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Market Oracle FREE Newsletter


Save Oil And Save The Planet

Commodities / Crude Oil Mar 01, 2010 - 09:49 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleAnytime that oil prices hit US$ 80 a barrel, alarm bells start ringing, and tried-and-tested slogans are dusted off, for one more run in the media. In January 2010 oil prices briefly surged past US$ 80 a barrel, prompting US Energy Secretary Chu to add more proof that high-priced oil, if not global warming is taken seriously by high level national deciders and policy makers. Chu's schizophrenic concern on high priced oil was underlined by the fact that high oil prices make it a little less uneconomic to develop the mostly and usually costly new and renewable energy sources his Department is promoting with fervour.

Today however, oil price hysteria is being given awhirl by none other than Al Gore, who with Rejendra Pachauri is probably the world's best-known promoter of global warming catastrophe. In a late February interview with New York Times, Al Gore said: "It would be an enormous relief if the recent attacks on the science of global warming indicated that we do not face an unimaginable calamity requiring large-scale, preventive measures to protect human civilization as we know it. Of course, we would still need to deal with the national security risks of our growing dependence on a global oil market dominated by dwindling oil reserves in the most unstable region of the world, and the economic risks of sending hundreds of billions of dollars a year overseas in return for that oil"

This new approach was also used by world environment ministers meeting in Bali, Indonesia in late February. The "unimaginable calamity" of global warming now has a more down-to-earth and practical handle: high oil prices. As Al Gore and economic deciders like Ben Bernanke of the US Federal Reserve and Jean-Claude Trichet of Europe's Central Bank, and environment ministers now lard into their speeches, economic recovery from what the IMF calls the worst economic recession since 1945 is threatened by high oil prices.


Taking some while to cut through the blanket wall of politically correct media which tirelessly promotes global warming catastrophe, facts finally brought down the lyrical calls for forced development of soft energy and massive financing of emissions trading, as the only ways to save the planet. The same is now applied to oil prices, but massive and coherent economic data shows that what are called "sky high oil prices" work to bolster and accelerate economic growth, until really extreme high prices are attained. This is what I call Petro Keynesian Growth.

We can start by comparing global equity market movement and oil prices. Equity markets have shown growth and recovery closely tracking recovery of the oil price since the lows of 2008. In December 2008 the January 2009 delivery WTI contract price on the US Nymex was traded at about US$ 32.40 a barrel, but hovers near US$ 80 today. Many equity markets have grown by over 50% since early 2009, with market operators bidding up stock prices any day, and every day that oil prices grow. Gold prices also showed strong recovery and growth since 2008, enouraged by the weakness of the US dollar against other world moneys, which also advantages the oil price.

The major reason for weakness of the US dollar, GB pound, the Euro, and certain other major moneys is national debt and government budget deficits. The US budget for financial year 2009, recently announced by Obama, is a major example: the deficit for FY 2009 will be about US$ 1 300 billion. Many other countries have budget deficits equal to 10% or 12.5% of total annual economic output, or GDP. This spending deficit is due to economic recession and accumulated, very large national debts, in many cases equal to more than one year's GDP. Blaming this on oil prices is about as rational as pretending world temperatures will grow "by 5°C or 6°C by the end of the century", as the furthest-out GW hysteric James Lovelock likes to whine.

Whatever is needed for reducing extreme debt and deficits, apart from a panic lunge into massive austerity, includes restoring economic growth. There is no alternative to this. Devaluing national money to depreciate the real value and real cost of repaying debt, or simply repudiating national debt will be as somber in its effects as a crash dive into national austerity. When or if any major country is forced to repudiate debt the global economy would suffer extreme instability and very, very intense economic slump. To be sure, oil prices would plummet, but this would be small consolation for the economic, social and geopolitical sequels.

Low and cheap oil prices are in no way capable of changing this situation, over and above the fact that financial and debt crisis in the OECD's major countries is not due to the oil exporter countries. A few simple facts underline this, using the example of the world's largest oil importer economy.


Official monthly trade data for the USA shows US total net imports of crude oil, after re-exports, were 245.45 million barrels (about 8.16 Mbd) in November 2009. Total payments made by US crude oil importers were US$ 17.81 billion for an average barrel price of US$ 72.54. Other energy imports , specially natural gas, added about US$ 5.4 billion to energy import costs. At the average monthly oil price for November 2009, for a 12-month period, the total annual US crude oil import bill would run at about US$ 214 billion.

This can be called "very large", by Al Gore or Ben Bernanke, but compare this with the US$ 1300 billion budget deficit for FY 2009. The oil import bill is under one-sixth of the budget deficit. We can next compare the annual oil import bill with the deficit-financed aid, support, low cost loans and bailouts made to the US financial industry and to car makers, certain airlines, and other economic actors since late 2008. Taking only the Poulson Plan of late 2008, under G W Bush, and the Geithner Plan from 2009, under B H Obama, this adds up to about US$ 1 500 billion - equivalent to more than 7 years of total oil import costs at an average US $ 72.54 a barrel.

Even more important however, oil is a "real resource", not a "paper resource". Payments made by oil importer countries like the USA to the exporter countries quickly result in increased demand for world exports of goods, machinery, equipment and services. This is shown by detailed IMF studies on the recycling of windfall gains by all commodity producer countries, producing all kinds and types of commodities. Since the late 1990s, these studies show, almost all the windfall gains are reinjected to the global economy in the same year they are received. Up to oil price levels well above what are presently called "very high", global economic growth is favoured by strong oil and other commodity prices.


High oil prices offer a real world, real economy solution to current extreme financial and monetary challenges. Only economic growth can counter the debt menace, and certainly not the proposed "Carbon Money" that was discussed, and rejected in private session at the Copenhagen climate summit, notably by China and India. Present debt levels in OECD countries, and other countries must be reduced, and the only way for this is economic growth - or real economic armageddon. Oil prices will tend to go on rising for many reasons, not just depletion and better returns from petrochemical feedstock utilisation of crude.

Prices up to, and perhaps beyond US $ 90 a barrel will surely not cause economic catastrophe, but will strengthen growth. Pretence that inflation will "burst out" and engulf the global economy, with oil at US$ 85 a barrel instead of US$ 75 a barrel are as laughable as Al Gore maps of disappearing continents and pictures of drowning polar bears. Oil prices far above US$ 100 a barrel in 2008 did little in the way of triggering an inflation fireball, and prices above US$ 90 a barrel were associated with continuing high economic growth rates - even in OECD countries.

By Andrew McKillop

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

© 2010 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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