The World Is Awash In Oil, False Assurances, Magical Thinking, & Complacency…

Authored by Charles Hugh Smith via OfTwoMinds blog,

This collapse of price will manifest in all sorts of markets that are based on debt-funded purchases of desires rather than a warily prudent priority on needs.

Since markets are supposed to discover the price of excesses and scarcities, it’s a mystery why everything that is in oversupply is still grossly overpriced as global demand slides off a cliff: oil, semiconductors, Uber rides, AirBNB listings and many other risk-on / global growth stories are still priced as if pre-Covid-19 demand was still guaranteed.

Punters are still buying semiconductor stocks based on out-of-touch projections that are the equivalent to counting the number of fairies on the head of a pin, ignoring the fundamental reality that very few people actually need a new mobile phone, vehicle, laptop, refrigerator, etc.

It boils down to confidence and certainty. People pursue what they desire but don’t need when they’re brimming with confidence in the future, bolstered by an animal-spirits euphoria that their income and wealth will continue rising–a sense of certainty anchored by a belief that their economic world is essentially without risk.

When confidence dissipates and is replaced by fear and uncertainty, desires lose their luster and needs take precedence. When you’re afraid of getting a deadly virus or losing your livelihood, status symbols and frivolous spending no longer top the agenda.

Yet the entire risk-on / global growth story is based entirely on desires not needs. The vast majority of demand isn’t for a pressing need, it’s for euphoric aspirational consumption, spending intended to make the buyer larger than they really are, in their own self-image and in the image they present to the world in the brands they display, the cafes they dine in, etc. etc.

Since the world is awash in false assurances, magical thinking and complacency, we might ask: what’s the market value of these disconnected-from-reality fantasies? There’s no pricing mechanism for such intangibles, of course, but should counting the number of fairies on the head of a pin give way to a new appreciation of risk and a pervasive awareness of uncertainty, then global demand will fall off a cliff as desires are set aside indefinitely.

In a world of bogus projections and rigged statistics, plunging demand for oil is one of the few reality-based measures available. One of the games being played is whenever a reality-based measure is discovered–electricity consumption, satellite images of empty parking lots, etc.–authorities immediately limit access to the measures and/or unleash a tsunami of counter-narratives to discredit the real-world evidence that global demand is cratering.

Since oil is the master resource for the industrialized, interconnected global economy, it’s tough to argue that declining consumption of oil doesn’t matter.

When demand craters, producers must restrict supply or price will crater, too. The problem with oil and everything else that’s now in over-supply / over-production is that producers can’t survive either a sustained drop in price or a sustained drop in production. Since both are equally fatal, producers have every incentive to keep producing and hope that somebody else lowers their production to keep prices high.

Alas, no producer is willing to fall on their sword to keep prices unnaturally elevated. And so excess production continues apace until price collapses.

This collapse of price will manifest in all sorts of markets that are based on debt-funded purchases of desires rather than a warily prudent priority on needs.