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If The Euro Collapses What Will Happen to the Oil Price?

Currencies / Euro May 19, 2010 - 12:25 PM GMT

By: Andrew_Butter

Currencies

Best Financial Markets Analysis ArticleAccording to the IMF World GDP in nominal terms expressed in dollars was $57 trillion in 2009. The European Union accounted for 29% of that; and lets say another 10% of the world implicitly or explicitly link their currencies to the Euro (for the sake of argument I’m assuming the Pound tracks the Euro and the Yen will track the dollar more or less).


Regardless of what the Gold-Bugs say (and they may have their day in Court yet), the rest of the world effectively uses dollars.

So…if the Euro in 2010 on average (or however the IMF works  it out) is worth 75% in dollar terms, compared to what it was in 2009, and assuming anaemic growth, rough number that would mean World GDP in nominal terms denominated in dollars would go down by 39% x 0.2 = 8%.

Rough Numbers!!

Of course that’s not “Real”. And it does not account for PPP or any of those clever benchmarks that economists use to pontificate about this or that and justify their existence.

But dollars are dollars, and nominal GDP is simply about dollars or their equivalent, passing from one pocket to another.

And then the penny dropped that “someone else” would NOT be happy to lend money to profligate PIIGS and the like so that they could pay huge sums of money (that they don’t stand a chance in collecting in taxes), to pay for armies of public servants and union members to live a life a of luxury, at the expense of a diminishing pool of people who actually work for a living and pay the part of the wages and pensions of the “majority”.

The trick there was that the majority always vote for an easy life of play-today pay-tomorrow, that’s what democracy as it is currently practiced is all about, that’s why UK joined with America to invade Iraq, it was the “will of the majority”. Just like the majority of Americans (the 70% who owned houses), voted for the housing bubble (and what they are really angry about is it burst).

That’s the joy of democracy, when nations vote to commit collective suicide (and there is a lot of pork to grease the wheels (no pun intended)), well if they have a majority, that’s what they will do (witness the credit crunch).

Put it another way, if the “profits” that banks reported in 2006 and 2007 were not “real”, then perhaps a lot of the GDP that the EU reported until recently, was simply a construct, built like the failed US model, on insanely foolish debt.

So What about Oil?

Regardless, money is money, and dollars are dollars, and so long as there are people prepared to accept dollars as payment for goods & services that’s the way it’s going to be (whether that was a good idea or not is not the issue).

Regardless also, one thing that everyone will buy; is oil, because if they don’t have oil they can’t drive to work, tractors don’t run, and just-in-time logistics gets snarled up.

When the market for oil is not in disequilibrium (and right now it’s not), short-term (I’m talking two or three years), the “fundamental” price of oil is a function of World GDP.

That’s of course assuming that the essential principles of Parasite Economics apply (http://seekingalpha.com/.. ).

Oil was on a pretty steady path towards $90 until the latest “upset” with the Euro.

If the Euro goes down and stays down relative to the dollar, then unless there is a spike up in the GDP of the rest of the world, the “fundamental” oil price (in dollars) is likely to drop from about $75 now to about $69. Until of course it becomes blindingly obvious it’s about to run out (and given the inability of the governments of Western Democracies to plan any further ahead than what dish of pork they will have for lunch, it’s likely that will be a BIG SURPRISE .

Just like it was a BIG SURPRISE when a few weeks after Hank Paulson declared “The US Banking System is Safe and Sound”; all the banks in America started failing, like dominoes.

So are those “nasty” markets that Angel Merkel is trying to defy, like King Canute ordering the tide to go down, anticipating Euro at $1.15 or less?

Makes sense, the EU is full of pork and self serving “democracy” of the “I wanna-free-lunch” at the expense of the (ever-diminishing) productive part of the economy, variety.  Perhaps now is the time for that to get washed out by a dose of reality, like neat cod-liver oil?

The big question now, is when will Germany decide to leave the Euro?

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- 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.

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