Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

The Coming Oil Price Shock

Commodities / Crude Oil May 08, 2010 - 05:20 PM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleFatal Difference - Fatal Indifference - We need only to recap the experience of the 1970s and 1980s to understand why massive public national deficit financing of Keynesian-type spending to restore global economic growth will almost surely end with a 1970s style oil shock. That is oil price explosion, falling consumer confidence and corporate investment, falling economic growth, finance sector panic, competitive devaluation of world moneys and a catastrophic slump back into recession. Like the 1970s experience, the recession will be very inflationary.


Then and Now

The 1970s delivered two short-sharp oil shocks, with never-known-before massive rises in the oil price, unlike the slow but permanent oil shock that operated through 2003 to the collapse of the global economic growth surge in 2008. Rising oil and commodity prices until 2007-2008, neither ironically nor magically, surely levered up global economic growth in a process I call Petro Keynesian Growth and the IMF and Federal Reserve Bank of New York calls fast, near complete recycling of windfall gains by major capital surplus oil and gas exporter countries - including Russia, for example. The petrodollars and petroeuros are quickly recycled to the global economy, raising solvent demand. This didnt happen in the 1970s.

This growth levering process operated in the Petro Keynes interval of 2004-2007, before the traditional model, Deficit Keynes, was called in to rescue the imploded finance, bank and insurance sector of most OECD countries, from midyear 2008. While the petrodollar recycling stimulus was figured in the high giga dollar range, the new debt racked up by OECD political deciders rushing to save the banks and slow the plunging economy was tera dollar sized, with peta dollar ultimate wipeout no longer a fantasy notion when or if Weimar Republic hyperinflation surges as a result.

For students of history we can note the oil price rises in the 1970s shocks were about 295% in 1973-1974, about 115% in 1979-1980. Through the 9 years from 1999 to Q2 2008 prices rose about 950%, all measured in nominal dollars not inflation adjusted.

Now and the Near Term

In 2010 another 100% hike, or doubling from the current price level around US$75 a barrel is possible or probable if there is any kind of global economic recovery. It is also possible or probable if both the Euro and the US dollar fall in value, following the present panic, inciting oil and gas exporters to cover near-term risk of further devaluation and/or inflation in the countries emitting these moneys. In a worst-case scenario, where we also have a rise in geopolitical insecurity as the USA finally quits Iraq and the Afghan war is declared an unwinnable high cost vanity project, and Israel runs a bungled regime change attempt against Iran, prices could triple from current levels very fast.

The big difference between the 1970s shocks and what has happened since around 2005 or 2006, is that the 1970s oil shocks were caused by short and sharp oil supply cuts for political reasons. Since 2005 or 2006 it is clear that global oil output simply doesnt respond to rising prices, in the exact same way gold production plays dead in response to record prices. Among the factors causing this we have the no-no for government friendly media, called geological depletion. Asking why BP drills 5 kilometres into the Earth's crust in 2 kilometre deep water instead of seeking "highly abundant" land-based oil reserves is a useful question: perhaps BP does this for technological kudos, to keep offshore rig builders in business, or for ecological experimentation with toxic dispersants ?

In the 1970s and 1980s world oil production capacity kept growing on the back of accumulated and large discoveries. Any prospect of physical supply shortage was removed from the scene for at least the next 20 years. Time then ran out.

Now we have a guaranteed short fuse, low ceiling, fast feedback on oil prices when global oil demand recovers. When we get to real Post Peak Oil and a net annual capacity outturn of zero, with any new capacity added only replacing lost, the price linkage will be even closer - and the splendid 75% price crashes like late 2008-midyear 2009 will be a thing of the past. The tilt to permanent high prices is totally predictable in the next 3 - 5 years.

With the Slump Dividend gone, we can focus on permanent high priced debt joining permanent high priced oil in the new inflation party. Ironically, this could save the party in the early lead-in phase, through 2010-2011.

The Coming Recovery

Due to the Slump Dividend of sub-critical oil prices, barrel prices below about US$ 125, the Petro Keynesian lever is alive and well, and working to the benefit of China, India, Brazil, South Korea, Australia and other countries. Below the critical level, oil and energy prices are not high enough to impact food prices, industrial materials, sea transport and construction costs, and consumer confidence in those economies able to run with the

Petro Keynes lever.

Global economic growth can or might pull the most-affected (that is most debt riddled) OECD countries out of their semi-structural slump, during the rest of 2010 and into 2011. By then, however, oil prices can again go critical leaving us with the 1970s default solution. Through 1974-1979 the response was to print money, like today, but to also accept the inflation caused by printing money. Today's political deciders in the debt riddled OECD countries maintain a herd facade of "struggle" against inflation being second only to "struggle" against Al Qaeda, and sometimes even in front of it, in the big list of national salvation quests.

Keeping the party going beyond end 2010 will mean accepting inflation. If this is linked to slow-or-no economic growth, it can tilt to hyperinflation. The coming economic recovery, if it comes, will be inflationary. In the famous slogan of Thatcher, parroted by generations of other great leaders: "There is No Alternative".

Geological shortage is not responsive to regime-change of oil exporter countries, as the Iraq situation shows, despite the brave words of its Chi'ite leadership bragging they can outproduce Saudi Arabia. Economic policy regime change is a lot easier, and is coming in the debt riddled OECD countries of Europe quite soon.

Inflationary growth, growth at any price, any cost, is the only way out. World oil demand will recover, oil prices will then again spiral as in 2007-2008 and with or without the help of Goldman Sachs structured products.

Coming Oil Demand Cuts

Using IEA and OPEC data, world oil demand in 2008-2009 declined at around 3.5% a year before stabilizing late in 2009, and showing low growth from the start of 2010. The bad news is that long-term contraction of world net export supply or "offer" (also caused by oil exporter countries actually consuming oil themselves) is likely already on a downslope of about 1% a year and will soon move up to 2.75% to 3% per year. Permanent recession becomes the default solution if oil prices are the bogeyman. Put another way, the present recession, described by the IMF as the worst since 1945, and the present OECD debt crisis the IMF tends not to talk about (because unprecedented) delivered a temporary cut in global oil demand at somewhat less than the coming long term trend rate for cutting global economic intensity of oil demand.

Demand compression will be difficult to set for India, China, Pakistan, Brazil and the main oil exporter countries like Russia, Saudi Arabia, Iran, Venezuela, UAE and others. This signals oil demand capping, and programmed year-on-year oil demand cuts will have to come from the OECD countries, essentially the (unacknowledged) basis of the European "20-20-20" plan, dressed up in climate-change frills. On average, the OECD countries use about 5 times more oil per head of population than China and 9 times more than India.

The main danger is that nice intentions on long-term oil intensity cuts will be shortcircuited by real world energy demand growth due to economic recovery in the real world near term. Previous instant remedy solutions of the Bush-Blair model, regime change of targeted oil producer countries to improve their export performance, are too slow and are always bungled, meaning that controlled cuts in oil intensity become the No Alternative.

Put another way, attempts at regime change to improve oil export performance will be decreasingly attractive due to very slim spare capacity margins for oil export supply. The sharp rise in oil prices through 2010 will have to be swallowed, because progress in restoring OECD economic growth is no longer an option - but a life or death need. Time is now short and oil intensity cuts are now urgent. Achieving perhaps a 75% reduction of oil, gas and coal intensity of the economy by around 2035 will need large investment, industrial restructuring, economic restructuring, legislative action, lifestyle change and consumer communication. Dressing this up as saving the world from climate catastrophe has not worked making the coming shaky economic recovery a period of epochal change

The challenge of energy transition is very clear. Organized dialogue between oil exporter and oil importer countries, aiming for stable and high but tolerable oil prices, in a transparent supply and pricing framework linked to energy transition. This will be vastly more productive than heroic attempts at printing money to beat the debt bulldozer or trying out new regime change adventures in oil exporter countries.

By Andrew McKillop

gsoassociates.com

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 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Negvex
23 Aug 10, 21:59
China at the mergin

Oil demand/prices over the next decade will to a large degree be driven by emerging economy demand at the margin. Here is another thought experiment using Chinese demand to generate some rough back of the envelopeĀ€ forecasts:

- China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year over the next 30 years

- No peak in global production

Result: In next 10 years we must find 44 million BOPD - 26 million BOPD to maintain supply and 18 million BOPD to keep up with demand increases.

If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years - most likely something would give far before that price level:

- Oil demand elasticity of -0.3

- Current production 84 million BOPD

- Current price US$ 80

- Peak production 100 million BOPD

- Post peak decline rate of 3-4%

If you want to try the china oil demand or the peak oil models for yourself using your own assumptions they can be found at Enquirica in the "Research" section: http://www.enquirica.com/index.php?option=com_content&view=article&id=11&Itemid=13


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules