Comfort on a Razor’s Edge

 

You know you are in trouble when the only comfortable place is a razor’s edge.

When oil prices are rising we can soon expect trouble from reduced economic growth and inflation.

When oil prices are falling we can soon expect trouble from a slowing economy and deflation; and we can also expect oil shortages a few years out because investing in new oil production becomes unprofitable and most of our existing wells now deplete quickly.

 

Q: Why is it so important that the economy grows?

A: Most people mistakenly believe growth is important because it makes us a little more wealthy in the future. The real reason growth is important is that it makes us much more wealthy today.

 

Q: We never used to worry about a little inflation or deflation. What’s changed?

A: Total global debt has grown to over $250,000,000,000,000 (250 thousand billion dollars) and it’s consuming more and more of our income for interest payments.

Inflation causes interest rates to rise which makes it more difficult to service the debt.

Deflation removes money from the economy which makes it more difficult to service the debt given that interest rates are already as low as they can go.

 

Q: Why has debt become a problem?

A: Debt is growing much faster than our income. We must now borrow about $5 for every $1 of GDP growth.

 

Q: We used to achieve $1 of growth with less than $1 of debt. What’s changed?

A: We burned all the cheap oil which caused the price of oil to increase which forces us to borrow more money to maintain our lifestyles.

 

Q: Why do our lifestyles depend on the price of oil?

A: Our comfortable lives are made possible by a growing GDP. Most of our GDP is produced with machines, and energy is the food of machines. As the price of energy goes up, we can’t afford to feed our machines as much, and they produce less.

 

https://www.cnbc.com/2018/11/09/oil-markets-crude-supply-global-economy-in-focus.html

US crude oil posts longest losing streak in over 34 years, falling for 10th day

  • Oil prices fall for a 10th consecutive session, sinking U.S. crude futures deeper into bear market territory and wiping out the benchmark’s gains for the year.
  • Crude futures fell for a fifth straight week on growing output from key producers and a deteriorating outlook for oil demand deepen.
  • Signs that OPEC and several other oil producers including Russia could soon cut output have not put a floor under the market.

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