Best of the Week
Most Popular
1.U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - Nadeem_Walayat
2.The Coming U.S. Economic Collapse Will Trigger a Revolution - Harry_Dent
3. Stock Market Crash a Historical Pattern? - Wim_Grommen
4.Global Panic - U.S. Federal Government Stockpiling Ammo – Here’s What We’re Going to Do - Shah Gilani
5.AI, Robotics, and the Future of Jobs - Aaron Smith
6.This is Your Economic Recovery With and Without Drugs - James_Quinn
7.Gold and Silver Price Getting Set To Explode Higher - Austin_Galt
8.The Something for Nothing Society - Lifecycle of Bureaucracy - Ty_Andros
9.Another Interesting Stock Market Juncture - Tony_Caldaro
10.Inflation vs the Deflationary Straw Man - Gary_Tanashian
Last 5 days
Independent Scotland Currency, Plan A, B, C or D - British or Scottish Pound? - 2nd Sep 14
Gold and Silver Price A Critical Juncture - 2nd Sep 14
Gold and Silver Precious Metals Complex Contradiction and Potential - 2nd Sep 14
France And The Long-Gone Thatcher Moment - 2nd Sep 14
Stock Market Approaching An Important High? - 2nd Sep 14
Gold, Silver Price Summer Doldrums Coming to an End - 2nd Sep 14
The Ultimate Demise Of The Euro Union - 1st Sep 14
Palladium Price Breaks Multi-Year High Over $900 - 1st Sep 14
When Complexity Becomes Chaos - 1st Sep 14
Designer War By Default - 1st Sep 14
Islamic State or Russia? Ten Key Questions Towards Pragmatism - 1st Sep 14
Mixed Emotions for the Gold Market - 1st Sep 14
These Clowns Are Dragging Us Into War with Russia - 1st Sep 14
Marx And The Capitalist Cancer Of Overproduction - 1st Sep 14
Scottish Banks Salivating at the Prospects for an Independent Scotland of 6 Million Debt Slaves - 1st Sep 14
Small Man Europe Is Now In “Effective State Of War” With Russia - 31st Aug 14
The Unintended Blowback Of False Flags - 31st Aug 14
Tesco Supermarket Death Spiral Latest Profits Warning and Dividend Slashed - 31st Aug 14
Dow, Gold and Silver - A Last Stand, A Fake Out And A Surge - 31st Aug 14
If U.S. Consumers are so Confident Why aren't They Spending? - 31st Aug 14
Scotland Independence House Prices Crash, Deflationary Debt Death Spiral - 31st Aug 14
Obama’s “Catastrophic Defeat” in Ukraine - 30th Aug 14
Stock Market Inflection Point Approaching - 30th Aug 14
Gold And Silver - Elite's NWO Losing Traction. Expect More War - 30th Aug 14
Corporations Join Droves of Americans Renouncing US Citizenship - 30th Aug 14
Peter Schiff U.S. Housing Market, House Prices Bubble Warning - 30th Aug 14
Russia, Ukraine War - It’s Time to Play the “Gazprom Card” - 29th Aug 14
The One Tech Stock Investment You Should Never Sell - 29th Aug 14
Bitcoin Price $500 as Current Downside Barrier - 29th Aug 14
Don't Get Ruined by These 10 Popular Stock Market Investment Myths - 29th Aug 14
Low Cost Transcontinental Gold - 29th Aug 14
Gold Bullish Central Banks Should Give Money Directly To The People - Helicopter Janet? - 29th Aug 14
US House Prices Bull Market Over? Trend Forecast Video - 29th Aug 14
The Fed Meeting at Jackson Hole Exposed Yellen’s Greatest Weakness - 29th Aug 14
AAPL Apple Stock About To Get sMACked - 29th Aug 14
A History of Unlimited Money: Learn From It or Repeat Its Mistakes - 29th Aug 14
How You Can Play to Win When Market Makers Are Calling the Shots - 28th Aug 14
EU Gas Supply Is In Real And Imminent Danger - 28th Aug 14
Central Banks at the Root of Evil - 28th Aug 14
European Bond Market: Bubble of all Bubbles! - 28th Aug 14
Employers Aren’t Just Whining: The “Skills Gap” Is Real - 28th Aug 14
The ISIS Menace - Just What We Need, Another War - 27th Aug 14
The Risky Business of Methane-Rich “Fire Ice” - 27th Aug 14
CFR Recommends Policy Shift that is Very Bullish for Gold - 27th Aug 14
Ukraine Standoff Signals Global Power Shift - 27th Aug 14
Stock Market Panic Decline Begins - 27th Aug 14
The Monopoly of the Government Education Cartel - 27th Aug 14
How to Invest in Silver Today for Double-Digit Gains - 27th Aug 14
The Big Solar Energy Breakthrough We've Been Waiting For - 27th Aug 14
U.S. Empire’s Bumpy Ride - 27th Aug 14
Gold Market and the Interest Rate Trap - 27th Aug 14
Stock Market Staring Into the Great Abyss - 27th Aug 14
A Look at the Coming 30-year Inflation Cycle - 27th Aug 14
Forex Trading - Will USD/CHF Rally Above 0.9200? - 27th Aug 14
Europe’s Depressing Economy Dog Days of Summer - 27th Aug 14
How The Coming Silver Price Bubble Will Develop - 26th Aug 14
A Nation of Shopkeepers - Supply-Side (Voodoo) Economics? - 26th Aug 14
Stock Market Bear Tracks Abound In Wall Street - 26th Aug 14
65,000 U.S. Marines Hold up a Mirror to the Economy - 26th Aug 14
Bitcoin Market Provides Clues for Investors - 26th Aug 14
The Key to Trading Success - 26th Aug 14
Will The US Succeed in Breaking Russia to Maintain Dollar Hegemony?... - 26th Aug 14
Even Mainstream Academia Worried about Massive Bubbles in Markets - 26th Aug 14
Iraq and Syria Follow Lebanon's Precedent - 26th Aug 14
Colonization by Bankruptcy: The High-stakes Chess Match for Argentina - 26th Aug 14
Dow Stock Index On The Cusp - 26th Aug 14
Prohibition Laws and Agency Regulations - 26th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

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.


© 2005-2014 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

Free Report - Financial Markets 2014