Best of the Week
Most Popular
1.North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - Nadeem_Walayat
2.Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - OilPrice_Com
3.Gold and Silver : The Battle for Control - Rambus_Chartology
4.Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - Nadeem_Walayat
5.Deep State Conspiracy or Chaos - James_Quinn
6.The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - Plunger
7.Gold Stocks Coiled Spring - Zeal_LLC
8.Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - John_Mauldin
9.Crude Oil Price Precious Metals Link in August - Nadia_Simmons
10.Gold and Silver Precious Metals Nearing Breakout - Jordan_Roy_Byrne
Last 7 days
Global Financial Crisis 10 Years On: Gold Rises 100% from $650 to $1,300 - 23rd Aug 17
GBP/USD Extends Losses - 23rd Aug 17
Donald Trump Terrorist in Chief, “We Aren’t Nation-Building Again, We Are Killing Terrorists” - 23rd Aug 17
How Planned Fed Rate Increases Impact The National Debt & Deficits - 23rd Aug 17
The 3 Assets to Add to Your Stocks Portfolio in This Rate Tightening Cycle - 23rd Aug 17
Half Price UK Theme Parks Entry 2017 With Cheap Chocolate Packs - 23rd Aug 17
[GIFT] Market Control System! - 23rd Aug 17
4 Reasons European Stocks Will Make a Big Comeback This Year - 22nd Aug 17
3 Lesser-Known Charts Revealing a Massive Stock Market Disconnect - 22nd Aug 17
U.S. Treasury Secretary: "I Assume Fort Knox Gold Is Still There" - 22nd Aug 17
Is the Stock Market Setting itself up for a Spectacular Crash? - 22nd Aug 17
Power Elites Launches Civil War Against Trump - 22nd Aug 17
The Stock Market No Longer Cares About Trump - 21st Aug 17
The Coming Boom Of Productivity Will Get Our Economy Back On Track - 21st Aug 17
Buffett Sees Stock Market Crash Coming? His Cash Speaks Louder Than Words - 21st Aug 17
This Could Be The Biggest Gold Discovery In History - 21st Aug 17
Stock Market Correction in Full Swing - 21st Aug 17
Seeking Confirmations – US Stock Market - 21st Aug 17
The changing demographic of online gamblers - 21st Aug 17
Gold is a coiled spring… the breakout is here, fundamentals are in place, technicals are compelling - 20th Aug 17
A Midsummer Night's Dream: Buy Gold and Silver - 20th Aug 17
Gold Mining Stocks 2017 Fundamentals - 20th Aug 17
EIA Weekly Report and Crude Oil - 19th Aug 17
4 Insights for Adjusting Your Portfolio in a Rate-hike Environment - 19th Aug 17
Gold Direction Indicator - 19th Aug 17
Historical Inevitability and Gold and Silver Ownership - 19th Aug 17
You Are Being Lied To About “Low” Gold Demand - 19th Aug 17
This is Why Cocoa's Crash Was a Perfect Setup - 19th Aug 17
Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High - 19th Aug 17
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Will Oil Inflation Destroy America Or Will 2011 Be The Year of The Rabbit?

Commodities / Crude Oil Dec 14, 2010 - 01:20 PM GMT

By: Andrew_Butter

Commodities

Best Financial Markets Analysis ArticleThe good news is that the Saudis are saying $70 to $80 is “Fair”. The bad news is they may change their minds and with oil knocking at the door of $90 and some OPEC malcontents muttering $100, they are starting to look a bit wobbly.  Or even if they are “steadfast”, perhaps they won’t be able to pump enough oil to contain prices?

In 1985 OPEC was holding back 11 million barrels a day of capacity, in 1995 that had dwindled to 2 million a day, today no one is sure. The leverage to keep oil prices down is a function of how much “ammo” you have.


In which case oil might start to get priced not at an estimate of the “correct” amount of “blood” to suck out of the world economy, without causing serious harm (Parasite Economics), but instead at the cost to go out and bring 25 million barrels a day or so of “new oil”, on line…like next week.

So how about if oil goes back up to $147 and stays there?

This is an analysis of the “Fair-Price” of oil going back to 1970, before the first oil-shock. The red-line (the fundamental or in valuation-speak the Other-Than-Market-Value), is an estimate of the price at which the world economy does not suffer.

The logic behind that line is at: http://seekingalpha.com/article/240571-bubbleomics-10-year-oil-price-prediction

Let’s pretend for a moment that line is about right, the next thing that’s interesting is what happens when there is “disequilibrium”, or in other words when the actual price of oil is markedly different from the “fundamental”.

Expressing that as a percentage (actual-oil-price divided by the “fundamental”), and comparing it with a measure of “economic well-being”, for example, CPI in America:

Here is a comparison with two versions; CPI-U which is the “official” figure (red-line) and the Shadow Stats estimate (blue line)

Best-fit, year-on year 62% of changes in CPI-U, can be predicted by oil mispricing lagged one year (so this year’s CPI-U is roughly predicted by last year’s oil mispricing). Plot against the average of CPI-U and Shadow-Stats and the correlation improves.

Sure oil is clearly not the only driver, although eyeballing the chart suggests that a mechanism might be (1) oil gets mispriced up (2) CPI goes up (3) the Fed “tightens” and CPI goes down (along with the economy) (4) oil goes down (5) everyone breathes a sigh of relief. And well when oil is mispriced low, that’s a time of milk and honey, where the “Inflation Targeting” of the Fed can do no wrong.

My view on the Shadow Stats numbers is that they are over-blown, and that the big mistake that the Bureau of Labour made was in relation to Owner’s Equivalent of Rent, but apart from that their numbers are pretty sound, so the big disconnect started in about 2000.

But that’s just detail, what hits me in the face about that chart is:

1:  The price of oil or the mispricing of oil reference what the buyers can afford to pay; is a better determinate of CPI-U or whatever, than monetary policy.

2: If the Saudi’s can’t “contain” the price of oil, and the threat of “peak-oil” which even the IEA now concedes is a reality, starts to provide a logic for those countries who have any oil left to keep it in the ground; on the assumption that it will be worth a lot more next year, then prices will go up.

And by-the way don’t put too much faith in corn-ethanol as a saviour, the reality is that you need more oil to make that stuff than you need to make regular gasoline.

If oil prices keep going up and start knocking on $150, then according to that chart CPI however you measure it will go up.

In that case, regardless of Ben’s brave words about being able to cut-off inflation in a heartbeat; there will be nothing the Fed can do about that, outside of pushing up the base rate to throttle-down the economy.

America is unique in the world in that it needs twice the oil to generate one unit of GDP, as anywhere else; and now that the financial engineers who kept the Smoke and Mirrors show on the road for so long, are out of business; if oil does start to blow, could that signal the end of an era?

For the past fifteen years, any discussion about "Peak-Oil" has been countered with the argument - "don't worry your pretty little head… someone will pull a rabbit out of the hat".

If so, the only question that remains is will 2011 be the "Year of the Rabbit", in more ways than one?

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.

Andrew Butter Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

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

Catching a Falling Financial Knife