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A World Of Hurt

December 5, 2014

Mr.MARKET has been puttin' the hurtin' on gold bulls, writes Bill Bonner in his Diary of a Rogue Economist.

Monday, however, he went after the gold shorts. Gold rose $42.60 per ounce from Friday's close...some 3.6%. That's proportionally equal to a move of 640 points on the Dow.

But today our sympathies go to poor Vladimir Putin and Nicolás Maduro. In Russia, the Ruble is falling and growth is grinding to a halt. In Venezuela, the whole economy is falling apart. The proximate cause of this hurtin' is a fall in the price of oil.

Monday, US crude oil saw its largest daily gain since August 2012. But it's still down 32% from its 52-week high, set in June.

Outside of the big oil exporting countries and the US shale-oil business this big drop in prices is widely seen as good news. Consumers fill their tanks at lower gas prices and have a few bucks left over – money that can be used to buy things. According to the current and conventional delusions of the economic profession, this leads to sustained higher economic growth, more jobs and a cure for impotence.

But dear reader, was there ever in the history of the world a hurtin' that stayed put?

That's the trouble with hurtin': It moves around.

In today's Diary we look more closely at the subject of hurtin' generally...and the effect of lower oil prices, specifically.

In passing, we observe that the secret to investing success is to buy what is hurtin' when it is hurtin' most...and to sell what ain't.

It came out last week that OPEC is deliberately adding to the suffering of US shale-oil producers.

At its meeting in Vienna last Thursday, the 12-nation oil cartel decided to leave its output ceiling at 30 million barrels of oil a day, where it has been for the last three years.

As Chris put it yesterday in The B&P Briefing – our subscriber-only bonus letter – this is economic warfare.

OPEC believes, or so it seems, that cheaper oil prices will put pressure on high-cost US shale-oil producers. Although production costs vary, fracking costs more than pumping straight up.

Middle Eastern oil comes as readily up from the sand as water from a hand-dug well. That's why the Saudis are the world's lowest-cost producers – at just $2 a barrel.

All else being equal, the more they pump, the lower prices go, and the harder it is to make a good living in South Texas or West Siberia.

Conventional Middle Eastern oil is still profitable – even with oil as low as $67 a barrel. Unconventional shale and offshore oil may not be. Abdalla El-Badri, OPEC's secretary-general, reckons half of all US shale output is unprofitable below an oil price of $85 a barrel.

Still, you may say, lower energy costs will revive the US consumer matter who pumps it. (Chris wrote about this recently here.)

Lower oil prices make it possible for Americans to buy more stuff. Or even save their money!

Pity the poor Russians and Venezuelans: They'll have to live with less.

On this point, we congratulate Mr.Maduro for his deep philosophical reflection on the nature of hurtin'. Rather than whine about it, he noted it was "an opportunity to end superfluous luxuries and unnecessary spending."

So you see, the hurtee may come out ahead. He may emerge from the hurtin' in better shape – like the gold mining companies that have had to take free soda machines out of their corporate dining rooms.

When the hurtin' moves to someone else, they are leaner and meaner than ever.

For instance, low oil prices squeeze out capital investment in the energy sector.

Who wants to drill a new well with the price falling? Who wants to put in solar panels? Who wants to buy a new Prius or a new Tesla? Who invests in future production?

No one.

Higher-cost shale-oil producers go out of business. Alternative energy producers go to sleep. The bulls go broke and the shorts count their money. Then, the hurtin' is ready to move on – from the producers to the consumers.

Low oil prices have the same sort of unintended, but fully predictable, consequences as low interest rates. Consumers catch a break – temporarily. But capital investment goes down. And output declines.

Worldwide, oil use is still increasing. Without more investment to bring forth more supply, prices will shoot up again.

Gold is hurtin'. Oil is hurtin'. Russia is hurtin'. Venezuela is hurtin'. Greece is hurtin'.

Eventually, the pain will go away. But the hurtin' may also get worse before the hurtin' moves on.


Courtesy of Bonner & Partners -

The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).
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