Peak Oil is You
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Page added on September 21, 2015
Oil-Dollar Breakdown
There is an almost dogmatic belief that the price of oil and the dollar have an inverse relationship. While in recent years, the dollar/oil inverse correlation has been very tight, throughout history that has not always been the case. In fact in the oil market and that of other commodities, we may be on the verge of a total breakdown of that strong inverse relationship. The reason for that breakdown is the same reason commodities became so highly correlated to the dollar in the first place; it was the impact of quantitative easing (QE).
Commodities and the dollar do not always go in opposite directions. There have been numerous times when commodities and the dollar have gone in the same direction. Many times commodities actually outperformed the dollar. (See chart below.)
*DXY is a weighted geometric mean of the dollar’s value compared only with a “basket” of six other major currencies, which are: Euro (EUR) 57.6%, Japanese Yen (JPY) 13.6%, Pound Sterling (GBP) 11.9%, Canadian Dollar (CAD) 9.1%, Swedish Krona (SEK) 4.2%, Swiss Franc (CHF) 3.6%.
**Commodities are represented by the S&P GSCI TR from January 1970 to July 1998 and the Bloomberg Commodity Index TR from August 1998 through September 2014.
When commodity demand is strong domestically, or even internationally, the exchange rate doesn’t matter. Currency will chase the product regardless of the cost of the currency. While the dollar has some impact on the price of oil and other commodities, as commodities are priced in dollars, it is far from the only factor.
The value of the dollar had more influence on oil prices when, in the 1990s, the US had to import almost 60 percent of its petroleum. Now US net imports account for only 27 percent of the petroleum consumed in the country, the lowest annual average since 1985. That drop in imports makes the price less sensitive to currency market fluctuations.
The European Central Bank conducted a study and found that the US dollar and the crude oil market had a strong negative correlation. That correlation became clear early on in the year 2000. Yet prior to the year 2000, “there was no such systematic correlation over the previous three decades”.
The oil-to-dollar correlation hit its zenith at the start of the financial crisis, when in 2008-09 it ran near 60 percent. The reason for the high correlation was the strength or weakness of currencies, which was reflecting a shifting of risk assets trying to find a safe haven against what was an unfolding economic crisis.
Oil had been in a historic bull market. Not only was the US economy expanding due to low oil prices, those same low oil prices helped drive the explosive industrial revolution in China as well as the growing strength of the European Union. Oil prices saw a low of $16.70 that then went on to peak at $147.27 a barrel in the heat of the commodity-buying frenzy at the height of the economic crisis in 2008.
While most of the early price movement was driven by supply and demand, a massive surge of more than $97.00 a barrel from the lows in 2007 to the high in 2008 really was caused by panic and risk aversion as the wheels started to come off the global economy.
Many misunderstood that price move. Some said the rally came because the world had hit peak oil production. The theory was that as demand grew and we produced more oil, the maximum rate of extraction of petroleum would be reached, and the rate of production would then enter terminal decline.
In 2007 there was talk of oil shortages, and in a book titled Twilight in the Desert by the late Matt Simmons fears were raised that oil fields in Saudi Arabia, the world’s largest oil producer, had entered decline.
Oil man T. Boone Pickens said that oil production had already peaked when production hit more than 84 million barrels per day. Pickens said that global production could not sustain more than 84 million barrels a day because the largest oil fields in the world were declining. “It’s a treadmill that you just can’t keep up with,” Pickens said. “If I’m right, we’re already at the peak, the price will have to go up.” That was before the enormity of the shale oil revolution became clear to him and many others. Prices did go up, but the reason was not peak oil but something almost as ominous.
The real run on oil started in 2007 when Federal Reserve Chairman Ben Bernanke started to realize the depth of the financial crisis. In August 2007, the Federal Open Market Committee’s (FOMC’s) target for the federal funds rate was 5.25 percent, and as the economy started to deteriorate, the Federal Reserve started to lower interest rates even as Europe continued to raise them. This caused the dollar to severely decline, and the massive buying of oil and other commodity assets began to act as a hedge from the falling dollar’s value.
Buying in the oil market also came as traders thought the world supply of oil would tighten dramatically. Even big banks such as Goldman Sachs were predicting that due to the unending strength in energy demand from China and Europe, the world would see oil as high as $200 a barrel, despite problems in the US sub-prime market.
Many believed that global economies had “decoupled” from the US economy and that our problems here would not hurt demand growth even if the US mortgage crisis slowed US growth.
The Lehman Brothers’ bankruptcy stopped the world in 2008, and the truth about what drove oil became apparent. It was not “peak oil production” but a bubble created by money moving around the globe trying to find a safe haven from falling interest rates and the collapse of the US dollar. Oil prices tanked and demand for oil plummeted, falling more than 2.0 million barrels a day in an instant, as credit and the global economy froze.
On November 25, 2008, the Federal Reserve attempted to mend the economy by announcing they were moving toward quantitative easing. This raised the correlation of the price of oil to the dollar to the point at which their movements were utterly dependent on each other. They literally moved in lock step. Money printing by the Federal Reserve was the only demand growth hope that oil had going for it. On December 16, 2008, the program was formally launched after the oil market, in that month, hit a low of $32.40 per barrel.
Then came the era of risk-on and risk-off. As economic hopes brightened, traders on “risk-on” days would buy euros, buy commodities and sell the dollar. On “risk-off” days, they would do the opposite. Investment money was trading scared. Money was beginning to take small steps back into the market and then would pull back until traders eventually got used to the cold economic waters. The price of oil moved in tight constraints. It was up on risk-on days and down on risk-off days as it became clear that Federal Reserve actions and subsequent simulative actions by other central banks were all that prices and demand had going for them. Oil would ride the QE risk-on/risk-off move all the way back up to $114.83 a barrel in May 2011.
At present day, the Fed is looking to raise interest rates as the rest of the world continues going in the opposite direction. This is almost the exact opposite of the beginning of the financial crisis when the Fed started to lower rates while Europe was raising them. We now have 63 percent of the global central banks raising interest rates as the Fed in the US is signaling they are about to begin raising them. This has caused the US dollar to go to a 13-year high and crude oil to fall back to its lowest levels since the beginning when the Federal Reserve first moved to quantitative easing. While the move in oil is predictable, from an exchange rate perspective, we have to ask: will it be sustainable?
Because even though in the short run the dollar is weighing the price of crude oil, the fact that the Fed is normalizing rates should mean that the US economy is finally starting to heal and will bode well for energy demand. Even for the economies that are struggling, we should still see demand for crude oil grow as more QE and lower interest rates in those economies will increase demand as well. If demand starts to spark, the price of oil will break away from its US dollar value related change as the current glut of oil will start to dry up.
The glut of crude oil will dry up not only because demand will improve, but also because the recent price decline caused a massive pullback in energy investment, and this will eventually take a toll on production. US output will fall later this year just as global demand starts to improve. This then will start an oil demand price run-up that should take the price of crude oil back towards the $80-per-barrel area. This all assumes, of course, that the turmoil in Greece doesn’t drag Europe into a recession. Oil will find its own way despite the dollar even after the Fed starts to raise rates.
27 Comments on "Oil-Dollar Breakdown"
Makati1 on Mon, 21st Sep 2015 7:54 am
Still pushing the “global demand will improve” BS. lol. Lots of banker propaganda (BS) in that last paragraph.
twocats on Mon, 21st Sep 2015 10:32 am
This article is dated 9/21, but its almost as if the writer didn’t catch the part where the Fed didn’t raise rates and is signaling it might go NIRP and back on QE. He also doesn’t explore petrodollar (and its apparent weakness). Its an important discussion.
tita on Mon, 21st Sep 2015 10:39 am
The rally in oil prices between 2007 and 2008 may have been caused from the devaluation of the dollar consequent to the lower interest rate of the FED consequent to the eve of financial crisis. But before that, another rally happened between 1998 and 2007, which raised the awareness of the concept of peak oil. This was not caused from financial distress. Of course, some geopolitical events took place, but it was mainly driven by a tight gap between production and demand. If this was not some effect of approching peak oil, then what was it?
And what really caused this financial crisis? Not exactly peak oil, but the rising energy toll did not help to repay our own debt.
Peak oil is not something that will happen overnight. In facts, it is quite a long process difficult to measure, but clearly affecting the global economy.
Davy on Mon, 21st Sep 2015 10:41 am
Great point Tita!
penury on Mon, 21st Sep 2015 11:03 am
Lets cut the B.S, and de-couple the dollar and oil and see if the relationship changes.
Boat on Mon, 21st Sep 2015 11:20 am
tita
The big jump in oil price lasted about 6 years. But a whole new world of oil now awaits. From Argentina to Mexico the US shale fracking is waiting with oil resources waiting on price. Even now there are 600 rigs drilling at $40 oil in the US.
You are correct some geopolitical events took place. Liberia took much of it’s oil off the market. Nigeria had many problems and of course until recently Iraq. Iran also dropped 1/2 of it’s production. That explains the tight oil market.
So why the glut? Much of this drop off was replaced with tar sands and fracked oil. As these nations return with oil production the world just cant grow fast enough. IMO it will take geopolitics to raise oil to the $100 level or decades down the road maybe climate change. Oil in general there is plenty of it and a long time till peak oil.
Davy on Mon, 21st Sep 2015 11:23 am
Dream on Boat, as always it is a “until something happens this will happen deal” in regards to your mother load of oil waiting. That is not rock solid Boat. Your just pissing in the wind and eating corn pone as usual.
Boat on Mon, 21st Sep 2015 11:29 am
Davy,
Did ya know there are less than 200 drilling rigs for nat gas in the US right now? This is down from 1550 just awhile back in history. And guess what, they still put out enough production to fuel a huge gas expansion overtaking coal as the US largest electric producer. All at cheap prices. Wow what an technology.
Boat on Mon, 21st Sep 2015 11:59 am
Davy,
You notice that huge drop off in US production? I have yet to see it.
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS1&f=M
Oil drilling rigs went down from 1640 to 644. Your cheering of the demise of US oil may be a little premature. lol
At some point you doomers may want to rethink your oil is in decline argument. It will take climate change to flood out the oil fields maybe. Or apemans fires. He loves them fires.
Jersey Patriot on Mon, 21st Sep 2015 12:27 pm
Of course, some geopolitical events took place, but it was mainly driven by a tight gap between production and demand. If this was not some effect of approching peak oil, then what was it?
Commodities rose sharply in price during the 2000s, almost without exception. If practically all commodities rose in price at the same time, peak oil probably isn’t the cause. More likely, the sharp rise was due to China’s incomprehensibly massive construction boom. The end of China’s boom brought a global crash across commodities, not just oil.
Davy on Mon, 21st Sep 2015 12:35 pm
Jersey, oil is a foundational commodity. Oil wags all the other commodities tale. China was a big influence but a lions share of China energy growth was coal followed by oil. Peak oil dynamics was most definitely involved along with speculation.
apneaman on Mon, 21st Sep 2015 12:53 pm
Boat, no he hates those fires because he has been almost trapped by one and burned and in a completely different episode not AGW related his cousin’s house burned to the ground and they lost everything, including our family tree (pre computer storage) and also his wife’s family tree. Some things insurance cannot replace. Ask the 1100 people in California who lost their home recently from the AGW enhanced fires about that then go back to your cheerleading for more of everything driving it you mindless fucking ape.
Boat on Mon, 21st Sep 2015 1:22 pm
apeman,
You done to many of those drugs. I am not cheer-leading the FF industry, I can just read a chart. LOL. Tell me ape, why do people build homes in the middle of trees. And then they wonder why a fire came.
Davy on Mon, 21st Sep 2015 1:35 pm
Boat, with or without past drug use the Ape Man has a better handle on things then you do. Maybe drugs would do you good. You know maybe if you would pass through the “Doors or Perception” maybe you would see life as it is instead of your Disney world magic kingdom.
apneaman on Mon, 21st Sep 2015 2:29 pm
Boat, where do you get the idea that drug use muddles everyone’s thinking? If we were to disregard every great mind throughout that was a heavy user or drinker (same thing) our world would be much impoverished. Essentially, we would all be neo-liberals who viewed the entirety of ape experience through industry graphs and gizmos and the bottom line. You know, like you and the rest of the conservative corns (different from the greenie corns). You and planty and the other narrow minded culls are still parroting the Nancy Reagan/Big Gov “Just say NO” brainwashing memes from the 1980’s. See any crack babies lately? One would have to do an awful amount of drugs or drinking for many decades to cause serious irreversible damage. Something equivalent to working at the PVC pipe plant for 15 years – it’s all just chemicals baby. No more druggie Rock N Roll for you boaty, them’s is bad folks. Boat, and what about all the people who can’t even get out of bed without their chemically mind altering mood altering legalized happy pills? Are they not dependant drug users? Should we try and discredit them too? These tens of millions of pot smokers should be locked up too eh? It’s very powerful shit compared to 40 years ago. Boater, my unsolicited advice to you is get some acid or shrooms or peyote, some good tunes and go on a trip.
10 famous geniuses and their drugs of choice
These intellectual luminaries indulged
http://www.salon.com/2013/08/16/10_famous_geniuses_who_used_drugs_and_were_better_off_for_it_partner/
apneaman on Mon, 21st Sep 2015 2:39 pm
Boat, did you alway wear your PPE?
Toxic Substances Portal – Vinyl Chloride
“People who work at facilities that make vinyl chloride or PVC usually are exposed to higher levels than the general population. Work exposure occurs primarily from breathing air that contains vinyl chloride, but workers also are exposed when vinyl chloride contacts the skin or eyes. Based on studies using animals, it is possible that if vinyl chloride comes into contact with your skin or eyes, extremely small amounts could enter your body.”
” Studies of workers who have breathed vinyl chloride over many years showed an increased risk for cancer of the liver. Brain cancer, lung cancer, and some cancers of the blood also may be connected with breathing vinyl chloride over long periods.”
http://www.atsdr.cdc.gov/PHS/PHS.asp?id=280&tid=51
PVC, the Poison Plastic
Unhealthy for Our Nation’s Children and Schools
http://www.chej.org/pvcfactsheets/The_Poison_Plastic.html
Davy on Mon, 21st Sep 2015 3:03 pm
Damn, Ape Man, you found Boats diagnosis. You actually saved him a boat load of money since he won’t have to see a shrink to determine what is the matter with himself.
See this PO dot com board is wonderous. Can we consider Boat part of peak oil dot com dynamics? He is a special case of dynamic disequilibrium. He is from Houston. Peak oil dynamics should cover that.
JuanP on Mon, 21st Sep 2015 3:20 pm
“US output will fall later this year just as global demand starts to improve.”
Later this year? On what planet does this fool live? US oil extraction is already falling, even according to the EIA.
Makati1 on Mon, 21st Sep 2015 9:47 pm
Meanwhile, the Chinese are buying and storing all the oil they can get.
Getting ready for the Us induced world war 3?
Proof of this assertion…
http://journal-neo.org/2015/09/21/the-us-grand-strategy-is-taking-a-u-turn/
Meanwhile…
http://www.washingtonsblog.com/2015/09/u-s-will-station-new-nuclear-weapons-in-germany-against-russia.html
And the drums of war beat louder…
MrNoItAll on Mon, 21st Sep 2015 9:57 pm
Mak — Nobody beats the drums of war louder and more frequently than you. But you’re going to end up being very disappointed. There will be NO big world war three. Reason why: not enough fuel. One week of WWII style battles and troop/supply movements would just about burn up every drop of oil we can get our hands on. Oh — nuclear war you think and frequently predict. I seriously doubt it — nothing to gain, everything to lose. And why bother when total economic collapse will wipe out billions anyway. Yeah, I know, you’re always dreaming of war, war and more war. I just don’t think you’ll get what you so feverishly fantasize and prophesize about all the time.
apneaman on Mon, 21st Sep 2015 10:03 pm
Davy, I only did it because I care so much about the boy.
Bahahahahahahahahahahahahaa…..
Makati1 on Tue, 22nd Sep 2015 1:50 am
MrNo, what fuel is needed for a nuke exchange? Game over.
http://www.globalresearch.ca/republican-warmongers-and-washingtons-policy-of-airstrike-democracy/5477410
http://www.globalresearch.ca/republican-warmongers-and-washingtons-policy-of-airstrike-democracy/5477410
http://journal-neo.org/2015/09/21/the-us-grand-strategy-is-taking-a-u-turn/
etc…
I can only say that the end of almost every empire was war, a major war. And the Us will lose if it doesn’t use it’s nukes first. Not that that will save any part of America, but our leaders are all insane. you only have to listen to their BS to see it. Insanity knows no reason.
Makati1 on Tue, 22nd Sep 2015 1:52 am
MRNo, in denial? Afraid to look behind that curtain? Most are. We are closer to nuclear war than anytime since Hiroshima.
tita on Tue, 22nd Sep 2015 2:08 am
Boat
I’m not a geologist, neither a specialist in oil production. But I’m quite sure that when we dig less holes we’re going to produce less oil. I just don’t know how much. Also, if this shale oil around the world hasn’t been produced yet, that means it isn’t economically interesting. Big oil had not much interest in shale oil. Too much drilling to keep production levels, heavy logistics, short time producing well. The US experience is still ongoing now.
So, the real potential of shale oil is on the debate. We may produce it worldwide or not, depending on the success of the US experience, and the ability to reproduce it elsewhere. Yes, I will wait a year before affirming anything. But we already proved that shale oil is necessary just to sustain the daily global oil consumption.
Davy on Tue, 22nd Sep 2015 2:26 am
MR. you are in denial, shame on you! says the war pig it must be true.
apneaman on Tue, 22nd Sep 2015 2:55 am
Well, anyone studied in the many near misses with nukes might be a little concerned with all the nuclear saber rattling. See the run up to WWI for an example of what can go wrong when tensions are high and 1 unfortunate incident happens. Fuck, war is what we do. Were blood soaked.
marmico on Tue, 22nd Sep 2015 4:14 am
Take mommy’s car and troll for the nuclear hit in East Vancouver, douche.
Now mommy has to fill up the gasoline tank after your trolling. That’s GDP. Your nuclear hit is not recorded in the national accounts, fuctard.
You are a nutter. In the data set when it comes to energy expenditures relative to national income, 2015 will be in the lowest 15% since records were kept.
http://www.eia.gov/totalenergy/data/monthly/pdf/sec1_17.pdf
You should really jump Davy-land’s Green Acres dick for the goat herder circle jerk.