Wednesday, April 01, 2015

Johnny B Crude

1. Not so long ago, Pollyanna Pangloss, professor of political economy, public policy, and positivist philosophy predicted that the dramatic decline in oil prices would mean good things for capitalism.

Joined by all the little Pollyannas, professor Pangloss opined that the 50 percent decline in prices would bring yet another sunny day in the endless summer of capital's long wave. "Let's grab our boards and.....accumulate," said the professor.

Singing behind the professor's December, 2014,  acapella  rendition of  "Surfin' Safari" (music stolen from Chuck Berry) were the studio artists known as the Fantastic Baggies-- made up of the IMF, the US Federal Reserve, and the European Central Bank.  Declared the Baggies, in unison, "the low oil prices are a shot in the arm."  Mario the Draghi, given a chance to solo, grabbed the mike and crooned that the price drop was "unambiguously positive" for the world economy.

The "theory" was that for consumers-- and we're all consumers, aren't we?-- reduced prices due to expanded production of US "tight" shale oil would mean cheaper gasoline.  Cheaper gasoline would mean more disposable income.  More disposable income essentially would be a wage hike without costing employers anything.  And consumers, that's us, would consume more at... Starbuck's, Ikea, Loew's Cineplex, Amazon.

More consumption would mean more demand and more demand demands more supply and nothing supplies supply like more investment, and pretty soon, well it would be the most perfect of worlds.

For industry, the theory was that reduced oil prices would mean reduced costs of inputs to production, and lower costs means higher profits.

It was enough, almost, to make one stand up, turn towards North Dakota or Texas or both and pledge allegiance to Bakken, Eagle Ford, and the Permian Basin.  In fracking mud we trust.

2. Hasn't exactly worked out according to the theory. It can't work out according to theory, because the theory presumes that price determines consumption; consumption determines production; and production is last of the line in this long train of capital trying to climb the grade of accumulation.

Turns out, that price, in this case the declining price of crude, was the result of overproduction, and that the price deflation is the manifestation of the devaluation of capital that follows from a tendency of the rate of profit to fall as the means of production accumulate as capital.  Consumption, particularly consumption by all us consumers, is derived from profitability.   Overproduction is the acute manifestation of the chronic tendency of capital which is the falling profitability of production.

We have here a case of devalorization.

3. Once upon a time,  after1986 in fact, the mantra being mouthed in Texas went like this:  "Dear Lord, just give me another oil boom, and I promise not to screw it up."  Kind of true to its words, Texas since that bust has reduced its concentration on energy production.  Still the oil and gas sector accounts for 8.7 percent of the state's economic output.  Between 2009 and 2013, the Texas economy grew at an average annual rate of 4.4 percent, twice that of the United States as a whole.

But meet the new United States, same as the old Texas.  While Texas "diversified," oil and gas production for the US as a whole became an "overweighted" sector in the economy.  Fixed assets concentrated in the oil and gas sector at a rate far exceeding that for US industry as a whole. Between 2000 and 2013, the value of fixed assets in the oil and gas sector quintupled, while those in the entire industrial sector (includes manufacturing, utilities, construction, mining) increased 65 percent.  As a portion of the total fixed assets in industry, during these years those in the oil and gas sector tripled to measure 19.1 percent of the total. Since 2009, 70 percent of net new industrial investment (that portion above the amount required to replace investment in fixed assets consumed in production) has been dedicated to the oil and gas sector.

This concentration of investment in production is mirrored in the portion of bank revenues provided by the oil and gas sectors.  In 2014, oil and gas sector investment accounted for 11.8 percent of  Citigroup's banking revenues; for 14.9 percent of Wells Fargo Securities' banking revenue; for 7.4 percent of Bank America's revenues; 6.6 percent of JP Morgan's.

With US production achieving a record gain for a single year in 2014, with stored crude at its highest volume in 20 years, with the terminal at Cushing, Oklahoma literally topped out, with production from shale sources reaching 4.5 million barrels per day, amounting to half of all US production, the resulting deflation in oil price necessarily rebounds in reduced capital spending in this "overweighted" sector, and reduction in revenues to the still distressed banking sector.  Draghi might talk about a shot in the arm, but what counts is what's in the syringe.  In this case,  it's an overdose of heroin, not the jolt of methamphetamine.

The number of US rigs at work has declined by about 25 percent year-over-year.  The number of offshore rigs, laid up or scrapped has reached a 20 year high and now represents one-quarter of the total.   Schlumberger has laid-off 7 percent of its work force.  The oil "majors"-- ExxonMobil, Chevron, Shell, BP, ConocoPhillips, etc-- have reduced capital spending budgets between 12 and 20 percent.

What has not collapsed, however, is production from the shale fields.  In January 2015, US producer the number of new wells drilled was 28 percent the number drilled in June 2014.  Shale production however declined only 8.5 percent.  Greater production has been extracted from existing wells.  Even with budgets for new drilling slashed, the capital costs of drilling and bringing shale wells into production are so much less than in drilling offshore, or standard "vertical" wells, new shale wells can be brought on line to maintain production at high levels.  Nothing engenders more overproduction like overproduction.

4.  Oil, container ships, coal, steel, dry bulk carriers, these are all commodities, all capital, all values, all finished products at one moment, and all inputs, intermediate values to further production at the next moment.  The accumulation of capital becomes the biggest obstacle to the accumulation of capital. 

The "good times" are all in capitalism's past, and they were never there to begin with. 

March 31, 2015


  1. uh...clem12:16 PM

    Seems like your analysis is lacking a political element. Isn't the falling world price of oil due, at least as much, to the collusion of the US and Saudi Arabia in ramping up the level of oil production in order to undermine the oil revenues of several of their "enemies"---Venezuela, Iran, and Russia?

  2. Sure collusion exists; sure the bourgeoisie compete, undercut, utilize every trick in the book to accomplish their goals, but the goal is revenues. The "political" dimension is a reflection of the social. Let's step back for a second, and flip the script a bit: was fracking technology developed in order to undermine the political regimes in Venezuela, Iran, Russia? Or was it developed to aggrandize profits?

    I don't think US policy determines what US producers do. No more than I think the current reduction in capital spending among US producers and international majors is designed to strengthen the regimes in Nigeria, Angola, Mexico.

  3. Anonymous2:54 PM

    I am wondering what are you view on the origins of the crisis? Do you subscribe to any particular Marxist explanation of the crisis or have you developed something more of your own? Am I correct in reading falling rate of profit theory as your explanatory framework in this post?

    1. Some of my answer depends on what you mean by "crisis." If you mean the period since 2008, then yeah, I think the decline in the rate of profit coincident with the accumulation of capital is the root.

      If we're talking since 1970, when the postwar rate of profit peaked, I don't consider the entire period to be one of crisis. 45 years, as I've said before, ain't no crisis, it's a business plan.

      But in general, yes, I think the tendency of the rate of profit to fall and the attempts to offset that decline are the elements determining the path of capital.

      See "In No Particular Order" for further information