Why oil under $30 per barrel is a major problem

A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:

1. Oil producers can’t really produce oil for $30 per barrel.

A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.

Figure 1. Global Breakeven prices (considering only technical extraction costs) versus production. Source:Alliance Bernstein, October 2014

Figure 1. Global breakeven prices (considering only technical extraction costs) versus production. Source: Alliance Bernstein, October 2014

2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

Oil can only be extracted within a broader system. Companies need to pay taxes. These can be very high. Including these costs has historically brought total costs for many OPEC countries to over $100 per barrel.

Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well.

3. When oil prices drop very low, producers generally don’t stop producing.

There are built-in delays in the oil production system. It takes several years to put a new oil extraction project in place. If companies have been working on a project, they generally won’t stop just because prices happen to be low. One reason for continuing on a project is the existence of debt that must be repaid with interest, whether or not the project continues.

Also, once an oil well is drilled, it can continue to produce for several years. Ongoing costs after the initial drilling are generally very low. These previously drilled wells will generally be kept operating, regardless of the current selling price for oil. In theory, these wells can be stopped and restarted, but the costs involved tend to deter this action.

Oil exporters will continue to drill new wells because their governments badly need tax revenue from oil sales to fund government programs. These countries tend to have low extraction costs; nearly the entire difference between the market price of oil and the price required to operate the oil company ends up being paid in taxes. Thus, there is an incentive to raise production to help generate additional tax revenue, if prices drop. This is the issue for Saudi Arabia and many other OPEC nations.

Very often, oil companies will purchase derivative contracts that protect themselves from the impact of a drop in market prices for a specified time period (typically a year or two). These companies will tend to ignore price drops for as long as these contracts are in place.

There is also the issue of employee retention. In a sense, a company’s greatest assets are its employees. Once these employees are lost, it will be hard to hire and retrain new employees. So employees are kept on as long as possible.

The US keeps raising its biofuel mandate, regardless of the price of oil. No one stops to realize that in the current over-supplied situation, the mandate adds to low price pressures.

One brake on the system should be the financial pain induced by low oil prices, but this braking effect doesn’t necessarily happen quickly. Oil exporters often have sovereign wealth funds that they can tap to offset low tax revenue. Because of the availability of these funds, some exporters can continue to finance governmental services for two or more years, even with very low oil prices.

Defaults on loans to oil companies should also act as a brake on the system. We know that during the Great Recession, regulators allowed commercial real estate loans to be extended, even when property valuations fell, thus keeping the problem hidden. There is a temptation for regulators to allow similar leniency regarding oil company loans. If this happens, the “braking effect” on the system is reduced, allowing the default problem to grow until it becomes very large and can no longer be hidden.

4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

People often think that going from a low price to a high price is the opposite of going from a high price to a low price, in terms of the effect on the economy. This is not really the case.

4a. When oil prices rise from a low price to a high price, this generally means that production has been inadequate, with only the production that could be obtained at the prior lower price. The price must rise to a higher level in order to encourage additional production.

The reason that the cost of oil production tends to rise is because the cheapest-to-extract oil is removed first. Oil producers must thus keep adding production that is ever-more expensive for one reason or another: harder to reach location, more advanced technology, or needing additional steps that require additional human labor and more physical resources. Growing efficiencies can somewhat offset this trend, but the overall trend in the cost of oil production has been sharply upward since about 1999.

The rising price of oil has an adverse impact on affordability. The usual pattern is that after a rise in the price of oil, economies of oil importing nations go into recession. This happens because workers’ wages do not rise at the same time as oil prices. As a result, workers find that they cannot buy as many discretionary items and must cut back. These cutbacks in purchases create problems for businesses, because businesses generally have high fixed costs including mortgages and other debt payments. If these businesses are to continue to operate, they are forced to cut costs in one way or another. Cost reduction occurs in many ways, including reducing wages for workers, layoffs, automation, and outsourcing of manufacturing to cheaper locations.

For both employers and employees, the impact of these rapid changes often feels like a rug has been pulled out from under foot. It is very unpleasant and disconcerting.

4b. When prices fall, the situation that occurs is not the opposite of 4a. Employers find that thanks to lower oil prices, their costs are a little lower. Very often, they will try to keep some of these savings as higher profits. Governments may choose to raise tax rates on oil products when oil prices fall, because consumers will be less sensitive to such a change than otherwise would be the case. Businesses have no motivation to give up cost-saving techniques they have adopted, such as automation or outsourcing to a cheaper location.

Few businesses will construct new factories with the expectation that low oil prices will be available for a long time, because they realize that low prices are only temporary. They know that if oil prices don’t go back up in a fairly short period of time (months or a few years), the quantity of oil available is likely to drop precipitously. If sufficient oil is to be available in the future, oil prices will need to be high enough to cover the true cost of production. Thus, current low prices are at most a temporary benefit–something like the eye of a hurricane.

Since the impact of low prices is only temporary, businesses will want to adopt only changes that can take place quickly and can be easily reversed. A restaurant or bar might add more waiters and waitresses. A car sales business might add a few more salesmen because car sales might be better. A factory making cars might schedule more shifts of workers, so as to keep the number of cars produced very high. Airlines might add more flights, if they can do so without purchasing additional planes.

Because of these issues, the jobs that are added to the economy are likely to be mostly in the service sector. The shift toward outsourcing to lower-cost countries and automation can be expected to continue. Citizens will get some benefit from the lower oil prices, but not as much as if governments and businesses weren’t first in line to get their share of the savings. The benefit to citizens will be much less than if all of the people who were laid off in the last recession got their jobs back.

5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production. 

Instead, recent oil prices represent an attempt by the market to find a balance between supply and demand. Since supply doesn’t come down quickly in response to lower prices, and demand doesn’t rise quickly in response to lower prices, prices can drop very low–far below the cost of production.

As noted in Section 4, high oil prices tend to be recessionary. The primary way of offsetting recessionary forces is by directly or indirectly adding debt at low interest rates. With this increased debt, more homes and factories can be built, and more cars can be purchased. The economy can be forced to act in a more “normal” manner because the low interest rates and the additional debt in some sense counteract the adverse impact of high oil prices.

Figure 2. World oil supply and prices based on EIA data.

Figure 2. World oil supply and prices based on EIA data.

Oil prices dropped very low in 2008, as a result of the recessionary influences that take place when oil prices are high. It was only with the benefit of considerable debt-based stimulation that oil prices were gradually pumped back up to the $100+ per barrel level. This stimulation included US deficit spending, Quantitative Easing (QE) starting in December 2008, and a considerable increase in debt by the Chinese.

Commodity prices tend to be very volatile because we use such large quantities of them and because storage is quite limited. Supply and demand have to balance almost exactly, or prices spike higher or lower. We are now back to an “out of balance” situation, similar to where we were in late 2008. Our options for fixing the situation are more limited this time. Interest rates are already very low, and governments generally feel that they have as much debt as they can safely handle.

6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

As noted in Section 4, high oil prices tend to be recessionary. As noted in Section 5, this recessionary impact can, at least to some extent, be offset by stimulus in the form of increased debt and lower interest rates. Unfortunately, this stimulus has tended to have adverse consequences. It encouraged overbuilding of both homes and factories in China. It encouraged a speculative rise in asset prices. It encouraged investments in enterprises of questionable profitability, including many investments in oil from US shale formations.

In response to these problems, the amount of stimulus is being reduced. The US discontinued its QE program and cut back its deficit spending. It even began raising interest rates in December 2015. China is also cutting back on the quantity of new debt it is adding.

Unfortunately, without the high level of past stimulus, it is difficult for the world economy to grow rapidly enough to keep the prices of all commodities, including oil, high. This is a major contributing factor to current low prices.

7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

There are a number of different ways that oil production can be lost if low oil prices continue for an extended period.

In oil exporting countries, there can be revolutions and political unrest leading to a loss of oil production.

In almost any country, there can be a sharp reduction in production because oil companies cannot obtain debt financing to pay for more services. In some cases, companies may go bankrupt, and the new owners may choose not to extract oil at low prices.

There can also be systemwide financial problems that indirectly lead to much lower oil production. For example, if banks cannot be depended upon for payroll services, or to guarantee payment for international shipments, such problems would affect all oil companies, not just ones in financial difficulty.

Oil is not unique in its problems. Coal and natural gas are also experiencing low prices. They could experience disruptions indirectly because of continued low prices.

8. The economy cannot get along without an adequate supply of oil and other fossil fuel products. 

We often read articles in the press that seem to suggest that the economy could get along without fossil fuels. For example, the impression is given that renewables are “just around the corner,” and their existence will eliminate the need for fossil fuels. Unfortunately, at this point in time, we are nowhere near being able to get along without fossil fuels.

Food is grown and transported using oil products. Roads are made and maintained using oil and other energy products. Oil is our single largest energy product.

Experience over a very long period shows a close tie between energy use and GDP growth (Figure 3). Nearly all technology is made using fossil fuel products, so even energy growth ascribed to technology improvements could be considered to be available to a significant extent because of fossil fuels.

Figure 3. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil's Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

Figure 3. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends from 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by the author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

While renewables are being added, they still represent only a tiny share of the world’s energy consumption.

Figure 4. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Figure 4. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Thus, we are nowhere near a point where the world economy could continue to function without an adequate supply of oil, coal and natural gas.

9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely. 

The growing cost of oil extraction that we have been encountering in the last 15 years represents one form of diminishing returns. Once the cost of making energy products becomes high, an economy is permanently handicapped. Prices higher than those maintained in the 2011-2014 period are really needed if extraction is to continue and grow. Unfortunately, such high prices tend to be recessionary. As a result, high prices tend to push demand down. When demand falls too low, prices tend to fall very low.

There are several ways to improve demand for commodities, and thus raise prices again. These include (a) increasing wages of non-elite workers (b) increasing the proportion of the population with jobs, and (c) increasing the amount of debt. None of these are moving in the “right” direction.

Joseph Tainter in The Collapse of Complex Societies points out that once diminishing returns set in, the response is more “complexity” to solve these problems. Government programs become more important, and taxes are often higher. Education of elite workers becomes more important. Businesses become larger. This increased complexity leads to more of the output of the economy being funneled to sectors of the economy other than the wages of non-elite workers. Because there are so many of these non-elite workers, their lack of buying power adversely affects demand for goods that use commodities, such as homes, cars, and motorcycles.1

Another force tending to hold down demand is a smaller proportion of the population in the labor force. There are many factors contributing to this: Young people are in school longer. The bulge of workers born after World War II is now reaching retirement age. Lagging wages make it increasingly difficult for young parents to afford childcare so that both can work.

As noted in Section 5, debt growth is no longer rising as rapidly as in the past. In fact, we are seeing the beginning of interest rate increases.

When we add to these problems the slowdown in growth in the Chinese economy and the new oil that Iran will be adding to the world oil supply, it is hard to see how the oil imbalance will be fixed in any reasonable time period. Instead, the imbalance seems likely to remain at a high level, or even get worse. With limited storage available, prices will tend to continue to fall.

10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.  

Without US production, world oil production (broadly defined, including biofuels and natural gas liquids) is close to flat.

Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.

Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.

Viewed separately, US oil production has risen very rapidly. Total production rose by about six million barrels per day between 2008 and 2015.

Figure 6. US Liquids production, based on EIA data (International Petroleum Monthly, through June 2015; supplemented by December Monthly Energy Review for most recent data.

Figure 6. US Liquids production, based on EIA data (International Petroleum Monthly, through June 2015; supplemented by December Monthly Energy Review for most recent data).

US oil supply was able to rise very rapidly partly because QE led to the availability of debt at very low interest rates. In addition, investors found yields on debt so low that they purchased almost any equity investment that appeared to have a chance of long-term value. The combination of these factors, plus the belief that oil prices would always increase because extraction costs tend to rise over time, funneled large amounts of investment funds into the liquid fuels sector.

As a result, US oil production (broadly defined), increased rapidly, increasing nearly 1.0 million barrels per day in 2012, 1.2 million barrels per day in 2013, 1.7 million barrels per day in 2014. The final numbers are not in, but it looks like US oil production will still increase by another 700,000 barrels a day in 2015. The 700,000 extra barrels of oil added by the US in 2015 is likely greater than the amount added by either Saudi Arabia or Iraq.

World oil consumption does not increase rapidly when oil prices are high. World oil consumption increased by 871,000 barrels a day in 2012, 1,397,000 barrels a day in 2013, and 843,000 barrels a day in 2014, according to BP. Thus, in 2014, the US by itself added approximately twice as much oil production as the increase in world oil demand. This mismatch likely contributed to collapsing oil prices in 2014.

Given the apparent role of the US in creating the mismatch between oil supply and demand, it shouldn’t be too surprising that Saudi Arabia is unwilling to try to fix the problem.

Conclusion

Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

Complicating the problem is the economy’s continued need for stimulus in order to keep the prices of oil and other commodities high enough to encourage production. Stimulus seems to takes the form of ever-rising debt at ever-lower interest rates. Such a program isn’t sustainable, partly because it leads to mal-investment and partly because it leads to a debt bubble that is subject to collapse.

Stimulus seems to be needed because of today’s high extraction cost for oil. If the cost of extraction were still very low, this stimulus wouldn’t be needed because products made using oil would be more affordable.

Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

Rigidities built into the oil price-supply system (as described in Sections 3 and 4) tend to hide problems, letting them grow bigger and bigger. This is why we could suddenly find ourselves with a major financial problem that few have anticipated.

Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.

Note:

[1] For example, more dividend and interest payments are paid, tending to benefit the financial industry and the elite classes. More of the output of the economy goes to workers in supervisory positions or having advanced education. Other workers–those with more “ordinary” responsibilities–find their wages falling behind the general rise in the cost of living. As a result, they find it increasingly difficult to buy cars, homes, motorcycles, and other goods that use commodities.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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2,298 Responses to Why oil under $30 per barrel is a major problem

  1. regards says:

    I’m not sure oil is cheap. It’s still as expensive as it used to be. The only difference is that before we were paying the price at the pump; while now it’s those who have invested their savings in fracking who are paying the price.

  2. Fast Eddy says:

    The End of the World…. Survival Options

    Now here’s a place where nobody would be likely to bother you post BAU…. Whanganui Inlet….

    http://www.doc.govt.nz/parks-and-recreation/places-to-go/nelson-tasman/places/westhaven-whanganui-inlet-area/

    I took the long drive to the inlet in the truck today — it’s a national park — loads of fish — deer — pigs — shellfish etc….

    And virtually nobody there — a handful of summer cottages in the area — a decent dirt road that will wash out once the rains hit and it is not maintained….

    • doomphd says:

      Careful FE, have you read this book: “Into the Wild” is a 1996 non-fiction book written by Jon Krakauer.

      Of course, Krakauer chonicles the boy’s vital mistakes. Who will write about ours?

      • “Careful FE, have you read this book: “Into the Wild” is a 1996 non-fiction book written by Jon Krakauer.”

        Into the Wild is a perfect example of not taking the Fast Eddy Challenge. He could have gotten a job at a slaughterhouse, practised hunting and cleaning a rabbit while in society, basically done anything. He could have gone slightly less into the wild. Nope, just packed up and hiked into the middle of nowhere Alaska with just a couple books on identifying plants and butchering animals.

        • Ed says:

          He was schizophrenic. The lesson is, if you are mentally ill, do not go walk into the middle of nowhere. He was portrayed as romantic. It was not romantic it was just a sad case of diminished capacity.

  3. http://www.mauldineconomics.com/frontlinethoughts/100-trillion-up-in-smoke?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+johnmauldin%2Fnewsletters+Mauldin+Newsletters#When:15:07:00Z
    The above link, gives some food for thought.
    “Quick math: The full Morocco project will cost $9 billion and will generate 580 megawatts. The Solar Energy Industries Association (SEIA) says one megawatt can power 164 homes on average. So 164 homes x 580 MW = 95,120 homes. Divide by $9 billion, and the cost per home is $94,617. Amortized over 20 years, the cost is $394 per home, per month. A tad high, but you also have no carbon emissions and no exposure to oil prices.
    Now throw in inflation over the 20 years, and $394 a month for the final 10 of those years will probably not be nearly as high a real cost as it is today. I’ve thought for some time that solar will beat fossil fuels strictly on cost at some point. Current research data says that even without subsidies solar could be cost-effective in many locations in 10 to 15 years. This article suggests we are getting much closer. That’s bad news for conventional energy companies and OPEC. ”

    For me the morale of this, is to take all opinions as they are opinions. At the end of the day the “facts” become truly clear after the events rather than before. Thus how can one make a judgment on something and go “all in”.

    • Ed says:

      That is about $0.50/kwhr at US consumption rates maybe $1.00/kwhr at Moroccan consumption rates. This is about what Gail has been saying RE costs. The cost of storage or night time backup are not included in this price. So maybe $2.00/kwhr with storage? How many in Morocco can afford to pay this? How many in New York State can afford to pay this?

    • “The Solar Energy Industries Association (SEIA) says one megawatt can power 164 homes on average.”

      At first glance, I was thinking that ~$400 per month for electricity would be a pretty immense burden for people with an average income of ~$500 USD per month per household. Then I realized those consumption numbers are for American households.

      From the article that the other article is based on:
      http://www.theguardian.com/environment/2015/oct/26/morocco-poised-to-become-a-solar-superpower-with-launch-of-desert-mega-project

      They expect the 580 MW project to power 1 million homes, so let’s say $80 per household per month. It also seems their long term goal is to export electricity to Europe.

      • Make that $40 per household per month.

        • bandits101 says:

          I didn’t read the article but if you did, can you let me know what powers the homes at night, what cleans the panels and maintains the system and who owns and maintains the grid. If inflation reduces the cost over time like was stated above, does that mean everything else is not subject to inflation. What emissions were created during construction.

  4. Rodster says:

    “For me the morale of this, is to take all opinions as they are opinions. At the end of the day the “facts” become truly clear after the events rather than before.”

    I agree with that. On this board you’ll find extreme views on both sides including moderate views. If you take just the financial aspects alone, you would have thought the global eCONomy would have collapsed a couple of years ago. But it keeps chugging on because those pulling the strings are manipulating things much to the dismay of the so-called financial experts.

    We can all speculate, theorize and play armchair quarterback. In the end no one “precisely” knows how things will really unravel and play out. We can only guess. It doesn’t look to be pretty or end well BUT that’s my guess. 😉

  5. kesar0 says:

    I recommend to you all the book, I am reading:
    Joe Stork – Middle East oil and the energy crisis.
    This book explaines very deeply from historical perspective the US policy on Middle East.

    A few quotes:
    “their position [US oil corporations] was that global monopoly control of oil reserves was necessary to achieve “rational” productions schedules that would eliminate competitive pressure to lower prices. The process of close cooperation between government and industry described earolier was further advanced with the creation in 1924 of the Federal Oil Conservation Board (made up of the secretaries of Interior, War, Navy, and Commerce). It saw its conseration role in the “avoidance of economic waste” – the restriction of supply to maintain profitable crude oil prices… the American Petroleum Intitute pushed for the exemption of oil operators from antitrust restriction. The Oil Conservation Board supported this viewpoint in its first report, which called for legislation to allo producers to “coordinate” production […]in order to avoid the pressure of competitive struggle.”

    This would conclude the “anti-monopoly free enterprise” ideology.

    “The postwar strategy received a broad but preliminary outline in a [US] State Department memorandum of April 1944 that was simply entitled “Foreign Petroleum Policy of the United States.” The “specific policy objectives” were noted as follows:
    1. To influence the flow of world trade in petroleum products in such manner as to substitute Middle Eastern oil for Western Hemisphere oil in Eastern Hemisphere markets,”
    specifically Europe, Africa, and South asia. This “may come about in consequence of natural economic forces once Middle Eastern production has been adeqately stimulated.”

    This strategy was further elaborated in a memorandum from Navy Secretary Forrestal to the Secretary of State:
    It is distincly in the strategic interest of the United States to encourage industry to promote the orderly development of petroleum reserves in the more remote areas such as the Persian Gulf, therby supplementing the Western Hemisphere sources and protecting against their early exhastion…

    Under these circumstances it is patently in the Navy’s interest that no part of the national wealth, as represented by the present holdings of foreign oil reserves by American nationals, be lost at this time. Indeed, the active expansion of such holdings is very much to be desired.”

    • Tasha Zhang says:

      Does the book adress what the middle east was prior to WW1? How many new countries “evolved” in the ME post WW1 to now? How did they come about so quickly? In the rest of the world border and nations are pretty static but in this one part of the world new nations “spontaneously” erupt and border change in a relativly short period of time. Any book that doesnt address the questions raised by those events is lacking in my opinion.

  6. Stilgar Wilcox says:

    Wow, 2276 posts – that must be a record! I bet if we keep this same article on here until March we can pass 5,000 posts.

  7. Fast Eddy says:

    Attention those who think deflation is not possible….

    The Magic Formula That Powered Japanese Stocks Is Falling Apart

    For Japanese investors, it must have seemed the equivalent of turning lead into gold.

    Unlike in the Middle Ages, the alchemy now relied on mixing central bank stimulus with a weakening yen to create rising profits and a stock market that soared to an eight-year high. But that was back in August, and the formula has since lost its potency.

    By one measure, earnings in the world’s third-largest stock market are poised to retreat more than 20 percent this quarter, and for the first time since 2012 more Japanese companies are missing forecasts than beating them. Meanwhile, the yen just staged its biggest weekly rally since 2009 even though the Bank of Japan surprised the world by cutting interest rates to below zero.

    “Whether it be quantitative easing or the weaker yen, the effect is getting smaller and smaller,” Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which manages $453 billion. “The problem is that we’re not seeing excitement domestically. The fact that the global economy isn’t good is impacting Japanese earnings, too.”

    In many ways, Japan isn’t alone. Evidence is mounting that central banks’ easy money policies are having less ability to give their economies — and asset prices — a boost. In the U.S., Standard & Poor’s 500 Index companies are about to report the third consecutive quarter of declining income. Bank stocks in Europe are near a 3 1/2 year low as measures of risk in credit markets reach the highest since 2013.

    “We’ve entered a period of stagnation,” said Shinobu Yonezawa, a quantitative analyst at Mizuho Securities Research & Consulting Co. in Tokyo. “China has become an issue and oil prices tumbled at the end of last year, changing the landscape for corporate earnings.”

    Moar: http://www.bloomberg.com/news/articles/2016-02-08/the-magic-formula-that-powered-japanese-stocks-is-falling-apart

    • Fast Eddy says:

      What’s the lingo for this….. I think it’s OMG…. definitely not LOL…..

      For corporate profits, the consequences look bleak. Companies will post a 21 percent slide in net income in the three months through March, the biggest decline since the summer of 2012, according to figures compiled by Mizuho Securities on the nation’s largest firms excluding banks. The estimates are derived by comparing companies’ nine-month performances with full-year forecasts. Mizuho’s earnings-revision index, a measure of downgrades versus upgrades, dropped to minus 10.5 in January, the lowest since November 2011, Yonezawa said.

  8. Tasha Zhang says:

    CHK is the epitomy of a walking dead energy company, the poster child. Should have been chapter 11 in 2008 but plunge protection saved them. If the poster child is indeed allowed to go C11 it would speak strongly to Gails premise that there free markets still do exist and solvency does matter. If that is true we will need a serious distraction and that distraction will likely be the proxy war in Syria becoming de-proxied.

    http://www.zerohedge.com/news/2016-02-08/chesapeake-plummets-over-20-report-it-has-hired-bankruptcy-attorneys

  9. Fast Eddy says:

    A drop in oil production and consumption = a drop in global GDP = collapse

  10. Stilgar Wilcox says:

    http://www.bloomberg.com/energy

    After WTI oil went up last week it’s back down to 29.97 a barrel.

    After the Dow shot back up above 16000 it’s back down into the 15000’s.

    The glass is half full – no, it’s half empty. Rinse and repeat.

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