Why Didn't the Media-Proclaimed Experts Predict the Oil Price Plunge?

RUSH: This is a good point here. A story by Alex Pollock at Real Clear Markets: "Why Did No One Predict the Oil-Price Collapse?" This interests me. "We have just had a free fall in one of the most important prices in the world-the price of oil. Looking back, we are keenly aware that it dropped about 60% from its 2014 high to its recent low. Although some people thought the price of oil would go down, nobody (at least nobody that I can find) publicly predicted anything like this big a drop. Why? Oil prices went from $108 a barrel in June of last year to an intraday low on January 13, 2015 of $44."

Some people now say it could go all the way down to 25. "Among those failing to predict this drop were the government's Financial Stability Oversight Council and its Office of Financial Research. Although they were searching for systemic risk factors, they didn't find this one. Why not? Perhaps they were too busy trying to expand their power over insurance companies to think of it. As for the Federal Reserve, their current adverse case 'stress test' has oil prices going up to $110," so they missed this totally at the Federal Reserve.

"The Wall Street Journal's 2014 economic forecasting survey found that 'The economists surveyed expected oil to end 2014 at about $95 a barrel, up from about $92 at the time of the survey.' A big miss to be sure, but they were not alone. The US Energy Information Administration's 2014 outlook gave itself a very wide margin for error, projecting oil prices between $159 on the high to $70 on the low. Obviously that range wasn't wide enough, with the actual low so far about 35% under their lowest case. The IMF World Economic Outlook of October, 2014 forecast that the 'average price of oil will be $102 a barrel in 2014 and $99 a barrel in 2015.'

"As Wells Fargo analysts said in December, 'Markets anticipated a slight decline in oil prices, but few (if any) expected the rapid 50% decline.' Or as the investors on last week's Barron's Roundtable reflected, 'None of us predicted the oil price plunge.' Or as one financial journalist wrote with candor, 'My recounting hasn't yet made mention of the recent dive in oil prices.'"

Now, the point here is we got experts in everything, folks. We got experts predicting what job numbers are gonna be next month, experts predicting how many unemployment claims we're gonna have, experts predicting what the temperature of the climate's gonna be 50 years from now. We've got experts telling us this disaster's gonna happen and that good time is gonna happen. We've got experts predicting everything. We got experts predicting what's gonna happen with the economy. We have experts predict what's gonna happen with health care. We have experts predicting what's gonna happen in the Middle East.

Nobody predicted this. Nobody got anywhere near close to this. Especially people whose lives are devoted to the price of oil, whose careers are intertwined with it. The people whose business it is to track the price of oil hadn't the slightest idea this was coming. Oil has dropped 60% in less than a year. No one predicted it. Not one expert. Now, what is the take-away from this?

Well, I mean, it could be a bunch of them, the usual ones, make fun of experts and count 'em out every time an expert makes a prediction. We made fun of 'em for years. And this is just more evidence that making fun of 'em is justified.

But strip all that away, let's focus back on the people who are in the oil market. Maybe they're in the oil markets in the futures markets on Wall Street. Maybe they're in the derivatives side of it. Maybe they're at ExxonMobil, wherever they are, the people who are working in the business of oil and all of its related businesses, nobody called this. And you've got, amongst these people, no doubt consultants hired by various entities to tell them when these kinds of things are going to happen.

They've set themselves up as experts. Just like Dr. Kissinger is a consultant on world affairs and foreign policy. He's got clients, minimum is a million dollars a year to get Henry Kissinger's advice on what's gonna happen wherever you want to know what it is anywhere in the world. I'm sure the oil business got the same kind of people. Nobody got it. Nobody called it.

In the open of the program today I posited that one of the things that people missed in the plunging price of oil was shrinking demand. And why'd they miss that? Do not discount the fact that there are a bunch of idiots everywhere and they'll believe whatever a government agency says about something. And if a government agency, backed up by the media, says the economy is roaring when it isn't, and if that's something they want to hear, then they will immediately discount anything that tells them the demand for oil -- i.e., gasoline -- is down, because the economy isn't good.

But more than that, what caused the plummeting price in oil? If these people who are in the business didn't know it was coming, much less couldn't predict it, then how do you explain it? Is it the overwhelming, complex, inexplicably power of markets that simply cannot be pigeonholed and tracked and forecast because they're simply way too complex. You can't control them. You can't analyze them. Or is it because -- and this is where people fall into a trap, I think -- is it because somebody, a very powerful entity or series of them, decided to get involved and artificially start running the price down while nobody saw this was happening, and if that's the explanation, then how did they get away with it for so long?

Remember, it took a year for this to happen. How did these people on the sly -- I mean, the popular answer to this is the Saudis. "Yeah, the Saudis did it, man, you should know that, Rush. The Saudis did it. I've even heard you explain it, Rush, the Saudis are trying to wipe out fracking. They're lowering the price, they're biting the bullet on it themselves 'til they lower the fracking price and put the US out of business, because the US reserves are now larger than Saudi Arabia. But they've gotta be about 70 bucks a barrel before we can go get it at a profit."

Well, okay, if that's your answer, if the Saudis did it, our friends, the Saudis, how did they do it in the dark behind closed doors, behind the curtain, how did they do it unseen for a year? And if they were doing it and everybody knew they were doing it, why didn't people guess where it was gonna end up? And why weren't people able to predict the plunge, the next plunge as each one occurred? I mean, it was at 102, then it was at 90, then 85, and then 80, it kept going down. Nobody at any point had any idea where it was gonna end up.

If the Saudis are behind it, and they want to destroy fracking, say, "Okay, it's gonna stop at around 60," wherever they need it to stop just below the number that the US needs to make it profitable to get it, that's where it'll stop. Oh, wait a minute. There's another interesting thing. Yes siree. The ChiCom economy, which we're told is just growing to beat the band. Yes, we're told that because the media and leftists love to extol communist economies, and we are supposed to believe that the ChiComs, a full-fledged economy, dripped and steeped in communism is becoming bigger than ours. They're outrunning us, and they're making mincemeat of us, just like the Cuban health care system makes mincemeat of our health care system, right?

Well, the problem is the ChiCom economy is not growing. The ChiCom economy is slowing down, and the demand that had everybody worried just a year ago that we were gonna run out of oil because all these developing nations were starting to develop: India, the ChiComs, remember all this, if you can? All this paranoid talk that we had to go electric, we had to go hybrid, we had to downsize, we gotta go solar, we gotta go wind, because the ChiComs have now discovered a car that's now affordable to most of their population. And India's discovered a car, and it's affordable.

We can't compete. And our enemies, our friends the Iranians are gonna flood the Chinese market with oil and deny us. Remember all of these panic stories? Every one of them wrong. Every one of them. Every aspect of this has been wrong. It's so wrong it can't be a conspiracy because if it is, whoever's in charge of this is the biggest idiot that's ever run a conspiracy. The Russian economy is tanking. Well, of course the Russians are. That's about it. You know, the Russians, Vladimir Putin with no T-shirt on sweatshirts as licensed merchandise is about all their economy has. Well, plus the natural gas lines they're running through these nations.

But I'm just stunned. All of these experts and nobody called it. The lesson is the media is filled with experts everywhere telling you about anything, predicting the future, and nobody knows it. The lesson is don't think yourself silly. Do not think yourself stupid. Do not think all these other people out there are smarter than you are, because they aren't. The only difference is they have access to cameras and microphones and know how to make themselves look like they're smart, and you may not. But that doesn't mean they're smarter than you are.

If somebody knew that the oil price was gonna plunge this much, do you realize what kind of money there was to be made on this on the short side of it in any number of ways? We haven't heard that that happened. Maybe somebody has made out big time, but I don't know. Anything that exposes the establishment and these self-proclaimed or media-proclaimed experts as frauds interests me. And that's what this is. (interruption) Well, yeah, I mean, the fall of the oil price domestically, great for consumers, but it's bad -- all economic news is good and bad at the same time.

The plunging oil price is great for those of us at the pump, but the people who live and breathe the business in this country, the price plummeting so low is not helpful to them. It's always a dual-edged sword. But the ramifications of it are what they are. The effects of a plunging oil price are what they are. What fascinates me is -- and I'm sorry to be redundant -- is that nobody, nobody, I mean, not a single, not Rex Tillerson at Exxon.

If anybody should know what's gonna happen to the price of oil it should be Rex Tillerson. What a great name for a CEO at an oil company, though. He had no idea. (interruption) Are there gonna be hearings? I don't think it's become a controversy. I don't think it's a controversy. Maybe to Ted Baxter, but I don't think it's a controversy anywhere. It's the market in all of its glory, despite all these leftist efforts to say they can control it and manage it for everybody's benefit, bull shhhh. Sorry.

RUSH: Let me repeat something I said at the very beginning of the program today. Who was it that said this: "For decades we have known the days of cheap and easily accessible oil were numbered?" Who said that? "For decades we have known the days of cheap and easily accessible oil were numbered." Hint: 2010. Further hint, Oval Office. Got it? Obama. That's right, my friends. Four or five years ago Obama said the days of cheap oil are over forever, and everybody's known it. Another expert weighing in.

Rush :”Why Didn't the Media-Proclaimed Experts Predict the Oil Price Plunge?”

Speaking of 'experts' Rush.

Obama Wants High Gas Prices (Rushlimbaugh.com February 21, 2012 TRANSCRIPT)

El-Rushbo knows all

Might explain why Obama's approval ratings went up 9% in the past few weeks.

It was caused by Saudi Arabia in an attempt to re-gain market share and in the long term, price. Basically it was the action the libs always accuse Wallmart of taking; selling at a loss to drive out smaller competitors. In this case it is an attempt to drive out competitors who have higher production costs.

Not something that could be predicted by normal market forces.

Houston money manager W. Ben Hunt on the Oil Narrative:

None of the mainstream messages are untrue. Yes, there’s an oversupply of crude in the world today. Yes, global growth (and hence demand for crude) is anemic at best. Yes, the Saudis are unhappy with the U.S. shale revolution. Yes, the Saudis would be delighted to see Iran squeezed to death and Russia squeezed to weakness. Yes, there is marked divergence in monetary policy today, a divergence which pushes the U.S. dollar higher and commodities priced in U.S. dollars (like oil) lower. So stipulated.
But all of these things–particularly everything to do with supply/demand fundamentals–were just as true three months ago, when oil was $40 higher.

I see anyone talking about the $40/bbl or so baen in by oil speculators.

Once things went from a slight shortage to a glut, the hedge funds bailed out - and oil slumped over $40/bbl.

And guess who allowed hedge funds to start playing games with oil futures....

The question is, why did the King of Saudi Arabia — the leader of OPEC — decide to keep oil flowing at a rate that he knew would cause oil price to collapse NOW, instead of years ago?

It has always been in Saudi Arabia’s interest to keep the price of oil low enough to end fracking here and to bring Saudi Arabia’s Shiite enemies — particularly Iran — to their knees. But why is this happening NOW?

Maybe it’s because Barack Obama stabbed Saudi Arabia in the back when he suddenly lifted sanctions against Iran last year, thereby allowing Iran to keep its nuclear program going at full speed and also freeing up billions of dollars for Iran to use for funding Shiite terrorist groups like Hezbollah and supporting the Syrian dictatorship.

There’s a Sunni vs. Shiite war going on in the Middle East, and Obama has taken the side of the Shiites against Sunni Saudi Arabia and its allies. So the King of Saudi Arabia has finally said, No more Mr. Nice Guy, and has put its own interests above those of its new pro-Iran enemy, the U.S. under Obama.

The Saudis are now determined to economically destroy Iran so that it can’t create nuclear bombs which will be aimed at Saudi Arabia.

So when will oil prices go up again? When Iran’s economy has been wiped out.

Because the financial elites of the world have manipulated the price down to arm-twist Russia into backing down on Ukraine.

The “side-effects” of it being this low are of no long-term concern to the elites.

This is just how they operate, one of the tools they use - market manipulation.

From this current action we can also infer that the price of crude has been manipulated for a number of years far to the high side of what a legitimate market would look like. That “high price of oil” was part of other agendas that they have merely put on hold to arm-twist the Russian government.

Wow. Interesting. So what’s the cause?

I'll tell you, and then you'll know.

The cause of the glut is the same as the cause of the 1973 gas crunch, that is, inelasticity of demand. Consumer habits are fixed. If you need gas, you need gas. If you don't, you don't. In 1973, demand rose in response to an increase in the number of consumers, and exceeded supply. In response, the price rose, but this did not discourage consumers, who were willing to pay for what they saw as a necessity. Thus, lines and rationing.

Now, we have a slackening of demand due to the unrecognized depression of the economy. A lot of people are sitting at home, and don't need gas. Thus supply exceeds demand, and prices fall, but people don't run out and buy gas because it's cheap, and the oversupply turns into a glut, all due to the inelasticity of demand, and the price falls further.

I suppose that ultimately demand will recover, as the reduced expense for "fixed" consumption of gas will release money for other purposes, and stimulate the economy, and gas consumption, but this takes time. It's a sort of ballet.

>> The cause of the glut is the same as the cause of the 1973 gas crunch, that is, inelasticity of demand <<

I'm basically with you, but I'd emphasize that the inelasticity of demand is only half of the explanation.

Remember Alfred Marshall's famous question, which was something like, "Which blade of the scissors does the cutting?"

That is, price is always SIMULTANEOUSLY determined by demand-and-supply. Always, always, always.

Moreover, when there's a relatively small shift of the supply curve, either up or down, and whether instigated by the Saudi King or by some other actors, the inelasticity of demand dictates a disproportionate swing in the price. Call it an "iron law" of prices.

No mystery. End of story.

And IMHO, Rush should be ashamed of wasting our time on such lengthy bloviating. Must have been a very slow news day, as far as he was concerned.

That. If you study the history of the biz, the price of oil has always been notoriously volatile. I suspect it will always be so.

After the discovery of the East Texas Oil Field in the early 1930's, prices were as low as $0.10/bbl.

From what I can see, here in my comfy chair, is that the so-called experts,market makers and speculators are in fact a bunch of Lemmings that operate more on emotion than logic. But with that being said, if everyone in these intermingled groups operates that way then it is safe to say that the real ‘logic’ is to be able to determine the psychology of these people and use that knowledge to determine your own investment strategies. In other words determine how they will stampede before they know it themselves.

As for the rest of us in the population... Hang on the roller coaster has a LONG ways to go still.

Two takeaway quotes from Rush:

"The Wall Street Journal's 2014 economic forecasting survey found that 'The economists surveyed expected oil to end 2014 at about $95 a barrel, up from about $92 at the time of the survey.' A big miss to be sure, but they were not alone. The US Energy Information Administration's 2014 outlook gave itself a very wide margin for error, projecting oil prices between $159 on the high to $70 on the low.

and

If somebody knew that the oil price was gonna plunge this much, do you realize what kind of money there was to be made on this on the short side of it in any number of ways?

The converse to the latter is, "Where are all the losses? Why aren't there a rash of investment firm failures? Bankruptcies? Defaults?" Just as I've been parroting to friends.

If all the predictions were for prices DOUBLE what they are now, there should be BILLIONS in losses on the books of dozens of investment firms for losses on futures contracts. I'm no investment expert, but that's my takeaway.

One takeaway quote from Alex:

That's why the bad times end up so much worse than your worst case scenario, and why, as an old banker told me years ago, "Risk is the price that you never believed you would have to pay."

That's the crux of the problem I'm looking at: There appears to be NO RISK in investing in oil, even when all the predictors should have caused BILLIONS in losses after the crash. Maybe I'm in 'left field', but if no one LOST money, then somebody profited off the crash despite all the predictors to the contrary of what actually transpired.

That's telling, IMHO...as is the question that no one appears to be asking.

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