Guess What Happened The Last Time The Price Of Oil Plunged Below 38 Dollars A Barrel?

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On Monday, the price of U.S. oil dropped below 38 dollars a barrel for the first time in six years.  The last time the price of oil was this low, the global financial system was melting down and the U.S. economy was experiencing the worst recession that it had seen since the Great Depression of the 1930s.  As I write this article, the price of U.S. oil is sitting at $37.65.  For months, I have been warning that the crash in the price of oil would be extremely deflationary and would have severe consequences for the global economy.  Nations such as Japan, Canada, Brazil and Russia have already plunged into recession, and more than half of all major global stock market indexes are down at least 10 percent year to date.  The first major global financial crisis since 2009 has begun, and things are only going to get worse as we head into 2016.

The global head of oil research at Societe Generale, Mike Wittner, says that his “head is spinning” after the stunning drop in the price of oil on Monday.  Just like during the last financial crisis, we have broken the psychologically important 40 dollar barrier, and there are concerns that we could go much lower from here…


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5 years ago

Crude will go to $19.5/bbl. It may do this before the end of January, or it may take until the early spring, but it will go below $20. That’s $0.99/gal gasoline, folks. Which may sound like a boon, but…

But it’s not, because it heralds the collapse of production. Nobody will buy oil at $65/bbl any more, but the production keeps coming…so they’ve had to lower the price, because the oil must keep moving. And down, down, down it has come. But at some point, it costs more to produce than it can be sold for. And that’s where we are now with oil. It costs more to produce and refine it, than it can be sold for. Because while $0.99 gas was possible a decade ago, it isn’t anymore (mostly because of the devaluation of the dollar over the last 8 years).

So, what’s begun to happen is that the oil companies are cutting production; because they’re not making a profit at the current production levels. “Cut production and let demand drive up prices” is a rule of commodities….
But what if a little cut doesn’t give them the profits they require? Then bigger cuts happen. Layoffs of staff, closures of wells, and “scheduled shutdowns” of refining facilities, etc. Cut until it hurts. There are large surpluses of oil waiting to be refined. The largest surplusses we’ve seen in many years, due to the very weak demand.

Sooner or later, those surpluses will be exhausted, and demand will drive prices up. But, at that point, “soft prices” will have triggered such reductions in production that *there will actually be a shortage of gas and oil* which cannot be satisfied (laid off workers dont come right back when a company calls, mothballed refineries can’t just be turned on overnight, etc), and the trebuchet effect will launch gas and oil prices into the stratosphere -- figure $5 to $8 per gallon gas late next summer or early next fall, right at the height of the predisential campaign season.

Other commodities have gone into the same purge-cycle that oil is going through (such as gold and silver, and some food staples) and will also ride the price/demand trebuchet into sky-high prices in the next 6 to 24 months. But oil is different, because the price of oil, and it’s availability factor, affects the cost and availability of every other commodity -- -- Including the “commodity” called LABOR. Cheap gas will encourage people to take lower paying jobs, further from their homes… or buy less efficient vehicles for their commute, etc. But when the trebuchet swings, those folks will suddenly be unable to afford their commute at all, and thus the oil market has a serious bearing upon the labor/job market.

And the prices will likely neve come down. Our economy is actually on the verge of healing (somewhat) from the 7 years of abuse which the FED and the 0bama administration have heaped onto it… but that means that all the foreclosures and the bankruptcies have to be realized, and real price discovery has to happen on comodities like oil, food stuffs, and PMs.

And if the Idiots In Charge Of Everything (IICOE) (TM) can’t keep their hands off the controls, and let the market reballance itself at this point, as painful as that will be, then we *will* see a true and complete economic crash in the very near future. Count on it.