Unintended Consequences

by lizard

Two of my favorite writers regularly featured at Counterpunch have articles worth checking out. While the articles are about two different topics, both could be filed under unintended consequences.

The first article, by Michael Whitney, is titled Oil Price Blowback. Here is the opening of the article:

It’s hard to know which country is going to suffer the most from falling oil prices. Up to now, of course, Russia, Iran and Venezuela have taken the biggest hit, but that will probably change as time goes on. What the Obama administration should be worried about is the second-order effects that will eventually show up in terms of higher unemployment, market volatility, and wobbly bank balance sheets. That’s where the real damage is going to crop up because that’s where red ink and bad loans can metastasize into a full-blown financial crisis.

Later in the article Whitney explains in detail what could happen if prices remain low:

Many of the oil-drilling newcomers set up shop to take advantage of the low rates and easy money available in the bond market. Now that prices have crashed, investors are avoiding energy-related junk bonds like the plague which is making it impossible for the smaller companies to roll over their debt or attract fresh capital. When these companies start to default en masse, as they certainly will if prices don’t rebound, the blowback will be felt on bank balance sheets across the country creating the possibility of another financial meltdown. (Now we ARE talking about a financial crisis.)

The basic problem is that the banks have bundled a lot of their dodgy debt into financially-engineered products like Collateralized Loan Obligations (CLOs) and Collateralized Debt Obligations (CDOs) that will inevitably fail when borrowers are no longer able to service the loans. The rot can be concealed for a while, but eventually, if prices don’t recover, a significant number of these companies are going to go under which will push the perennially-undercapitalized banking system to the brink once again. That’s why Washington’s plan to push down oil prices (to hurt the Russian economy) might have made sense on a short-term basis (to shock Putin into submission) but as a long-term strategy, it’s nuts. And what’s even crazier, is that Obama has decided to double-down on the same wacky plan even though Putin hasn’t given an inch. Check this out from Reuters on Monday:

“The Obama administration has opened a new front in the global battle for oil market share, effectively clearing the way for the shipment of as much as a million barrels per day of ultra-light U.S. crude to the rest of the world…

The Department of Commerce on Tuesday ended a year-long silence on a contentious, four-decade ban on oil exports, saying it had begun approving a backlog of requests to sell processed light oil abroad.

The action comes at a critical juncture for the global oil market. World prices have halved to less than $60 a barrel since the summer as top exporter Saudi Arabia, once a staunch defender of $100 oil, refused to cut production in the face of surging U.S. shale output and tempered global demand…

With global oil markets in flux, it is far from clear how much U.S. condensate will find a market overseas.”
(Analysis – U.S. opening of oil export tap widens battle for global market, Reuters)

Obama is adding supply, which will further drop prices. There will be long-term consequences to this economic war against Russia. Republicans trying to get the Keystone XL pipeline passed have themselves been passed by the reality of low prices killing profits for Canadian producers (of course Republicans haven’t lived in reality for awhile now).

The other article is from Dave Lindorff, and it examines the unintended consequences of the NYPD work stoppage, which raises the following question: if stopping broken windows arrests doesn’t result in anarchy, why resume it? From the link:

For two weeks now, the largest police force in the nation has essentially stopped making arrests. According to a lead story in the New York Timestoday, ticket issuance by police in this city of 8.4 million is down by 90 percent. The paper reports that:

Most precincts’ weekly tallies for criminal infractions — typically about 4,000 a week citywide — were close to zero.

And yet, New York continues to function normally, with people going about their business, secure on sidewalk, street, public transit and in their homes.

Could it be that the city has been wasting much of the nearly $5 billion it spends annually on its over 34,000 uniformed cops (15% of the city’s budget)? Could it be that having all those cops cruising around neighborhoods harassing people — mostly, statistics show, people of color and poor people — by stopping them and frisking them, by busting them for “crimes” like public urination, smoking a joint, drinking a beer outside, selliing trinkets or “lossie” cigs, or just “looking suspicious” — has been doing nothing to reduce major crimes and violence after all?

The NYPD may want to rethink their tactics. Resuming the racist policy of stop and frisk justified by the increasingly debunked theory of broken windows policing will become more difficult with each passing day.

It will be interesting to see how these two issues develop.

  1. evdebs

    The Saudi’s have increased production at all. Their production for the past 2 1/2 years, has remained fairly stable. In fact, the current production is a bit lower than the average for that period. You can look it up: http://ycharts.com/indicators/saudi_arabia_crude_oil_production

    But it’s a convenient conspiracy theory to blame the drop in prices on them, given that it’s so cheap to extract oil in that country that they’d profit even if the current price dropped by half.

    The alleged “increase,” supposedly ramped up to damage Russia, at the behest of John Kerry, doesn’t exist. They’ve kept pretty much to OPEC quotas.

    The “problem,” if you want to call it that, is the major increase in US shale production, fueled by borrowed money. The bigger boys, particularly Shell, have substantially withdrawn from the market, leaving it to less environmentally considerate specialists such as Sandridge or Chesapeake.

    We are exporting instead of conserving.

    We’ve certainly destabilized the political situation in Eastern Europe, with the U.S. considerably helping to fuel the fire in Ukraine, as exemplified by the intercepted Victoria Nuland phone call. She of course is a former Dick Cheney deputy. Her husband is imperialist Robert Kagan, a Project for the New American Century (PNAC) co-founder, who is on the Council on Foreign Relations, which sports such criminals as Eliot Abrams on its roster.

    Obama has made many very bad appointments, but Nuland should be in contention for the title of the worst.

    • Saudi Arabia is an independent state in the same sense as Cuba, held hostage by forces beyond its control. When Wall Street/London say jump, the entire royal family there bows to the west and does as told.

      This same scenario played out in 1985, oil dropping to $9 a barrel, and then as now the target the Russians. Everything else is collateral damage, though they would like to see Venezuelan democracy ended too.

      Oil in teh hands of imperialists is just one more weapon.

      • Craig Moore

        Penn Square Bank failed in 1982. 80% of its load portfolio was in energy loans. This was followed by Seafirst Bank out of Seattle. To suggest that this was some sort of mutual suicide pact manipulated by your “hands of imperialists” is ridiculous.

      • I used the words “collateral damage.”

        These things can be understoof to a large degree, Craig, by first examining your assumptions. The first one to go, “free markets.” They don’t exist except among the very poor.

        Once you realize that free markets don’t exist, it easily follows that plunging oil prices are the result of manipulation. Then you can begin to exercise critical thought facilities on the who and why.

        This Endeth the lesson.

        • Craig Moore

          If you are going to make a specious argument, please quote my assumptions rather than making it up. Thus Endeth the lesson..

        • So you agree then that there are no free markets. Then why, pray tell, when your eyes tell you the truth, do you seek other explanations for current behaviors?

          There’s a game going on. It’s hurting a lot of people, and the stakes are very high. As Liz points out, it could easily backfire, and the people in London and on Wall Street know this, and are doing it anyway. That’s smacks of desperation.

          • Craig Moore

            Perhaps when the G3 geomagnetic storm hitting the earth today passes, you’ll recover enough to stop with the nonsense such as your lame attempt to put words in my mouth I have neither said nor written. As to your “game,” IMHO no matter how and why the fall in oil prices started, it is presently beyond effective control by your imagined dark forces or inept governments.

    • JC

      While Saudi Arabia/OPEC may not have increased production, they have not reduced production in light of U.S. and other country’s increased production. So they are complicit in the oil price plunge charade (oil weapon). They could have stabilized prices at any point they would have wanted by manipulating their volume.

      Of course, the corollary to this is that by not engaging in price manipulation, OPEC begins to allow the oil market to price itself more accurately. And the huge drop in the price of oil can then be attributed as much to drop in demand (slowing global economy) as it can to increased production.

      In any case, global financial market instability is the result of plunging oil prices, and when you are the empire of chaos, it presents unique opportunities to do things like leverage sanctions on countries you want to impose your hegemony on.

      To hell with small time investors in the Bakken. Compared to the resources available to exploit in Russia, it’s small potatoes.

    • Steve W

      The Saudis have offered price discounts which has driven down the price all around.

      • evdebs

        Reuters reported on Monday that: “The (Saudi) Kingdom’s move to cut its OSPs has been perceived by many traders as a signal of its decision to abandon efforts to shore up falling crude oil prices and, instead, focus on maintaining its share of key markets.”

        Is there any part of that sentence you don’t understand?

        The discounts just offered to push West Africa out of the NW European market amounts less than 3% of the per bbl price.

    • lizard19

      weak, Craig.

      • Craig Moore

        Really?? French President Francois Hollande called this attack “a terrorist attack without a doubt.” Neither Obama nor anyone else can find the words to call this horror what it is, a terrorist attack. NYC is the terrorist Holy Grail of locations. With the NYC police and mayor embroiled in mess of the mayor’s making with his statements and actions, would you be surprised to see the opportunity by the bad guys to take advantage of police stepping back because they have politicos and supportive bloggers like you across our country suggesting that law enforcement is the people’s enemy?

        • lizard19

          weren’t you just complaining about someone putting words in your mouth? are you a do as I say not as I do kind of guy? because you are doing the same thing to me. try to be less of a blatant hypocrite, Craig.

        • JC

          I listened to the head of the PBA extort the mayor on NPR last night. Basically he said that of course the PBA was open to dialog with the mayor. But first the mayor had to apologize to the police for his words.

          So who’s the boss here? The mayor or the head of the PBA? If I were the mayor, I’d probably pull a Reagan and fire the lot who were walking off the job.

          So yeah, militarized police are the people’s enemy. Bring back community policing.

          • evdebs

            Oh, yeah. Emulating Reagan. That ought to work. Grenada, El Salvador. PATCO. Fire ’em. Hire a bunch of novices and see what kind of swarms you’ll get for the next ten years.

            Air traffic control is an extremely stressful job and requires dedicated workers. Regan screwed the pooch.

            Ironicallly, only two unions supported Reagan in 1980: The Teamsters (thank you Jimmy Hoffa) and the air traffic controllers.

        • Why, Craig, do you automatically accept the pronouncements of public officials as true without doubt? I think it wise to wait on this, learn more about it, as it is alwasy possible it is the work of agents provocateur, quite common throughout history.

  2. steve kelly

    I tend to agree with Stockman’s theory that oil isn’t the only commodity heading lower, much lower, and that we’re entering uncharted territory. The smooth ride is all but over, so when will the pilot turn on the “fasten seatbelt” sign?

    “But it is important to recognize that these are not indicative of some timeless and repetitive cycle—–or an example merely of the old adage that high prices are their own best cure.

    Instead, today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking.

    Stated differently, the worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.” http://davidstockmanscontracorner.com/why-commodity-prices-are-cliff-diving-the-iron-ore-collapse-reflects-the-end-of-the-monetary-super-cycle/

  3. Burlington Northern Santa Fe Railroad (BNSF) owns all the rail lines in the US that connects with Western Canada, and they haul 80%+ of the crude from Canada to the midwest and Texas or charge short lines a fee to use their tracks.

    BSNF charges $30/barrel to haul the oil while the Keystone Pipeline would cost $10/barrel by the State Dept.’s own estimates. BSNF is owed by Berkshire Hathaway whose chairman is Warren Buffet. In the last two election cycles Buffet gave exclusively to Democratic causes and candidates. He has also bundled and hosted numerous fundraisers for Obama.

    If any one believes the Keystone Pipeline isn’t being blocked by Obama on Buffet’s behalf, I’ve got bridge to sell you. Buffet could stand to lose $2+ Billion a year if the pipeline is constructed. He make that same every year the pipeline is delayed.

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