$100 Trillion Up in Smoke

Mauldin Economics ^ | 06 February 2016 | John Mauldin

[Lorianne]

If energy powers the world, then whoever owns that energy must have power over the world. That’s certainly been the case for the last century or two. Ownership of our primary energy source, crude oil, is what made billionaires of John D. Rockefeller, H.L. Hunt, and assorted Middle Eastern kings, emirs, and sheikhs.

Oil in the ground is wealth only on paper – you may own that oil, but it earns you nothing until you recover and sell it. Yet paper wealth is still wealth. It goes on your balance sheet as an asset that you can sell. You can use it as collateral to borrow cash and buy other assets.

The ongoing oil price collapse is having a severely negative impact on the wealth of those who own oil reserves. The numbers, as you will see below, are almost incomprehensibly big. They are so big, in fact, that many analysts have simply tuned out. The attitude seems to be, “These numbers blow up my models, so I will ignore them.”

Today we’ll stop dancing around the truth and call the oil collapse what it is: global wealth destruction of epic proportions.

Simple Math, Hard Answers

In mid-2014, crude oil prices were about $100, depending on which grade you wanted to buy. Now prices hover near $30 – roughly a 70% decline in 18 months. That’s well-known, but we usually discuss the price collapse in terms of particular countries or companies: we don’t look at the bigger picture.

[IronJack]

That's a fact. You'll notice that "rising energy costs" were blamed for all the price increases we've seen in the last three or four years. But now that those fuel costs have dropped -- up to 70 percent -- we're sure not seeing comparable reductions in the price of goods.

Still, if that means profits are soaring for producers, then that just means more capital to expand facilities, hire more workers, build better mousetraps, etc.. So it still means that there's more disposable income available, even if it's not being "disposed."

And if it's not, I suspect the reason is fear. Businesses aren't sure what this worthless government is planning to do next (like this absurd proposal to tax crude at $10 a barrel), so they're hoarding cash and waiting out the obama storm, praying a fiscal conservative gets elected in November.

[IronJack]

the world is a better place with more smart phones and fewer PDP-8.

At the risk of being branded a Luddite, I would disagree. While the world is certainly a DIFFERENT place with smartphones instead of PDP-11s, it isn't necessarily a BETTER place.

Although I will concede that in many cases, technology does improve things.

But that's a matter for another discussion ...

[Lonesome in Massachussets]

I think we understand each other. You make a good point.