OPEC backs biggest oil cut since 2008 crisis
OPEC agreed on Thursday to cut oil output by an extra 1.5 million barrels per day (bpd) in the second quarter of 2020 to support prices that have been hit by the coronavirus outbreak, but made its action conditional on Russia and others joining in.
Notice that this and pretty much every other news report you read never explains the thermodynamic implications of what they report, because they are ignorant of, and/or deny, the relationships between wealth creation, credit availability, and fossil energy consumption.
Oil producers today cut production by about 1.5%.
Why? Because demand for oil is falling and the world has limited storage capacity. Oil must be burned at about the same rate it is produced. If they don’t curtail production prices will fall below the cost of production and everyone will lose money, except of course shale oil producers who have always lost money.
Why is oil demand falling? Because the oil powered machines that produce and deliver almost all of the things we use and eat are slowing down, which means economic growth is slowing or possibly declining.
What happens if economic growth stops or declines? Our banking system becomes fragile because the design of our debt backed fractional reserve monetary system requires growth to function.
Put more simply, money and debt retain value, and credit remains plentiful, only in the presence of economic growth.
Why are credit and debt important? Because our standard of living depends on them. For example, today you can save 5% of the price of a house, get credit for 95% in the form of a mortgage, and immediately enjoy 100% of the house. Your mortgage, in turn, funds someone else’s retirement portfolio. Without plentiful credit, most people will not enjoy their own home, or car, or iPhone, and most people will not be able to retire.
I explained the importance of growth and why we can’t have it forever in more detail here.
How have our leaders responded? Canada announced an emergency interest rate cut yesterday in the hope of stimulating economic growth. Our prime minister is planning to spend more printed money to stimulate growth.
Will it work? Does providing alcohol to an alcoholic work? Yes, for a while, unless he’s already too drunk, but doing so makes his bottom more painful.
How do you know when an alcoholic is too drunk? You offer him free liquor and he does not drink.
How do you know when an alcoholic has not yet bottomed out? He kills his hangover the next day with a drink.
How do you know when it’s too late to save an alcoholic? He dies from an overdose.
How do you know when an alcoholic is clean? He decides to promote and vote for a birth lottery.
<Edit Mar 8>
I’m going to go out on a limb and say the correction has begun that those of us with defective denial genes have anticipated since the rocket scientists that lead us “fixed” the too much debt crisis in 2008 with more debt. They’ll try again this time but I suspect the alcoholic is too drunk to drink. I don’t know if the drunk will respond if they try extreme measures like intravenous white lightning. Assuming he doesn’t, my guess is 20-50% of paper wealth will vaporize in this step down. There are more steps to follow in coming years until the alcoholic bottoms out when his preferred drink, oil, is gone. There’d be much less pain for all if he’d sober up now.