel before December. That would be welcomed news here, but for the rest of the world selling oil, it could translate into serious financial problems. At 50 dollars a barrel, countries would have to pump twice as much oil to obtain the same revenue. And that sort of overproduction could send prices even lower. Remember the Arabs are buying food and other consumables with their oil revenues.

This drop in the consumption of energy is a sign of economic hard times worldwide. A drop in oil prices is a drop in taxation for a country like the United States. Call it a tribute tax. It will make life a little more bearable for the near future, for the US and Europe, but sooner or later, bankers and oil sellers are going to demand a currency linked to gold. You can print money, but you can’t print food or the other things that oil can buy.

Look for the price of oil to collapse in the coming months. And after is does, look for it to be pegged to the price of gold and silver. Do you get the feeling that our currencies are floating on a cesspool of debt? Nah, it must be my imagination acting up again.

Copyright 2012 by Jim Brubaker


Anonymous said...


Gold and oil prices tend to move in tandem. Do you expect a Pullback in gold prices?

Jim in San Marcos said...

Hi Anon 8:43

I tend to think that gold and oil prices are not really linked any more.

One is a store of value (gold) and the other is a commodity. One gets used up and the other doesn't.

I would expect gold to take off if Obama gets re-elected. Deficit spending is not rocket science.

People do tend to sell gold when they need to raise dollars.

I don't see any pullback in gold prices.

Anonymous said...

Houses are (outside of the northeast), mostly heated with NatGas. Nat gas is in a major depression, and has been since widespread fracking.

Natgas doesn't have anywhere to fall to.

Oil, on the other hand...

Anonymous said...

Jefferson warned us about this banker controlled inflation, so I tend to agree with the comment that deflation will be coming next. Not sure when though.

Jim in San Marcos said...

Hi Anon 1:13

A hundred dollar bill won't even buy two tanks of gas. Where is deflation going to appear??????

If gas prices collapse, oh goodie, my $100 dollar bill goes further and that must be deflation.

You need to be in charge of paying the household bills. They are not going down, they are increasing.

Anonymous said...

You are correct. Also, in reading the latest monthly numbers of QE3, I'd have to say deflation is not as close as I thought. I keep forgetting that we are not in a market driven economy. My traditional schooling is failing me.


Jim in San Marcos said...

Hi Anon 1:13

I know what you mean when you say, "My traditional schooling is failing me," common sense doesn't even suggest any rhyme or reason for what is happening.

Things are getting worse in new, strange, and oddly different ways.

What happens next? Your guess is just as good as mine.