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Interesting perspective: Oil Limits And The End Of The Debt Supercycle http://davidstockmanscontracorner.com/2016-outlook-oil-limits-and-the-end-of-the-debt-su

Interesting perspective: Oil Limits And The End Of The Debt Supercycle http://davidstockmanscontracorner.com/2016-outlook-oil-limits-and-the-end-of-the-debt-supercycle/ http://davidstockmanscontracorner.com/2016-outlook-oil-limit...

ra1n85 11y ago
Fascinating. Never considered the price pressure of finite storage capacity. That said, about half the article could be summed up in "commodity prices are falling because demand from most of the global working class is falling".
- iofj 11y ago
  There's a second effect. Companies that are near 100% indebted (and a dropping oil price will seriously lower their expected value, therefore getting them far closer to their debt limits even if they don't actually loan anything). Such companies, how do they respond to price shocks ? You have capital invested, and debt to pay back. But capital is a sunk cost, the debt won't disappear because you stop pumping. Therein lies the rub. So there's 2 options: 1) you can stop working, stop producing, and use cash on hand (cashflow which they have spent years minimizing) to pay down debt. As soon as this cash on hand is gone, it's over. 2) they can keep working, and keep selling. Doing everything they can to increase revenue just a little bit (ie. selling more oil, making prices drop). This way the cash keeps flowing, even if they become less and less likely over the long term to pay back their debts, but they don't go under right now Which would you pick ? Keep in mind that price of oil will of course go back up at some point. Wouldn't you want to delay the point where you have to give up, in hopes of delaying it past the point where prices recover and you don't have to give up at all ? Of course not all companies will succeed at that. But the immediate result of oil companies becoming unprofitable due to price fluctuations is ... more oil getting pumped up. It makes sense if you think about it even if it is thoroughly counterintuitive.
  - jazzyk 11y ago
    Thanks for the thoughtful comment. However, I respectfully disagree with the statement "price of oil will of course go back up at some point". I don't think it will ever go back to $80+ for two reasons: - more producers (US, Iran's embargo over, other countries exploring shale) - other sources of energy (solar, , etc)
    - tamana 11y ago
      * developed world population (demand) doubling, repeatedly * easy to harvest oil exhausted
danmaz74 11y ago
> Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. The article doesn't show at all that there are diminishing returns from human labor. What we have, instead, is that even if technology is making labor ever more productive, these gains in productivity are going more and more towards companies and investors (mostly thanks to the competition from Chinese laborers) instead of (western) non-elite workers. Just look at the big fat profits of most big companies. The article is thought provoking, but as it usually happens when trying to find a simple explanation to complex phenomena, it doesn't stand to deeper scrutiny.
- danbruc 11y ago
  [...] these gains in productivity are going more and more towards companies and investors (mostly thanks to the competition from Chinese laborers) instead of (western) non-elite workers. This seems illogic to me - if you have to compete with cheap labour you have to cut your costs in one way or another, pay less to your work force, make them more efficient, accept smaller profits or what have you. Putting more money - in absolute terms - into the pockets of the capitalists only makes it harder for you to remain competitive. Therefore I could at best see that capitalists receive a larger share of the cake in relative terms but not in absolute terms due to competition with cheap labour.
  - danmaz74 11y ago
    It's not the "capitalists" that have to compete with cheap labour, it's the labourers. Big brands can move their production where cheap labour is, keep their prices up, and pocket higher profits. This won't work forever, but it works for now.
- tamana 11y ago
  You are making arbitrary choices as to which people get the credit for productivity that is generated by machines not people.

ra1n85 11y ago

Fascinating. Never considered the price pressure of finite storage capacity. That said, about half the article could be summed up in "commodity prices are falling because demand from most of the global working class is falling".

iofj 11y ago
There's a second effect. Companies that are near 100% indebted (and a dropping oil price will seriously lower their expected value, therefore getting them far closer to their debt limits even if they don't actually loan anything). Such companies, how do they respond to price shocks ? You have capital invested, and debt to pay back. But capital is a sunk cost, the debt won't disappear because you stop pumping. Therein lies the rub. So there's 2 options: 1) you can stop working, stop producing, and use cash on hand (cashflow which they have spent years minimizing) to pay down debt. As soon as this cash on hand is gone, it's over. 2) they can keep working, and keep selling. Doing everything they can to increase revenue just a little bit (ie. selling more oil, making prices drop). This way the cash keeps flowing, even if they become less and less likely over the long term to pay back their debts, but they don't go under right now Which would you pick ? Keep in mind that price of oil will of course go back up at some point. Wouldn't you want to delay the point where you have to give up, in hopes of delaying it past the point where prices recover and you don't have to give up at all ? Of course not all companies will succeed at that. But the immediate result of oil companies becoming unprofitable due to price fluctuations is ... more oil getting pumped up. It makes sense if you think about it even if it is thoroughly counterintuitive.
- jazzyk 11y ago
  Thanks for the thoughtful comment. However, I respectfully disagree with the statement "price of oil will of course go back up at some point". I don't think it will ever go back to $80+ for two reasons: - more producers (US, Iran's embargo over, other countries exploring shale) - other sources of energy (solar, , etc)
  - tamana 11y ago
    * developed world population (demand) doubling, repeatedly * easy to harvest oil exhausted

danmaz74 11y ago

> Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. The article doesn't show at all that there are diminishing returns from human labor. What we have, instead, is that even if technology is making labor ever more productive, these gains in productivity are going more and more towards companies and investors (mostly thanks to the competition from Chinese laborers) instead of (western) non-elite workers. Just look at the big fat profits of most big companies. The article is thought provoking, but as it usually happens when trying to find a simple explanation to complex phenomena, it doesn't stand to deeper scrutiny.

danbruc 11y ago
[...] these gains in productivity are going more and more towards companies and investors (mostly thanks to the competition from Chinese laborers) instead of (western) non-elite workers. This seems illogic to me - if you have to compete with cheap labour you have to cut your costs in one way or another, pay less to your work force, make them more efficient, accept smaller profits or what have you. Putting more money - in absolute terms - into the pockets of the capitalists only makes it harder for you to remain competitive. Therefore I could at best see that capitalists receive a larger share of the cake in relative terms but not in absolute terms due to competition with cheap labour.
- danmaz74 11y ago
  It's not the "capitalists" that have to compete with cheap labour, it's the labourers. Big brands can move their production where cheap labour is, keep their prices up, and pocket higher profits. This won't work forever, but it works for now.
tamana 11y ago
You are making arbitrary choices as to which people get the credit for productivity that is generated by machines not people.