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April 21, 2020 | Why Should We Care If Oil Giants Are Getting Crushed?

Rick Ackerman

Rick Ackerman is the editor of Rick’s Picks, an online service geared to traders of stocks, options, index futures and commodities. His detailed trading strategies have appeared since the early 1990s in Black Box Forecasts, a newsletter he founded that originally was geared to professional option traders. Barron’s once labeled him an “intrepid trader” in a headline that alluded to his key role in solving a notorious pill-tampering case. He received a $200,000 reward when a conviction resulted, and the story was retold on TV’s FBI: The Untold Story. His professional background includes 12 years as a market maker in the pits of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader.

With the whole world rubbernecking at the scene of crude oil’s crackup, you could lose sight of why it matters. Listening to Trump fret about it tells us nothing. He has endorsed collusion by energy suppliers, the better to push prices back up to…whatever. But he hasn’t said why this would be a good thing. It’s not as though we’re all feeling sorry for the likes of Exxon and BP just because the value of their inventory has imploded. Unfortunately, the benighted hacks who invent the news are too lazy to give us the real story. They’ve never been able to explain, even, why the price of gasoline sometimes fluctuate violently over a range of $1.00 or more, or why natural gas prices can crash without reducing our heating bills by a dime.

Paper Shufflers Rule!

Anyway, in case you missed an earlier commentary published here, crude-oil assets are the very real collateral for much of the aggressively leveraged borrowing that has taken place in global financial markets. The $1.5 quadrillion dollar derivatives market, for example. Just what percentage of this sum has been grown from oil in the ground is open to speculation. Suffice it to say, its dollar value would likely dwarf the approximately $100 trillion value of goods and services produced on this planet. So why do we need a financial edifice that is more than ten times the transaction value of actual things? The simple answer is that the main business of these times is not making things or performing tasks for a fee, but shuffling paper. Mostly, this shell game comprises hyperleveraged financial instruments whose relationship to the collateral from which they’ve sprung is as inscrutable as string theory.

So there you have it: The collapse of oil prices matters because, along with real estate, energy assets underpin most of the world’s debt. Receivables are just a rounding error. The Fed may be able to pump out enough funny money to keep the Dow from falling straightaway to 5000. But prevent a global debt bubble with a notional value 50 times the size of the U.S. stock market from collapsing? No way.

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April 21st, 2020

Posted In: Rick's Picks

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