Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Peak Oil And Peak Debt

Commodities / Crude Oil May 18, 2010 - 09:25 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleDID HIGH PRICED OIL CAUSE THE CRISIS ?
Attempts are made to try out this argument, in a few diehard neoliberal New Economy circles, for example tracing problems reducing the USA's extreme high, but falling trade deficit, to "stubbornly high" oil prices. Whenever mass unemployment, recession and devaluing the dollar to cut import demand and sell more US products overseas does not work, the handy culprit is high priced oil. Put another way, if US oil imports cost nothing, the trade deficit would be a lot smaller, but the same applies to overseas purchases of US exports like Microsoft Windows or Apple iPhones - if they were given away, importing them would be cheap and easy.


To be sure, the fact-free one-liners and soundbytes from defenders of the only way to run the economy wheel the shadow of 1970s Oil Shocks on stage - high priced oil was the sole reason for massive inflation and devaluation of the dollar, at the time, according to New Economy myth. More likely than these mercantilist strivings, seeking to bolster the money with always-in-surplus trade accounts, high priced oil through 2004-2007 drove the global economy and world trade to record high growth rates, in a process I call Petro Keynesian Growth.

This is recognized since around 2006 in multiple studies published by the IMF and US Federal Reserve Banks (for example the Reserve Bank of New York) which underline that windfall gains to oil and commodity exporters are recycled to the global economy almost completely in the year they accrue, totally unlike the 1970s case of "unrecycled" petrodollars. These studies go on to point out the USA is now the principal beneficiary of recycled petrodollars in the OECD: not only does it get a large slice of its own oil trade deficit dollars back, but also gets recycled petrodollars, and recycled petroeuros or petroyen from other big oil importer countries. To be sure there is a downside, investors recycling petrodollars want performance. They move them elsewhere, very fast, when performance shrinks as the economy slumps into recession.

DEBT, DEBT AND DEFICITS
The oil trade deficit for any country counts a lot of entry items and output items, in the US case including a rising amount of refined product exports. Invisibles include drilling and seismic services, equipment, financing and other revenue or value items, cutting the "big number" of the apparent deficit, based only on  volume - not value - data for total gross imports of crude and products multiplied by the prevailing oil price.

The volume number counts two components: gross imports of crude and products, and net imports after re-exports. Where crude is imported, and products exported, the value gain (and refinery gains) help pay a part of the crude imports, reducing the net deficit on oil trade.

This "big number" for the OECD group is about 44.5 Mbd (million barrels a day), of which the US takes around 12.5 Mbd in May 2010. If we used an average year barrel price of US$ 100, this would generate a total "big number" of approximately 1625 billion US dollars a year for the OECD group.

Net imports after re-exports are running about 20 Mbd less than the gross import volume figure, at around 24.75 Mbd for the OECD group in May 2010. This net import volume number multiplied by the prevailing oil price gives the apparent net deficit on oil trade - excluding value items (oil services, equipment, financing etc).

At a year average barrel price of US$ 100, current net oil import volumes of the OECD group's 27 importer countries would generate an apparent oil trade deficit of about US$ 900 billion a year.

Taking account of value items, the net deficit is far lower and probably below US$ 675 billion a year with a year-average barrel at US$ 100. Estimates for the net deficit on oil trade for the OECD range around US$ 625 - 675 bn a year, if we take a 100-dollar year average barrel price. Current outlook, assuming an 85-dollar average barrel for 2010, runs around 15% less, that is about 550 - 600 billion US dollars for year 2010. The US net deficit would likely be in the range of 180 - 190 billion US dollars for year 2010 with year average 85-dollar barrel.

To be sure this is a big number, but it needs comparing with total economic output and value data. This can be calculated several ways, including purchasing power and market currency corrections and estimates, leading to considerable variations. For 2009, after a fall in total GDP of the 30-nation OECD group attaining about 4.5% (using estimates from the IMF, World Bank, OECD Secretariat), OECD economic output was about 35 000 billion US dollars in value.

Relative to this, a net yearly import cost for all OECD oil consumption of around 650 billion US dollars, with an annual average barrel price around US$ 100, is not exactly extreme at about 2% of total GDP.  

OTHER DEFICITS
This is really clear from the quickest cut review of national budget deficits in nearly all OECD countries (excluding only 3 or 4 with deficits under 3% of annual GDP) for year 2010. The US and UK, for example, have record high budget deficits for 2010, in the 10% - 12% range.

For the US, the budget deficit swollen by debt service payments and hand outs and bail outs to failed finance sector gamblers will probably exceed 1500 billion US dollars. Several Eurozone-16 countries come close to this as a percent of national economic output (GDP) for 2010, with the EU-27 group of countries likely facing region-wide budget deficits totaling 1200 billion US dollars equivalent, in 2010. Japan, the record holder in the OECD group for national debt relative to annual GDP, will use at least 20% of its 2010 budget simply to pay interest on debt, for a deficit of above 500 billion US dollars equivalent.

National budget deficits for the US, EU-27 and Japan can exceed 3200 billion US dollars in 2010. Spending 650 bn US dollars on oil is distanced and shrunk to its real relative size, by these massive and likely out-of-control national deficits - and assuming oil prices rise to the "fear and loathing", or probable panic level of 100 dollars a barrel, year average. On current barrel price data, the net oil trade deficit for the entire OECD group, probably less than 600 billion US dollars for 2010, is around 18% of the national budget deficit number, and a tiny fraction of accumulated national debt for the group.

To be sure, austerity and rigour are now the keyword slogans for attempts to trim these massive deficits, but all political leaders in the OECD group know that only one thing can get them off the hook: economic growth. Getting economic growth back to the most-recent "belle epoque", that is 2004-2007 will unsurprisingly result in higher oil demand - pushing oil prices higher. The panic response to oil at 100 dollars a barrel will therefore be totally unproductive, and this time could trigger attempts at massive devaluation, national austerity, trade protection and any number of old style, tried-and-failed remedies for cutting economic pain.

THE BIGGEST DEFICIT
The biggest deficit is facing up to oil dependence and doing something about it - rather than making theatrical claims of climate change apocalypse as a smokescreen for selling energy austerity and justifying debt-financed and large government subsidies to high price green energy vanity projects. Changes to national energy policies and programmes through the last 35 years that could have been made, but were dumped the second oil prices fell back below the panic level, will be needed soon, rather than throwing borrowed and printed money at fantasy problems with fantasy solutions.

In the current this is unlikely. Going for growth is the No Alternative option - so higher oil prices will be the only result. Given the real amounts in play, panicking at the 100-dollar barrel is about as realistic as imagining biofuels can substitute even 10% of world car fleet fuel demand, but an entirely speculative oil price trading casino can drive prices right off the top of the chart. Energy conservation and rational energy utilisation, demand side management, and a massive increase in oil producer-consumer country dialogue and confidence building, with oil pricing taken out of the casino, are the only ways forward.

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

Peak_Debt
18 Sep 10, 07:23
Peak Debt

'Peak debt' is the stage at which an economy or an individuals debt servicing costs become so high relative to income that spending must slow down or stop. The term 'peak debt' was coined by Jaswant Jain PhD in 2006. Jain concluded that debt will eventually reach a limit at which point consumption must be reduced to pay the debt and interest. This reduction in consumption will inevitably have a deflationary effect.

Growth in global asset markets and property values have been rapidly outstripping incomes in many counties for years, and some people believe the corresponding international, national and household debt levels are unsustainable. It seems impossible for prices to keep outstripping incomes forever. Eventually so much would be spent on debt servicing costs that there would be no money remaining for anything else. Many countries appear to be hurtling towards peak debt, fueled by excess borrowing and an addiction to credit. To some observers, it appears illogical to take on ever increasing debt just to bid against each other for the same assets. Nations must at some stage reach their maximum debt limit. The timeframe for reaching this limit is always unknown but some believe we are at that limit already, or very close, in many countries.

Ron Laszewski attempts to determine the peak debt limit for America in his 2008 Peak Debt paper. Since the Bureau of Economic Analysis has statistics on how much Americans earn, how much they save, and how much they spend on debt servicing, it was possible for Laszewski to estimate how close America might be to a peak debt limit.

In his 2009 paper on Household Debt, Professor Steve Keen from the University of Western Sydney also discusses the notion of peak debt and how this applies to houses prices and the economies of America and Australia.

http://s4.zetaboards.com/Peak_Debt

http://en.wikipedia.org/wiki/Peak_debt


Post Comment

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

6 Critical Money Making Rules