Oil Price Slide – No Good Way Out
Dan here… Gail is an actuary interested in finite world issues – oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply. Her blog Our Finite World offers an extensive look at these issues. Originally published at Our Finite World and re-posted with permission from the author.
by Gail Tverberg
Oil Price Slide – No Good Way Out
The world is in a dangerous place now. A large share of oil sellers need the revenue from oil sales. They have to continue producing, regardless of how low oil prices go unless they are stopped by bankruptcy, revolution, or something else that gives them a very clear signal to stop. Producers of oil from US shale are in this category, as are most oil exporters, including many of the OPEC countries and Russia.
Some large oil companies, such as Shell and ExxonMobil, decided even before the recent drop in prices that they couldn’t make money by developing available producible resources at then-available prices, likely around $100 barrel. See my post, Beginning of the End? Oil Companies Cut Back on Spending. These large companies are in the process of trying to sell off acreage, if they can find someone to buy it. Their actions will eventually lead to a drop in oil production, but not very quickly–maybe in a couple of years.
So there is a definite time lag in slowing production–even with very low prices. In fact, if US shale production keeps rising, and Libya and Iraq keep work at getting oil production on line, we may even see an increase in world oil production, at a time when world oil production needs to decline.
A Decrease in Oil Prices May Not Fix Oil Demand
At the same time, demand doesn’t pick up quickly as prices drop. We are dealing with a world that has a huge amount of debt. China in particular has been on a debt binge that cannot continue at the same pace. A reduction in China’s debt, or even slower growth in its debt, reduces growth in the demand for oil, and thus its price. The same situation holds for other countries that are now saturated with debt, and trying to come closer to balancing their budgets.
Furthermore, the Federal Reserve’s discontinuation of quantitative easing has cut off a major flow of funds to emerging markets. Because of this change, emerging market demand for oil has dropped. This has happened partly because of the lower investment funds available, and partly because the value of emerging market currencies relative to the dollar has fallen. Again, a decrease in oil price is not likely to fix this problem to a significant extent.
Europe and Japan are having difficulty being competitive in today’s world. A drop in oil prices will help a bit, but their problems will mostly remain because to a significant extent they relate to high wages, taxes, and electricity prices compared to other producers. The reduction in oil prices will not fix these issues, unless it leads to lower wages (ouch). The reduction in oil prices is instead likely to lead to a different problem–deflation–that is hard to deal with. Deflation may indirectly lead to debt defaults and a further drop in oil demand and oil prices.
Thus, oil prices are likely to continue their slide for some time, until real damage is done, perhaps to several economies simultaneously.
The United States’ Role in the Oil Over-Production / Under-Demand Clash
The United States is the country with the single largest increase in oil production in the past year. This growth in oil production seems not to have stopped, in recent weeks.
Figure 1. US Weekly Crude Oil Production through Oct 24. Chart by EIA.
At the same time, the US’ own consumption of oil has not increased (Figure 2).
Figure 2. US oil consumption (called “Product Supplied”). Chart by EIA.
The result is a drop in needed imports. A number of oil exporters have been hit by the US drop in imports. Nigeria extracts a very light oil that competes for refinery space with oil from shale formations. Our imports of Nigerian oil have been reduced to zero (Figure 3). (The amounts I am showing on this and several other charts are “net imports.” These reflect transactions in both directions. Often the US imports crude oil and exports oil products, sometimes to the same country. In such a case, we are selling refinery services.)
Figure 3. US Net Petroleum Imports from Nigeria. Chart by EIA.
Our imports of oil from Mexico are way down as well (Figure 4), in part because their oil production has been falling.
Figure 4. US Net Imports of Petroleum from Mexico. Chart by EIA.
It is only in the past few months that US imports from Saudi Arabia have started to be significantly affected (Figure 5).
Figure 5. US net oil imports from Saudi Arabia. Chart by EIA.
Saudi Arabia, like other oil exporters, depends on the sale of oil revenue to provide tax revenue for its budget. While it has a reserve fund for rainy days, over the long term it, too, depends on revenue from oil exports. If Saudi Arabia’s exports to the United States decrease, Saudi Arabia needs to find someone else to sell these would-be exports to, or revenues to fund its budget will drop.
Alternatively, it can reduce the price it charges to US refineries, to influence purchasing decisions–something it has just done. Lowering its price to US refineries tends to push the world price for oil down.
Of course, the US also talks about allowing an increasing amount of crude oil exports, as its oil from shale formations rises. This increase would make the surplus of oil on the market worse, and world prices lower, if oil demand does not pick up.
Depending on Saudi Arabia and OPEC
In the West, we have been led to believe that OPEC in general and Saudi Arabia in particular exert great control over oil prices. We have been told that several OPEC countries have spare capacity. Several of the Middle Eastern countries claim that they have very high reserves, and we have been led to believe that they can ramp up their production if they invest more money to do so. We have also been told that these countries will reduce oil production, if needed, to hold up oil prices.
A very significant part of what we have been led to believe is exaggerated. Saudi Arabia’s oil exports were much higher back in the late 1970s than they are now (Figure 6). When they cut oil production and exports in the 1980s, they likely did have spare capacity.
Figure 6. Saudi oil production, consumption and exports based on EIA data.
But where we are now, the situation has changed greatly. The population of the Middle Eastern oil producers has risen. So has their own use of the oil they extract. Their budgets have risen, and the countries need increasing revenue from oil taxes to meet their budgets. Some countries, including Venezuela, Nigeria, and Iran, require oil prices well over $100 per barrel to support their budgets (Figure 7).
Figure 7. Estimate of OPEC break-even oil prices, including tax requirements by parent countries, from APICORP.
If oil prices are too low, subsidies for food and oil will need to be cut, as will spending on programs to provide jobs and new infrastructure such as desalination plants. If the cuts are too great, there is the possibility of revolution and rapid decline of oil production. Virtually none of the OPEC countries can get along with oil prices in the $80 per barrel range (Figure 7).
Most of OPEC’s actions in recent years have looked like actions a person would expect if OPEC countries were not all that different from other oil producers–their oil supplies were subject to limits and they tended to act in their own self interest. When oil prices were rising rapidly in the 2007-2008 period, they ramped up production, but not by very much and not very quickly (Figure 8). When oil prices dropped, they dropped their production back to where it had been, before the big ramp up in prices.
Figure 8. OPEC and Non-OPEC Oil Production, Compared to Oil Price. (Production is Crude and Condensate from EIA.)
Another situation occurred when Libya’s production declined in 2011. Saudi Arabia said it would increase its own supply to offset, but it could only produce extra very heavy crude when light oil was what was needed. In fact, even the increase in heavy oil is somewhat in doubt.
Furthermore, the dynamics of OPEC have been changed considerably in the last few years. Part of the problem relates to fact that both oil prices and the quantity of oil exports have been approximately flat in the period between 2011 and mid-2014. In such a situation, revenue from oil exports tends to be flat. OPEC members have found this to be a problem because their populations continued to grow and their need for water and imported food has continued to rise. These countries need ever-more tax revenue, but oil revenue is not providing it. At a minimum, OPEC countries have a strong “need” to maintain their current level of oil exports.
The other part of changing OPEC dynamics relates to increased oil production volatility. The bombing of Libya and sanctions against Iran have both produced unstable situations. Oil exports from both of these countries are lower than in the past, but can suddenly rise as their problems are “fixed,” adding to downward price pressures.
Another issue is the significant attempt to raise Iraq’s oil production in recent years. If Iraq’s oil production (plus US shale production) is too much to satisfy world demand for oil, should the rest of OPEC be the ones to try to “fix” the problem?
Figure 9. US net imports from Iraq. Exhibit by EIA.
Figure 9 seems to indicate that US imports from Iraq have increased in recent months. Of course, if we import more from Iraq, we will likely need to cut back on imports elsewhere. This doesn’t create good feelings among OPEC exporters.
Shouldn’t the United States Take Some Responsibility for Fixing the Problem?
One might ask whether the United States should be cutting back in its oil production, in response to low prices. Of course, as indicated above, US oil majors (like Shell, Chevron, and Exxon) are cutting back on investment in new fields, and this is eventually likely to lead to lower production. The question is whether this will be a sufficient change, quickly enough.
It is less likely that shale drillers will intentionally cut back quickly. The shale drillers have taken on leases on huge acreage and are reluctant to step back now. For one thing, part of their costs has already been paid, reducing their costs going forward on acreage already under development. They also have debt that needs to be repaid and many contractual arrangements with respect to drilling rigs, pipelines, and other services. Some may have futures contracts in place that will soften the impact of the oil price drop, at least for a while. Because of all of these factors, there is a tendency to continue business as usual, for as long as possible.
Whether or not shale drillers intentionally plan to cut back on oil production, some of them may be forced to, whether or not they believe that the production is likely to be profitable over the long run. The problem is likely to be falling cash flow because of lower oil prices, if the price drop is not mitigated by futures contracts. Because of this, some companies may be forced to cut back on drilling quite soon. Another alternative might be to ramp up borrowing, but lenders may not be very happy with such an arrangement.
We notice that some companies are already in very cash flow negative situations–in other words, in situations where they need to keep adding more debt. For example, Capital Resources, the largest operator in the Bakken, shows rapidly growing outstanding debt through 6/30/2014, without seeming to take on significant new acreage (Figure 10).
Figure 10. Selected figures from SEC filings by Continental Resources.
When companies are already in such cash flow negative situation, there may be more problems than otherwise.
If Lower Oil Prices “Hang Around” for Months to Years, What Could this Mean?
We are in uncharted territory, in such a situation.
One of the big issues is potential deflation. The issue seems to be not only lower oil prices, but lower prices for many other commodities, as well. The concern is that wages will drop, as will government receipts. Lower wages already seem to be happening in Spain. Unless governments figure out a way to “fix” the situation, this situation will make debt repayment very difficult. Lower debt will tend to reinforce the low prices of oil and other commodities.
If low prices become the norm for many kinds of commodities, we can expect major cutbacks in production of these commodities. This would be the situation of the 1930s all over again. Ben Bernanke has said he would send helicopters of money to prevent such a situation. The question is whether this can really be arranged, given that the United States (and several other countries) have already been “printing money” since 2008. At some point, it would seem like the arsenals of central banks will get used up.
If there is a cut back in debt and cutback in production of commodities, many goods we have come to expect in the market place will disappear, as will many jobs. There are likely to be breaks in supply chains, leading to more cutbacks in production.
With all of the debt problems, there is a question of how well international trade will hold up. Will would-be explorers trust buyers who have recently defaulted on their debt, and don’t look likely to be able to earn enough to pay for the goods that they currently are ordering?
The discussion has been mostly with respect to oil, but liquefied natural gas (LNG) is likely to be affected by low prices as well. Reuters is reporting that likelihood of US exports of LNG to Asia is down, for a number of reasons, including the discovery that costs would be higher than originally expected and the regulatory process less smooth. Another reason LNG exports are likely to be low is the fact that Asian prices dropped from a high of $20.50/mmBtu in February to a low of $10.60/mmBtu in August. Without sustained high LNG prices, it is hard to support the huge infrastructure investment needed for LNG exports.
Can Oil Prices Bounce Back?
If we could somehow fix the world’s debt problems, a rise in the price of oil would seem to be much more likely than it looks right now. As long as the drop in demand is related to declining debt, and the potential feedbacks seem to be in the direction of deflation and the possibility of making defaults ever more likely, we have a problem. The only direction for oil prices to go would seem to be downward.
I know that we have very creative central banks. But the issue at hand is really diminishing returns. Prior to diminishing returns becoming a problem, it was possible to extract and refine oil cheaply. With cheap oil, it was possible to create an economy with low-priced oil, inexpensive infrastructure built with that low-priced oil, and factories built with low-priced oil. Workers seemed to be very productive in such a setting, in part because low-priced oil allowed increased mechanization of production and allowed cheap transport of goods.
Once diminishing returns set in, oil became increasingly expensive to extract, because we needed to use more resources to obtain oil that was very deep, or in shale formations, or that required desalination plants to support the population. Once we needed to allocate resources for these endeavors, fewer resources were available for more general uses. With fewer resources for general activities, economic growth has become inhibited. This has tended to lead to fewer jobs, especially good-paying jobs. It also makes debt harder to repay. History shows that many economies have collapsed because of diminishing returns.
Most people assume that of course, oil prices will rise. That is what they learned from supply and demand discussions in Economics 101. I think that what we learned in Econ 101 is wrong because the supply and demand model most economists use ignores important feedback loops. (See my post Why Standard Economic Models Don’t Work–Our Economy is a Network.)
We often hear that if there is not enough oil at a given price, the situation will lead to substitution or to demand destruction. Because of the networked nature of the economy, this demand destruction comes about in a different way than most economists expect–it comes from fewer people having jobs with good wages. With lower wages, it also comes from less debt being available. We end up with a disparity between what consumers can afford to pay for oil, and the amount that it costs to extract the oil. This is the problem we are facing today, and it is a very difficult issue.
We have been hearing for so long that the problem of “peak oil” will be inadequate supply and high prices that we cannot adjust our thinking to the real situation. In fact, the two major problems of oil limits are likely to be shrinking debt and shrinking wages. The reason that oil supply will drop is likely to be because customers cannot afford to pay for it; they don’t have jobs that pay well and they can’t get loans.
In some ways, the oil prices situation reminds me of driving down a road where we have been warned to look carefully toward the left for potential problems. In fact, the potential problem is in precisely in the opposite direction–to the right. The problem gets overlooked for a very long time, because most of us have been looking out the wrong window.
Crappy jobs and wages kill off the energy business in addition to housing and retirement assets.
Who coulda knowed?
“will mostly remain because to a significant extent they relate to high wages, taxes, and electricity prices compared to other producers. The reduction in oil prices will not fix these issues, unless it leads to lower wages (ouch). ”
I am not seeing the relationship between decreased oil/energy costs in relation to wages. Oil/energy costs in relation to manufacturing can either be a materials or overhead cost, #1 and #2 in the cost of manufacturing. Direct Labor costs are #3 and after beating it up since the sixties, labor cost is the smallest portion of manufacturing at 10% or less.
You are going to have to explain more on this topic. By the way SS, Medicare, etc. are overhead.
Run75441, I understand your question, but if I understand the author, it is the feedback loop. I would add that it may also be a case for income inequality. the feedback says that while the manufacturer can now produce 100 widgets at less total cost because the price of oil has fallen, there is less demand for widgets internationally because the exporting countries have less revenue and therefore cannot buy as many widgets at the same price as they used to. In order to clear the supply of widgets, the manufacturer must lower his price and there is no extra money available to increase wages. Alternatively the income inequality analysis says that even if the widget manufacturer can maintain revenues while reducing costs, that money will not go to wages unless it has to. Instead it will go into the pockets of the capitalist.In either event the risk is widespread deflation with the result that everyone who owes money is worse off while those who have money–as opposed to other assets is better off. That would be the argument for keeping your money under your mattress–the liquidity trap.
Good summary of where things stand.
What troubles me is the pace of change. Six months ago Brent was 110, today it is 70. Nearly a 40% decline. It’s very hard for Russia, Iran, Iraq, Indonesia, Nigeria to adjust to this. The first casualty may be Venezuela.
The price drop happened at the same time that Russia started causing big trouble. Is that a coincidence? It appears to be, but it’s an odd one.
If the ‘Deciders’ wanted to push back against Russian aggression 6 months ago one option would have been to depress the price of oil. A few calls from G7 leaders to Saudi Princes, “Psst, Do us a favor – pump like hell and flood the US market with crude. That will drive the global price down. We’ll make it up to you later….”
The chart of Saudi exports to the US takes you down that path. Can the global market for crude be manipulated? Sure it can. The bond markets are manipulated every day.
I did visit your website. You spend a lot of time writing about oil and you seem to have come to the belief that oil is the dominant factor in our economy. Thus anything affecting the oil market has a very dramatic effect on the economy. You give deflation as an example.
But while oil is important, it is not a dominant factor. If the price of oil went to $200 per barrel, it would not be the end of the world. Human beings are noted for their adaptability. Obviously we would buy less of it, move to other energy sources, and find new ways to conserve energy. We would burn much more coal, and turning thermostats down to 60 degrees or lower overnight would become more likely. At $200 dollars a barrel there would probably be solar panels on any roof oriented to the south. At $70 a barrel we will have much less of those measures.
If OPEC keeps oil supply up, then prices will be depressed. Depress the price enough and some of the new sources of oil in the US will no longer be viable. They will be shut down until the price of oil goes high enough for a profit. I define ‘shut down’ very broadly, so this could be limited to less drilling for new wells. This will be a problem for those oil producers and the financial institutions which loaned them money.
But consumers will have more money to spend for other products. In my home state, gasoline taxes are set at some arbitrary pennies per gallon level at both the national and state level. Those taxes are not going down as gasoline prices go down but if gasoline usage goes up then those tax receipts will increase.
And I don’t see a feedback loop which would interfere with my sleep. Where was this feedback loop from 1991 to 2003 when oil prices were below $40 a barrel? (In inflation adjusted dollars) Why didn’t our economy improve dramatically when the price per barrel of oil crept from about $35.22 in 2002 to $99.06 in 2008? Shouldn’t that kind of price increase have made for a much better economy? Or are we to believe that low oil prices make the economy worse but raising them also makes the economy worse?
See inflation adjusted oil prices: http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp
The reality is that workers/consumers must be able to afford a commodity or consumers will use less of it. That is the fundamental dominant factor in our economy. (Or the world’s economy, for that matter.)
If we get deflation it will be because wages have fallen too far to support the economy to which we are accustomed.
Americans have already begun redefining their normal. At one time many of them bought a new car every 3 to 5 years when replacement was obviously not a necessity. The average fleet age of light vehicles had gone from 9.6 years in 2002 to 11.4 years in 2013.
Edward Lambert’s work on our economy and the effects of different levels of labor share comes much closer to describing the source of any possible deflation.
I have been thinking about the potential lost jobs in the fracking industry.
In October 2012 Bloomberg Businessweek reported “This year, the drilling industry will support about 360,000 direct jobs, 537,000 jobs in supplying industries and more than 850,000 jobs outside the industry, according to the report.”
From: http://www.businessweek.com/news/2012-10-23/fracking-will-support-1-dot-7-million-jobs-study-shows
The report being cited was done by IHS Global Insight and paid for by the American Petroleum Institute and the Natural Gas Supply Association, among others.
The BLS reported non farm employment in July 2012 was 134,111,000. (Seasonally adjusted)
From: http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CE_cesbref1
So if my math is correct then in 2012 direct jobs of 360,000 represented .00268 of the total non farm workforce or about .25%.
I have my doubts about the 537,000 jobs in supplying industries. But if we factor in the jobs in supplying industries, we get a total of 837,000 or .006688 of the total non farm workforce or about .67%.
I have even more doubts about the 850,000 jobs outside the industry. But if we factor in those jobs we get a total of 1,747,000 or .013 of the total non farm workforce or about 1.3%.
It seems extremely unlikely that the price of a barrel of oil would get so low that operational wells would be shut down. So we are talking about stopping exploration and drilling.
In November 2013, the Multi-State Shale Research Collaborative, a group of state-level research organizations, reported that far fewer than the promised jobs were being created by the fracking industry. “Between 2005 and 2012, less than four new shale-related jobs have been created for each new well. This figure stands in sharp contrast to the claims in some industry-financed studies, which have included estimates as high as 31 for the number of jobs created per well drilled.”
From: http://www.multistateshale.org/shale-employment-report
This report seems at least as reputable as that issued by the industry. Four jobs per well when up to 31 jobs per well were promised. That is a reduction by at least a factor of seven.
I don’t understand how anyone can believe that merely reducing this industry’s employment will significantly worsen our current Great Recession?
JimH:
Process industry and once drilled and/or fracked, I can not imagine there being much more to do most of the time.
There is no current “Great Recession”. This is a oil based economy and people don’t get that. Once they do, they scream in self-hate.
“Process industry and once drilled and/or fracked, I can not imagine there being much more to do most of the time.”
You may be right about the operation of the wells after the sites are drilled and fracked. That would mean that as drilling is slowed or stopped, employment would be very low in that industry. But it also raises more questions about the total employment by this industry.
“This traffic increase usually lasts a few weeks, and once well drilling, completion and fracturing are finished, should decrease substantially.”
From: https://fracfocus.org/hydraulic-fracturing-how-it-works/site-setup
EPA quote: “EPA estimates that approximately 35,000 wells are fractured each year across the United States.
From: http://yosemite.epa.gov/sab/sabproduct.nsf/0/D3483AB445AE61418525775900603E79/$File/Draft+Plan+to+Study+the+Potential+Impacts+of+Hydraulic+Fracturing+on+Drinking+Water+Resources-February+2011.pdf
Let’s allow 1 month for the drilling and fracking and then that crew would move on to the next well. And let’s assume 36,000 wells per year.
If it only takes 4 men per well during the drilling and fracking stages then 3,000 wells per month would require 12,000 men and they could drill and frack a total of 36,000 wells per year.
If it took 31 men per well during the drilling and fracking stages then 3,000 wells per month would require 93,000 men and they could drill and frack a total of 36,000 wells per year.
Losing 36,000 to 93,000 jobs doesn’t seem earth shattering to me. Our current unemployment and underemployment numbers dwarf that number.
I certainly don’t believe that we have recovered from the Great Recession which began in January 2008. And judging by their spending neither do consumers.
And I sure don’t want the coming recession to be blamed on the price of oil and the cut backs in employment in the oil industry. It should be blamed on the sorry state of the economy which should be blamed on low labor share in the entire economy.
JimH:
Consider the Keystone argument? Does it create tens of thousands of jobs or just a couple of thousand permanent jobs. I suspect the latter is more the reality once the pipeline is built. Oil and refining are basically process manufacturing jobs requiring little Labor input. I have not looked as to how many
menpeople are employed in this industry.Run75441,
I agree that this is like the Keystone arguments. The proponents need jobs to trump the environmental concerns. And the opponents may well be low balling the number of jobs for the same sort of reason. So I gave a range, but the top end is extremely low relative to the 134 million employed in our economy in 2012. Double or triple the 93,000 and we are still talking about relatively low numbers. This will have some ill effects, but it is not our main problem.
Lower prices for oil are a good thing for the vast majority of us. But for those speculating in that commodity or those lending to them, lower prices are a disaster. Prices don’t always go up, this should remind us of the speculation in residential housing in the 2000s.
As a side note, we have come to a sad place when we complain about savers and normal market forces.
Check out the job losses graph at CalculatedRisk for May 2014. The recoveries are taking progressively longer with each recession from 1981 forward. From 1990 it took 32 months to recover the job losses, from 2001 it took 46 months, and from 2007 it took 76 months. And we had government fiscal stimulus and almost 0% interest rates for the last.
From: http://www.calculatedriskblog.com/2014/06/may-employment-report-217000-jobs-63.html
Now we just have to find jobs for all those who came into the job market over the last 7 years.
I describe our real problem as “Consumers can not spend what they do not have, and producers will not produce what they can not sell”. Edward Lambert describes it as low labor share.
Distractions work in favor of the promoters for the current economic status quo.
JimH – You don’t like the current economic status quo? You’re hard to please.
2014 is the best year for employment since 1999. There are currently 5m jobs open and unfilled. Hours worked and wages are rising. Keep your fingers crossed that this continues, it does not get much better than this.
From the WSJ just now:
http://online.wsj.com/articles/u-s-payrolls-in-november-grew-321-000-jobless-rate-5-8-1417786322?mod=WSJ_hp_LEFTTopStories
So, now we are supposed to feel sorry for the poor oil companies and poor OPEC countries? Come on! Give me a break.
BKrasting,
From the Bureau of Labor Statistics:
1. The U3 unemployment rate is now 5.8% but in 2007 it was 4.3%.
2. The U6 rate is now 11% but in 2007 it was 8.3%.
Adding to those dismal statistics, today CalculatedRisk has a graph showing that the Labor Participation Rate is 62.8% which was last seen in 1978. That statistic was about 66% in 2007. That 3.2% represents a lot of men and women who have been shunted out of the workforce.
I don’t see this as a recovery. Take those statistics back to 2007 levels and I will join the cheerleaders.
As to the 5m jobs open, I would reserve a special place in hell for employers who post jobs but seldom if ever fill them. What seems to be happening is that employers are sifting thru the unemployed, looking for someone who is recently unemployed, who is well trained on their specific equipment or modes of operation, and who will work for less pay than has been historically paid for that position.
No PR job is going to convince me that filling 321,000 jobs out of 5,000,000 jobs openings is anything but pathetic. And I note that this avalanche of hiring is occurring just before the holiday sales season. Tiny little woopee here!
And lastly, you can read graphs as well as I can.
That CalculatedRisk graph showing months to recover job losses after a recession, presents a long term trend that overpowers any cheerleading.
How long do we have before the next recession? Tick, tick, tick.
JimH:
Pssst . . .
And what is the DJ doing these days? Peeking at 18,000?
They would tell you many of those making up the difference in PR is due to retirements by baby boomers. Some truth to this; but, I have argued it is not true for many as they can not afford to retire. I suspect much of this are Millenials, a bigger cohort than baby boomers.
Run75441,
The DJ getting to 18,000 and on lower volumes is quite a trick.
But the stock market is not the mainstream economy. And it tells us very little about the mainstream economy. Might as well use the number of visitors to PR.
That is my opinion anyway.
JimH
What might be causing such a climb?
The truth is that I don’t know.
I have wondered if the High Frequency Traders’ algorithms are somehow biased in favor of pushing or pulling individual stock prices higher.
Or there is a lot a credit available to the right people, so maybe there is more leveraged buying than in the past.
Those are my best guesses but they are only guesses.
JimH:
You could be right on borrowing money. A similar phenomena occurred in the seventies.
Run75441,
Well I would not want to discount the HFT algorithms causing the problem. I listed it first because I favor it very slightly.
My understanding of HFT is that they use very fast computers connected to the exchanges by very fast transmission paths. (i.e. fiber optic cables, thus the speed of light)
The algorithm detects a buy order for a certain stock and it offers a bid a penny or two higher. If the reply is positive, it cancels its bid and creates another bid for 3 or 4 pennies higher. If the reply is positive it repeats. Somewhere in this process it locates and buys the stock at the cheaper price. The objective is to make a profit of some pennies on each share of stock.
This doesn’t sound like very much money but this is done gazillions of times a day and trading day after trading day.
So what is providing any counterbalancing pressure to keep stocks down?
But I am guessing.
Jim:
The fast transmissions is correct, the financial engineering I am not so sure (not discounting it as it is the same thing which blew up with LTCM and 2008). The cure to this is to force them to hold the transaction for a period of time beyond what they are doing today . . . if it is a problem.