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Is Oil Cheap? (May 29, 2013) Gasoline is expensive at the pump, but by one measure oil is cheap and poised to go higher. I recently posed this question to longtime contributor Harun I.: could global hot money flow into the crude oil market, driving the price up even if demand declines? The basic idea here is that if equities, bond and housing markets soften or roll over (please see What If Stocks, Bonds and Housing All Go Down Together? May 24, 2013), global hot money will seek speculative gains elsewhere. In an era of rising geopolitical tensions (see Syria), what better place to notch a speculative gain than oil and gold? Put another way: Is oil cheap? Harun offered a chart of the crude oil/gold ratio (in effect, crude oil priced in gold rather than nominal U.S. dollars) and the following insightful commentary:
Very good question. I suggest we not make the error of just considering nominal price. For example, below is a chart I marked up about a week ago, the Crude Oil/Gold ratio. I like relative-strength charts because they are a better indication of high and low prices and they tend to oscillate within a range. Here we see a history going back to the 1970s.
Now imagine what would happen to prices if this ratio returns to its high. Remember this is relative, there could be a demand collapse and this ratio could still go to its historic high. What would that look like in the economy? Well much like the Great Depression, plenty of stuff but no money to buy it. Commodities are real and the effects of hot money are felt almost immediately causing demand to collapse quickly because the real people that make up the economy don't eat paper. If hot money flows into crude oil driving pump prices to $8.00/gallon it would devastate the economy even further. Thank you, Harun, for the chart and the commentary. You see what happens when oil becomes expensive: the economy sinks into recession. The conventional wisdom is that oil should decline in nominal price as global demand weakens along with the global economy. In the hot-money-seeks-a-new-home scenario outlined above, demand could decline on the margins but speculative inflows--demand for oil contracts by speculators--push prices higher, potentially a lot higher in a geopolitical crisis. The central banks that are creating all the "free money" that is available to large speculators fulminate against oil speculators, as if all the free money is only supposed to go to "approved" speculations in equities and bonds. Unfortunately for the central bankers, they only create the money, they don't control what the financiers who get the free money do with it. Despite the endless MSM hype about U.S. energy independence and U.S. exporting energy abroad, the U.S. still imports over 3 billion barrels of crude oil every year: U.S. Imports of Crude Oil (U.S. Energy Information Administration).
Demand for imported crude oil fell 4.9% from 2011 to 2012, tracking lower gasoline
consumption and miles driven. But that's still a figurative drop in the bucket of
oil imports. Anyone who believes the U.S. is impervious to geopolitical oil shocks
is on a Fantasyland ride with an abrupt stop in terribly inconvenient reality.
Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart: 
1. Debt and financialization
2. Crony capitalism and the elimination of accountability 3. Diminishing returns 4. Centralization 5. Technological, financial and demographic changes in our economy Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of
the same coin: once we accept responsibility, we become powerful.
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