Kind of long but well worth taking the time to read. It dispels some myths out there…..

March 20, 2012 by Brandon Smith

The Oil Conundrum Explained

Oil has not strayed far from the $100-per-barrel mark.

Oil as a commodity has always been a highly valuable early warning indicator of economic instability. Every conceivable element of our financial system depends on the price of energy, from fabrication to production to shipping to the consumer’s very ability to travel and make purchases. High energy prices derail healthy economies and completely decimate systems already on the verge of collapse. Oil affects everything.

This is why oil markets also tend to be the most misrepresented in the mainstream financial media. With so much at stake over the price of petroleum, and the cost steadily climbing over the past year returning to disastrous levels last seen in 2008, the American public will soon be looking for someone to blame. You can bet the MSM will do its utmost to ensure that blame is focused in the wrong direction. While there are, indeed, multiple reasons for the current high costs of oil, the primary culprits are obscured by considerable disinformation.

The most prominent but false conclusions on the expanding value of oil are centered on assertions that supply is decreasing dramatically, while demand is increasing dramatically. Neither of these claims is true.

The supply side of the oil equation is the absolute last factor that we should be worried about at this point. In fact, global oil use since the credit crisis of 2008 has tumbled dramatically. This decline accelerated at the end of 2011 and the beginning of 2012 all while oil prices rose.

In its February Oil Market Report, the International Energy Agency (IEA) forecast a reduction in the growth of demand into the spring of 2012, despite reports from the MSM that oil prices were spiking due to “recovery” and “high demand.” Simultaneously, the IEA reported that petroleum inventories rose to the highest levels since October 2008.

The Baltic Dry Index (BDI), which measures global shipping rates and the demand for freight in general, has fallen off a cliff in recent months, hovering near historic lows and signaling a sharp decline in world demand for raw materials used in production. On multiple occasions in the past, a fall in the BDI has been a predictive indicator of stock market chaos, including that which struck in 2008 and 2009. A sharply lower BDI means low global demand, which should, traditionally, mean decreasing prices.

So, supply is high across the board, inventories are stocked and demand is weak. By all common market logic, gasoline prices should be plummeting, and far more Americans should be smiling at the pump. Of course, this is not the case. Prices continue to rise despite deflationary elements, meaning there must be some other factors at work that are causing inflation in prices.

Ironically, stock market activity in the Dow Jones industrial average has now come under threat from this inflationary trend in oil. Rising energy costs have essentially put a cap on the epic explosion of equities, and many mainstream analysts now lament over this catch-22. The problem is that these investors and pundits are operating on the assumption that the Dow bull market is legitimate, and that the rally in oil is somehow an extension of a “healthier economy.” This version of reality, I’m afraid, is about as far from the truth as one can stretch.

In the candy-coated world of Obamanomics, high-priced stocks are a valid signal of economic growth, and oil is rising due to demand that extends from this growth. In the real world, stock values are completely fabricated, especially in light of record low trade volume over the past several months.

Low trade volume means very few investors are currently participating in active trade. This lack of investment interest in the markets allows big players (such as international bankers) to use their massive capital to swing stocks whichever way they choose, even to the point of creating false market rallies. Throw in the fact that the private Federal Reserve (along with the helpful hands-off approach by our government) has been constantly infusing these banks with fiat money printed from thin air, and one can hardly take the current ascension of the Dow or Standard & Poor’s 500 index very seriously.

Another issue that should be stressed is renewed tension in the Mideast — namely, the very distinct possibility of an Israeli or U.S. strike in Iran, and the possibility of NATO involvement in Syria (which has extensive ties to Russia and Iran). Certainly, this is a tangible danger that would have unimaginable consequences in global oil markets. However, the threat of growing war in the Mideast is in no way a new one, and has been ever present for the past decade. It hardly explains why, despite hollow demand and extreme supply, the price per barrel of oil has been an unstoppable rising tide.

This schizophrenic disconnection between the stock market, oil, and true supply and demand is a symptom of one very disturbing illness lurking in the backwaters of the U.S. fiscal bloodstream: dollar devaluation.

We all understand that the Federal Reserve has been engaged in nonstop quantitative easing measures in one form or another since 2008. We don’t know exactly how much fiat money the Fed has printed in that time, and we won’t know until a full and comprehensive audit is finally enacted. But we do know that the amount is at the very least in the tens of trillions of dollars. (Be sure to check out page 131 of this GAO report to find their breakdown of Fed QE activities. This is just the money printing that has been admitted to, in excess of $16 trillion.)

The dollar is being thoroughly squashed. Why is this not showing in the foreign exchange (FOREX)? The way the dollar is represented in FOREX is yet another example of a useless market indicator, because it measures dollar value relative to a basket of world fiat currencies, all of which also happen to be in decline. That is to say, the dollar appears to be vibrant, as long as you compare it to similarly worthless paper currencies that are being degraded in tandem with the greenback. Once you begin to compare the dollar to commodities, however, it soon shows its inherent weakness.

The dollar’s only saving graces have long been its status as the world reserve currency and its use as the primary trade mechanism for oil. This, however, is changing.

Bilateral trade agreements between China, Russia, Japan, India and other countries — especially those within the Association of Southeast Asian Nations trading bloc — are slowly but surely removing the dollar from the game as these nations begin to replace trade using other currencies, including the Yuan. I believe commodities, especially oil, have been reflecting this trend for quite some time. Even after the release of strategic oil reserves in the summer of 2011 in an effort to dilute prices, and the announcement of an even larger possible release of reserves this month, oil has not strayed far from the $100-per-barrel mark. High Brent crude prices have held for years, even after numerous promises from government and media entities admonishing what they called “speculation” and promises of a return to lower energy costs. Not long ago, $100 per barrel oil was an outlandish premise. Today, it is commonplace, and some people even consider it “affordable” compared to what we may be facing in the near future — all thanks to the steady deconstruction of the last pillar of the U.S. economy, the dollar, and its world reserve label.

Ultimately, no matter how manipulated and overindulged the stock market becomes and no matter how many fiat dollars are injected to prop up our failing system, the price of oil is the great game changer. As inflation is reflected in its price and energy costs burn out of control, the Dow will begin to fall, regardless of any low volume or quantitative easing. In all likelihood, this conundrum will be blamed on as many scapegoats as are available at the moment, including Iran, China, Russia, Japan, etc. All Americans, especially those involved in tracking the economy, will have to remind themselves and the public that the Federal Reserve created the conditions by which we suffer, including currency devaluation and high oil prices — not some foreign enemy.

The one positive element of this entire disaster (if one can call anything “positive” in this mess) is the manner in which the high price of oil tends to dash away the illusions of the common citizen. It is an issue they simply cannot ignore, because it affects every aspect of their lives in minute detail. Costly energy awakens otherwise ignorant people and forces them to see the many dangers lurking on the horizon. Hopefully, this awakening will not be too little too late.

–Brandon Smith