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Page added on May 24, 2016

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Has ‘Glut’ Become a Permanent Economic Fixture?

Consumption

While the “oil glut” has captured heavy media headlines since the legendary “energy crash” of mid-2014, which diminished oil per barrel price from $100 to $30 during the first quarter 2016, that glut has expanded well beyond “oil” to encompass an ever expanding number of economic entities. These would include a wide range of industrial commodities, such as iron ore (steel), coal, natural gas, copper, platinum, palladium, etc. Also hard hit has been a growing range of agricultural products.

In attempting to rationalize the factors behind this growing “glut” spread, it’s imperative to analyze the amazing productive process that has been generated by undeveloped, developing, and developed nations. These have increased their productivity and production at all levels of commodities, whether industrial, commercial, retail, agricultural, or technological.

Although economic futurists were previously contemplating worldwide shortages at the beginning of this century, due to the expectation of global population growth, the extent of technological breakthroughs, as well as the production evolution of previously undeveloped demand economies was not taken into account.

While much of the blame for the current overflow of oil, natural gas, copper, and steel buying power has been laid on China’s demand doorstep, what has been overlooked is Beijing’s own production increases.

Not only has China become the absorber of much of the world’s economic production, it has risen to the top of global steel production, plus its ability to increase production, where it had previously been in need of imports. Even Chinese oil production still places it among the world’s top dozen excavators and refiners.

While early 21st century projections in the demand/supply balance counted on a near doubling of the world’s population, the current 7.4 billion will easily reach the eight billion mark before the next decade has ended. But the unpredicted and incredible production and productivity to serve this number at increasingly growing supply levels was not taken into consideration.

Instead, the idea that “peak” availability in fossil fuels, as well as agricultural necessities for a fast-growing world were considered the major problem the world would be facing in the near term, has been replaced by wide-ranging overproduction. That is why a new inflationary spiral was thought to be inevitable in the near future, as the demand/supply balance was tilted in favor of the former.

At this point in time, the economic world will continue to seek a balance provided by more demand and supply limitation to keep the current “production glut” from careening out of control.

Dessert Sun



19 Comments on "Has ‘Glut’ Become a Permanent Economic Fixture?"

  1. rockman on Tue, 24th May 2016 3:04 pm 

    Interesting: so when global oil production demand declined in the 80’s resulting in oil prices less then half the current price and operators, like the KSA, cut production levels there was no “glut”. But now that oil prices have dropped to half of the former price but are 2X greater then the 1980’s non-glut and the world is consuming more oil then ever before we have a “glut”. A glut because operators are able to sell more oil then ever before since the petroleum age began.

    I’m confused: when there are not enough buyers for the available oil production (as we had in the 80’s) it’s NOT a glut. But when producers are able to sell record amounts of oil we have a glut.

    Sounds like some folks are defining “glut” by the price of oil and not the amount capable of being produced. This is a difficult conversation. LOL.

  2. Davy on Tue, 24th May 2016 3:06 pm 

    The article should be discussing the existential crisis of global malinvestment with its debt deflation, industrial overcapacity, and commodity overproduction. This malinvestment has contributed to a destabilized global financial arrangement. If we lose confidence in each other we will not trade. Our financial system is teetering on the dysfunctional and we are close to a hyperinflation loss of confidence in fiat currencies and paper wealth of all kinds. The malinvestment has pumped a huge amount of carbon into the atmosphere in a short time and with little of real value to show for it. Chinese ghost cities and unneeded US strip malls are not value. Value is something that is going to increase our chances of survival when the global system collapses. We could have used the 08 crisis to undergo a hard landing and adjust to our reality of a coming collapse. Instead we went balls to the wall in the search for growth. We are at the end of the line with a destroyed social fabric, economy, and climate.

  3. peakyeast on Tue, 24th May 2016 4:17 pm 

    Wheres the gluttonous plant now? I would have thought she would be on this article like a glut of flies on a glut of sheet and provide us with a glut of glut information.

    I bet she got something good glutting her up and now doesnt care about the really important people in her life here on PO.com. 🙂

    and the rock is right … as usual… :-S

  4. penury on Tue, 24th May 2016 4:39 pm 

    Davy, you are correct,however I think that would take several large books to explain. I guess a glut is where people run out of money or desire for something before the sellers run out of that something.

  5. dave thompson on Tue, 24th May 2016 5:02 pm 

    The Rock, as per usual, gets it right by asking just what constitutes a glut. The only thing I might add is that all of the oily stuff produced does eventually get refined and burned\used in our global system of destruction/consumption, economy. So yea ya gotta wonder what goes through the minds of the PTB knowing full well that this crazy roller coaster of human industrialization has no breaks, no one at the controls, all the mindless riders going WEEEEEEEEEE, with there hands up it the air while the track is quickly falling apart and/or running out of track.

  6. Davy on Tue, 24th May 2016 5:56 pm 

    “Why China Is Being Flooded With Oil: Billions In Underwater OPEC Loans Repayable In Crude”
    http://www.zerohedge.com/news/2016-05-24/why-china-being-flooded-oil-billions-underwater-opec-loans-repayable-crude

    “few oil exporters anticipated such an acute oil plunge in such as short time span, which resulted in the value of the collateral tumbling by 70%, and now find themselves have to repay the original loan by remitting as much as three times more oil!”

    “Barclays estimate Caracas owes $7 billion to Beijing this year and needs nearly 800,000 bpd to meet payments, up from 230,000 bpd when oil traded at $100 per barrel.”

    “Fast forward to today when Angola, Nigeria, Iraq, Venezuela and Kurdistan are due to repay a total of between $30 billion and $50 billion with oil, Reuters calculates. Repaying $50 billion required only slightly over 1 million barrels per day (bpd) of oil exports when it was trading at $120 per barrel but with prices of around $40, the same repayment would require exports of over 3 million bpd.”

    “This is terrible news for all the indebted exporters because not only do they now have to pump three times as much just to repay the same loan, they have little if anything left over to fund critical budget needs and certainly nothing left over to invest.”

    “it explains why China suddenly finds itself flooded with so much oil, the country has unleashed its teapot refining army into overdrive. More importantly, it may shift the entire dynamic of China’s soaring imports on its head, because according to Reuters, the reason why China is being flooded with oil has little to do with a surge in demand, but because OPEC exporters are forced to ship far greater amounts of crude to China!”

    “The summary is fascinating: China is being flooded with oil, on one hand due to ongoint purchases, but to a large extent because its oil-exporting counterparts (who need to remain on good terms with lender of last resort China) are scrambling to repay their Chinese loans by shipping out record amount of oil in the direction of China, so much so that even China’s infrastructure can no longer handle the inbound traffic. As Bloomberg notes, “ships continue to be held up at Qingdao. At least 16 oil tankers with capacity to carry 21.2 million barrels have stayed near the port for more than 10 days over May 1-23. Half of them were there for more than a month.” How this unprecedented dynamic plays out, is at this point impossible to predict, but with such dramatic pockets of zero-sum inefficiency, where half of OPEC-loss is China’s gain, we eagerly look forward to the conclusion and how it will impact the price of oil.”

  7. makati1 on Tue, 24th May 2016 7:30 pm 

    penury, you put it into the right words.

    There was a glut of food during the depression, because no one could afford to buy food at a profitable price for the farmers so a lot of it was dumped in the fields or on the roads rather than pay to ship it to market.

    That is where oil is today. No lack of oil. There is a huge lack of money to purchase it at a profitable price.

    Gut of oil? No, a huge glut of debt. So, yes, it has become a permanent glut, or at least until enough oil companies go bankrupt and shut down a lot of wells. The price will not go up much as the consumer cannot afford higher prices. If they try, it will collapse the world economy.

  8. Northwest Resident on Tue, 24th May 2016 8:25 pm 

    Davy — I read that article. It could be re-titled “Why China And The Rest Of The World Are Totally Screwed”. Clearly China dished out many billions and perhaps more in loans that they expected to be making a handsome profit on today. And it was supposed to be a killer deal for the countries they made the loans to as well. Instead, China ends up with a vast excess of a commodity that the global economy can’t absorb, and may never be able to fully absorb. Meanwhile, the countries they loaned to are sinking like rocks as depletion dynamics kick in and the price of oil remains far too low. Disaster!

  9. Keith McClary on Tue, 24th May 2016 11:58 pm 

    Right, there will be a “permanent” glut of our “virtually unlimited” resources.

  10. rockman on Wed, 25th May 2016 6:38 am 

    mak – So you chose to define a “glut” based upon the price of oil and not the record amount of consumption we see today. IOW every oil producer has a ready buyer for every bbl they have which is your mind is a glut. We’ll just gave to agree to disagree. Now if companies were forced to shut in their oil wells due to a lack of buyers that would be a glut IMHO.

    NR – As far as I know no one has defaulted on any Chinese loans. They are being paid in a currency or in oil. Either way the are getting paid as far as I can tell. OTOH those making repayments that get much of their income from oil sales are taking a big hit. But so far are still paying. And may actually be getting taken even greater advantage of by China as the need to borrow more money to maintain production. Just as we are seeing in the US those with capital are buying oil reserves in the ground. Which would make an even better investment for China today then when it were buying when oil was $90+/bbl.

    If you’re a major oil consumer and have the capex you’re I the driver’s seat today. As the Rockman always says: It ain’t personal…only business. LOL.

  11. makati1 on Wed, 25th May 2016 7:16 am 

    rockman, did you notice that the growth in “buying” is in the increase of millions of bbls/day in payment of countries that owe oil to China in payment of past loans?

    When oil was 100/bbl they could pay with a few hundred bbls/day. Now at $40 they have to pay 2 1/2 times as much oil to China to pay their debt. It adds up to about 3 million bbls/day going to China to pay for loans. That is 3 million bbl/day that China does not have to buy and is causing a glut in China. Something will soon change. Those oil debts will be renegotiated and then the “growth” will end.

    http://www.zerohedge.com/news/2016-05-24/why-china-being-flooded-oil-billions-underwater-opec-loans-repayable-crude

    Be patient. The Age of Petroleum is coming to a close.

  12. Davy on Wed, 25th May 2016 7:37 am 

    You can be sure these countries that engaged these deals with China will not be as happy with the Chinese as in the past. It is likely these countries are going to be very angry soon with China as they experience economic pain and suffering. It is also likely China is going to experience some bad debt particularly with Venezuela and maybe Nigeria. These countries are close to the point of non-payment. I talked about this 2 years ago and pro-Bric people laughed. It appears China and their spectacular bilateral trade deals are about to backfire. Their cost of oil may going to go up from non-payment of loans.

  13. rockman on Wed, 25th May 2016 10:40 am 

    MAK – Why are you talking about a “glut” of oil in China? First, they are a big net importer of oil since domestic production can’t meet demand. Second, China isn’t going to buy oil they aren’t consuming with the exception of what they are just starting to send to their SPR. And Chinese imports along with consumption have been increasing and will continue increasing. Perhaps you’ve missed understood the headlines about the decrease in Chinese oil consumption. That “decrease” has been in it RATE OF INCREASING CONSUMPTION…not its oil consumption which has not decreased but as shown below has been increasing all along. As far as paying back loans in oil vs cash I’ve yet to see a break down. But even if much of the repayment is in bbls of oil what’s wrong with that since China is still increasing its consumption?

    China’s oil demand will grow 4.3 percent this year to surpass 11 million barrels per day, compared to 4.8 percent growth last year, the country’s top energy group forecast on Tuesday. State-owned China National Petroleum Corporation (CNPC) sees the country’s oil demand rising to 566 million tonnes, or 11.32 million bpd in 2016, some 460,000 bpd higher than last year.

    The forecast, in an annual report released by CNPC’s research institute, also put the country’s net crude imports up 7.3 percent this year to 7.14 million bpd. China, the world’s second-largest oil consumer, raised crude imports by nearly 9 percent last year, or an additional 540,000 bpd, largely to boost government and commercial reserves as oil companies took advantage of the nearly 70 percent fall in global benchmark prices from mid-2014 to end-2015.

  14. PracticalMaina on Wed, 25th May 2016 10:43 am 

    The next generation should benefit greatly, if they survive.
    https://consumer.healthday.com/pregnancy-information-29/pregnancy-risks-news-546/air-pollution-tied-to-stillbirth-in-small-study-711301.html

  15. Apneaman on Wed, 25th May 2016 11:10 am 

    ExxonMobil tried to censor climate scientists to Congress during Bush era
    Exclusive: 2001 intervention adds to evidence that oil company was aware of the science and its implications for government policy and the energy industry

    https://www.theguardian.com/business/2016/may/25/exxonmobil-climate-change-scientists-congress-george-w-bush

    Wouldn’t Nuremberg style trails and punishment for these fucks be awesome? They could live stream the hangings.

  16. Apneaman on Wed, 25th May 2016 11:12 am 

    Members of Congress call for investigation of Shell over climate change

    http://www.latimes.com/business/la-fi-congress-shell-climate-change-20160218-story.html

    All these lawyers must add up. One can only hope.

  17. sidzepp on Wed, 25th May 2016 1:03 pm 

    Davy, interesting article from the BBC
    http://www.bbc.com/news/technology-36376966

    Wonder where those displaced Chinese workers are going and what they will do?

  18. Davy on Wed, 25th May 2016 2:12 pm 

    Sid, China is an amazing country of contradictions. It is a huge continent size economy. There are many different industrial and business sectors so you can expect some of this but the majority of China’s industry is heavy and it is here their problems are. No amount of robots can cause the kind of disruption as that of the failing zombie state owned firms. These failing state owned firms are China’s biggest challenge for social cohesion.

  19. antaris on Wed, 25th May 2016 4:59 pm 

    sidzepp, I can envision a cartoon showing a self driving car showing up at a chinese mcdonalds. The car has a one eyed, one armed robot there to buy an large order of fries and being handed it by another one armed robot. In the rear seat of the car are many past orders of large fries sitting not having been eaten. I would have to work on a good caption for the cartoon but it shouldn’t be hard.

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