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Trading Lessons

From Bin Laden To Biofuels - Quant Easing And Energy Security

Commodities / Crude Oil Oct 24, 2012 - 10:25 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleSACRILEGE
Many times, Bin Laden and his lieutenants would issue communiques loaded on floppy disks which were intercepted, translated and very creatively interpreted by the CIA's well paid Arabists. Concerning oil, The Bearded One was severe: the impious, even sacriligious West would be punished by oil at $144 a barrel and economic ruin would ensue. In July 2008, going not one better but three dollars better, Goldman Sachs goosed oil prices to $147 a barrel but economic ruin had already ensued. Quantitative Easing was invented, another semi-mystical cultural product of the impious West, whereby about $35 trillion of "new money" was invented since 2008, but disappeared like Bin Laden. To be sure there are differences between the two stories: Goldman Sachs did not receive a helicopter visit from Navy SEALS for its oil price-gouging tricks, but that is only a detail of history.


As any Saudi Wahabite or Islamic Salafist will tell, exactly like Orthodox Jews, western Christianity is impious, even sacrilegious and promotes the worst kind of anthropomorphism - pretending that a minor imam or prophet of Noah, called Jesus, was or could be the Son of God. Today with The Bearded One gone to higher pastures, and Goldman Sachs publicly saying the right price of Brent is $90 per barrel, resurrecting Jesus might be considered possible by Mormon candidate Romney, but resurrecting oil at $150 a barrel is not. Maybe Bashr el-Assad and his Iranian or Hezbollah friends could change that readout, but also possibly not.

The essential roles of high priced oil, and overblown debt for what's left of the New Economy (another Western sacrilege) need no proving. Without Bin Laden or at least without overpriced oil, would it have been possible to create so many tradable assets in - for example - biofuels, and incite the great Bill Gates to lose a cool $40 million on his half-baked Pacific Ethanol venture, or adventure aimed at magically changing food into gasoline? Where would Obama have been, without high priced oil to create so many big spending, big subsidizing opportunities for his administration and its closest corporate buddies, targeting a huge range of New Hopeful energy ventures? Today, how can we save overstretched banks drugged by casino-type asset plays, but always losing, without QE? Economic security depends on QE.

The linkage of the two stories is also twined and embedded by some economic fantasists, who still claim, even today, that high-priced oil caused the global economic crisis of 2008 - and with it the great new spinoff opportunity for big government and big central banks, called Quantitative Easing.

THE NUMBERS DO NOT ADD
Estimates naturally vary on how much QE and related government and central bank "fiscal easing" and economic bailout spending has attained, since 2008, in the OECD group of countries. Estimates are presently set at about $35 trillion. This is equivalent to about 40 years of total oil import spending by all OECD countries, at $100 per barrel, on a 2011 volume basis. Expensive oil caused this ruin?

For some countries in the "most ruined" category, like Greece, the numbers are far more lurid: its debt-and-disaster charade has a price tag, to date and for the long years ahead during which Greece will be strapped to the Wheel of Debt, of around 70 years of Greek oil import spending on a 2011 basis. Greece is a country almost totally dependent on imported oil. Expensive oil caused that Greek tragi-comedy?

Like we know (and unrelated to the disappearance of The Bearded One) oil prices will be falling. They can fall to say $75 a barrel before economic ruin ensues for Big Oil, and possibly fall more than that, but a freefall to old time cheap oil will spell ruin - for the energy sector. The proof of this for US natural gas producers is stark. Cheap energy spells ruin for Big Energy, and Big Government knows this but can only operate corporate kleptocrat tricks to handle the damage.

Biofuels of the Bill Gates type were never more than an economic joke, and the joke stopped raising laughs a long while back, even if Obama didn't notice: but whether he or the Mormon Candidate wins, the bad jokes of QE and the energy security crisis will continue. Keeping the long running High Price Oil/Energy Security threat alive is at least as important as keeping Bin Laden alive was until Obama saved the world with his Navy SEALS.

With its enduring geopolitical damage in the Middle East, the energy security cult is a virile small partner of its Big New Brother called QE. Keeping both alive will continue creating huge spending needs. Pushed hard enough, geopolitical damage in the Middle East supposedly to ensure energy security and low oil prices, can create a regional-scale civil war and make even more QE necessary to compensate the economic damage.

Oil obsession and the quest for energy security - meaning oil security, only - has truly cast the shadow of Ahriman on all the OECD countries, and created the still active raison d'etre of the OECD's International Energy Agency. This institution, truly reflecting the twisting and turning spiral of fantasy-and-reality that created the oil security myth, and drove the energy security quest to heights of folly, now promotes the extremest-possible spending "needs" on energy in the OECD countries, in its small-sized partner version of QE.

We could call this QE-E or quantitative energy easing. It is of course only small-sized relative to QE-Infinity, but the IEA's calls are for $5 trillion of OECD energy spending to 2020. Mostly unneeded of course, but "oil security is not cheap", even when oil prices fall, gas prices in the US are close to nothing and will fall worldwide, coal prices are falling daily, and massive oversupply of solar and windpower equipment is creating serial bankruptcy in the so-called sustainable energy industry!

ALWAYS SPEND MORE
Like an old time 45 rpm or even 78 rpm disc with a stuck needle, the oil and energy security music spins on but only repeats its outdated one-liner slogans, called "rationales". We cannot be sure who Her Master's Voice was, for Hillary Clinton, if HMV really was Barack Obama, but on her watch at the US State Department her energy bite was mostly bark, that she called "energy diplomacy". It was however a lot more than enough to create additional and enduring geopolitical damage and higher security-related spending needs in the Middle East and North Africa, always more costs.

At the end of the day, sometime and somewhere, the costs of energy misspending for any energy user, anywhere, will always be higher than needed. The parallels with QE are large. The US central bank, the Federal Reserve in recent days announced its third and biggest round of large-scale "mortgage backed security" purchases since 2008. The only difference is that in the same way as the claimed-as-possible similar bond buying stunt by Europe's ECB, if it launches, there is no ultimate limit on the amount the Fed might buy. There is also no limit on how long it will go on buying junk assets, that system-wise it helped organize the issuance of, from another wicket.

Wall Street is overjoyed: the talk is that Bernanke will “fight and fight until he sees real improvement in the economy,” or retires or is sacked by Romney. The spending must go on and needs an almost-mystical rationale: that it can help the economy and will go on until there is a "real turn" in the economy. Big energy spending is exactly the same. We have to spend big to ward off high priced oil - even if oil prices fall and all other forms and types of energy are available at bargain basement prices. There is No Alternative.

Double spending is good, when quadruple spending is not yet available. Energy security obsessions, in Europe, now mean it must flat-out build more gas pipelines, while it also builds LNG terminals at almost every available coastal site. This is the only way to ensure energy security. The renewable energy crusade also comes in more than handy: spending on alternative and renewable energy was a big ticket excuse and photo event for the Obama administration. If the Maestro wins, and even if the cocker spaniel with its ear to the wind-up gramophone is no longer called Hillary, energy diplomacy of the Old Oil Crisis type, and its spending ambitions, can carry on. Oil Crisis and Renewable Energy still mix really well, in those cocktail receptions following the never changing energy crisis conference calls.

To be sure, energy economists, like other economists can point out the dangers of overspending and misspending but that cuts no ice. By definition and diktat, called received wisdom there is still energy
crisis even if The Bearded One is gone, along with his Abottabad villa. Like energy crisis spending, QE will remain necessary "perhaps forever": in Europe's case the talk is of a 20-year crisis cycle, starting in 2008. On the back of energy crisis rhetoric, spending on bombs-and-circuses is vital: War on Terror, at least for government-friendly editorialists  is part and parcel of the fight against the high-priced barrel, meaning that the fight for high-priced energy is vital - logic that runs very nicely with QE.

THE ENERGY CRISIS CYCLE ENDS
QE-E to head off the illusionary dangers of high-priced insecure oil started long before QE, and is set to end first and fastest. The luxury of double and triple spending on energy, building three times more energy capacity than is needed as is for example enshrined in Europe's "climate crisis" energy plan, was a nice thing for government and corporate free riders, but is now superceded by Big Brother QE. The USA has QE, Europe has QE, China has its own type of QE. Damage to the economy caused by the cult of high energy prices will finally provoke and cause the change: as consumers and users are hit by higher and higher energy prices, while the real world's energy resources are rapidly growing and global energy prices are falling.

The downsized economy driven by QE and its starkly schizophrenic counterpart of national austerity programs will itself help cut energy needs for a long way forward. Forecasting serious and real energy demand growth, in the OECD countries, is now very difficult, only excepting clear and massive cases of collapsed energy prices getting through to consumers: gas consumption in the US shows this. The QE-damaged economy can or might slump into a deflationary spiral, first, before hyperinflation ensues - we do not know. What we do know is The Bearded One and high-priced oil are finished. QE-E will soon terminate.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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