Brexit: markets react first, think later; oil caught up in lemming race

The world was blessed to view an unprecedented diplomatic one-act play recently, in the form of the British vote to leave the European Union. Not much of interest in that story from an energy perspective, but since there was an impact on commodity prices it’s worth following the story for a minute.

When these relatively rare events happen, people see energy prices move in some violent fashion, and assume there is meaning to it all that’s only understood by the experts. Nothing could be further from the truth.

First of all, the story is only interesting because of the endearingly delusional image the EU has built for itself. The union has for several decades painted an image of being an indomitable and unbreakable force binding Europe together. The bravado was necessary to convince the world it could succeed.

The lengths they went to to ensure the sanctity of the union were impressive. The Greek fiasco takes center stage in that catalogue, without question. An economic basket case, Greece should never have been in the EU in the first place if the EU had enforced its standards. No member country can have more than a 3 percent budget deficit, so the rules go, unless the EU really wants them in then the rule is conveniently set aside. Greece couldn’t achieve that standard in a million years, and the farce began when the EU adopted the delicate public position of yelling about the importance of the stringent standards while embracing the financial derelicts and pretending the issue didn’t exist.

As the inevitable debt crisis unfolded, we were given a front row seat to a political institution (the EU) trying to steer Germany (a well run global financial powerhouse) with the same economic policy as Greece (the guy who can never return your hundred bucks yet drives around in a new car).

For whatever reason, the British people said enough of this horsesh*t and decided to do the unthinkable. The Brussels bureaucrats were dumbfounded and you can imagine the exasperation; 7 years spent on those #$%^&$* Greeks and the other deadbeats, continual reassurances that the EU will never be broken, then those g*d-d*mned Brits vote themselves out?

Which upset the markets to no end. The comical part of the global reaction was that markets didn’t know which way to go, because no one had any idea what was up next. But global markets have an incredibly weird habit whenever something major and unusual happens: everything gets sold except US dollars. It’s as predictable as the sun coming up and no one really knows why other than force of habit. The usual trite gibberish is trotted to explain it, no matter what the crisis – terrorist attacks, hedgefund meltdowns, earthquakes, inexplicable British referenda… the resulting appreciation of the US dollar will be called a “flight to safety”.

The US has an off the charts debt problem ($19 trillion and counting), massive looming deficits as far as the eye can see, and is still recovering from a near meltdown of its housing market 7 years ago – and the world views this as the safest place to park it’s money. Well that’s not quite true, massive cash flows into Swiss francs as well, but there are only so many of those to go around.

And, finally getting to energy, when this phenomenon happens, the price of oil is almost certain to fall. The theory is that oil is priced in US dollars, so as the dollar moves higher oil falls lower. Except sometimes it doesn’t, but people don’t talk about it then. And a lot of oil isn’t traded in US dollars; it’s the futures market and related financial machinations that are mostly USD. Nevertheless, nine times out of ten the relationship holds; it’s a bizarre lemming-like trade that happens as reflexively as swearing after touching a hot stove. It has nothing to do with anything, it just happens. Oil is not more or less valuable, though the secondary analysis comes to that conclusion and then ascribes meaning to that idea, such as oil has moved because of some event that happened in the world that day, and as usual the true story gets pounded into the ground like a fallen drunk in a mosh pit.

If you’re watching the news and you hear about a sharp drop in the price of oil, always remember that crazy stuff like this is happening in the background, for no particular reason other than habit. You’re not missing anything and it has nothing to do with the supply or demand for oil.