This article was published by The McAlvany Intelligence Advisor on Friday, November 20, 2015:
Eight years ago Nassim Taleb’s book The Black Swan was named by the Sunday Times as one of the twelve most influential books since World War II. Now serving as Distinguished Professor of Risk Engineering at the New York University Polytechnic School of Engineering, Taleb continues to build on his view that “black swan” events have a greater impact on culture and the economy simply because they are unexpected. As Chris Anderson explains in his review of Taleb’s book:
The problem … is that we place too much weight on the odds that past events will repeat (diligently trying to follow the path of the “millionaire next door,” when unrepeatable chance is a better explanation).
Instead, the really important events are rare and unpredictable. He calls them Black Swans, which is a reference to a 17th century philosophical thought experiment. In Europe all anyone had ever seen were white swans; indeed, “all swans are white” had long been used as the standard example of a scientific truth. So what was the chance of seeing a black one? Impossible to calculate, or at least they were until 1697, when explorers found Cygnus atratus in Australia.
Speaking last weekend at the Kilkenomics conference in Ireland, Taleb told the private gathering that he thinks the price of oil could, as a result of an unforeseen and therefore unpredictable event, drop to $4 a barrel. Those attending didn’t say what kind of an event might do it, nor what the consequences of such a drop might be. He is, after all, a professor and no longer a successful commodities trader.
It, apparently, falls to the rest of us to consider the consequences.
Taleb is not alone. In September Goldman Sachs analyst Damien Courvalin wrote: “The oil market is even more oversupplied that we had expected, and we now forecast this surplus to persist in 2016.” In his report he suggested that crude could drop to $20 a barrel before finding a bottom.
On Thursday Todd Gordon, writing at TradingAnalysis.com, said that, according to his charts, crude oil could drop to $26 a barrel: “Technicals say that in a good, solid pullback, we should see … a move lower … [that] puts us at $26 in the crude oil market.”
The consequences of such a pullback border on tea leaf analyses, while a drop to $4 would have breathtaking implications. The consequences of the current drop from $77 a barrel in June 2014 to $40 at present are clear enough.
The average American household is enjoying savings estimated to be $750 a year, while makers of pickup trucks, like Ford, are having a splendid year. Almost 90 percent of their pre-tax revenues worldwide come from the profits made from its F-150 model – profits estimated to be between $10,000 and $13,000 on each one sold at an average price of $44,000.
Less predictable are the profits being minted by refiners like Tesoro and Valero. As crude prices have dropped they have been reluctant to pass all the savings on to the retailers, keeping a bigger share for themselves. Instead of turning a profit of just over one percent, their margins, since June 2014, have grown to more than five percent.
This has been reflected in the price of their stocks: Valero traded at $43 a share in January, but today is at $70. Tesoro, trading at $64 then, is at $114 now.
On the other side of the ledger, OPEC, and Saudi Arabia in particular, are enjoying the consequences of being wrong in their assessment that they could outlive America’s energy industry. Despite laying off an estimated 200,000 workers from the oil patch and stacking half the oil rigs from a year ago, crude oil production in the U.S. has barely slipped: from 9.5 million barrels per day (bpd) in June to 9.2 million bpd now.
Cartel members, especially the thug running Venezuela, are screaming for an emergency meeting before the regular one OPEC has scheduled for early December, in order to push for restrictions on supplies in order to reverse the decline. For Venezuela the consequences are catastrophic, with double-digit inflation decimating the purchasing power of the Bolivar and energizing protestors threatening his regime.
The massacre in Paris could just be the kind of “black swan” event that Taleb writes and speaks about. As Jodie Gunzberg, global head of commodities at Standard and Poor’s, wrote:
The ISIS attack on Paris might be the catalyst to change OPEC’s oil market policy of defending market share. Saudi Arabia may need to alter its focus…. There is a pivotal question about whether Saudi [continues to protect its] long-term value of its … reserves, or if they defend their role as the pre-eminent power in the region.
Such a change in direction would end all speculation about just how low oil would go before it hits a bottom, and would begin the speculation about just how high crude might move before hitting a top.
CNBC: The chart that says crude oil is going to $26
CNBC: Oil: The case for low for longer prices
New York Times: Oil Prices: What’s Behind the Drop? Simple Economics
Oil-Price.net: Who benefits from lower oil prices?
Valero stock price chart – one year
Tesoro stock price chart – one year
Bloomberg: How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility
EIA.gov: Weekly U. S. Field production of Crude Oil
Autoblog.com: Ford could make as much as $13k profit for every F-150
Crude oil price chart – three year