Best of the Week
Most Popular
1.Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - Nadeem_Walayat
2.Gold and Silver Stocks Apocalypse Now, Bear Market Review - Rambus_Chartology
3.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
4.Ebola Terror Threat Suicide Bio-Weapons Threatens Multiple 9/11's, Global Plague - Nadeem_Walayat
5.Second-Richest Man Says Mortgages Now a "No Brainer" - Dr. Steve Sjuggerud
6.Gold And Silver Still No End In Sight - Michael_Noonan
7.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
8.The Gold Bug is Set to Bite Back - EWI
9.How Alibaba Could Capitalize on the EBay-PayPal Split - Frank_Holmes
10.The Consequences of the Economic Peace - John_Mauldin
Last 5 days
How Will We Know That the Gold & Silver Price Bottom Is In? - 21st Oct 14
Is Gold as Dead as Florida Hurricanes? - 21st Oct 14
First Swiss Gold Poll Shows Pro-Gold Side In Lead At 45% - 21st Oct 14
The Similarities Between Germany and China - 21st Oct 14
The REAL Reason Why the Stock Market Turned Down - 21st Oct 14
Petrobras is a 'Scheme, Not a Stock' - 21st Oct 14
Stocks Bear Market Indicator Is Off the Mark - 20th Oct 14
Stock Market Ideal Turning Point is at Hand - 20th Oct 14
Investors Quit Complaining, The Environment is Perfect Right Now - 20th Oct 14
Ebola Armageddon Could Trigger a Rebirth in Gold and Silver Prices - 20th Oct 14
Gold vs Euro Risk Due To Possible Return of Italian Lira - Drachmas, Escudos, Pesetas and Punts? - 20th Oct 14
Stocks Rebounded Following Recent Sell-Off, But Will It Last? - 20th Oct 14
U.S. Responsible for West Africa Ebola Outbreak Says Liberian Scientist - 20th Oct 14
Stock Market Intermediate B Wave has Started - 20th Oct 14
Gold Stocks Analysis – FNV, CG, NCM, SBM - 19th Oct 14
Stock Market Primary IV Wave Counter Trend Rally - 19th Oct 14
Gold And Silver - Financial World: House Of Cards Built On Sand - 18th Oct 14
Anatomy of a Stock Market Sell-Off - 18th Oct 14
Why OPEC Has Declared an Oil War on Russia - 18th Oct 14
Gold and Silver Extreme Shorting Peaks - 18th Oct 14
Bitcoin Price Fall to $350? - 18th Oct 14
Tesco Supermarket Crisis Worse To Come as Customers Vanish! - 18th Oct 14
Sheffield Roma Crisis School Place Application's Fraud Perfect Storm - 17th Oct 14
Stock Markets, Commodities and Indicators - 17th Oct 14
“Save Our Swiss Gold ” - Game Changer For Gold? - 17th Oct 14
How to Trade the Ebola Stock Market Sell-Off - 17th Oct 14
When... Not if... Crude Oil Price Drops Below $70 - 17th Oct 14
Either You're The Butcher or You're The Cattle - 17th Oct 14
Gold Benefits from Market Uncertainty - 17th Oct 14
Stock Market Pullback Underway, Euro downside, Commodities - 17th Oct 14
Stock Market Seven Year Cycle and A Correction Ahead? - 17th Oct 14
Three Ways to Play Uranium: Top Stock Picks - 17th Oct 14
America Flirts With Deflation - 17th Oct 14
Why the Fed Should Consider Delaying the End of QE - 16th Oct 14
Gold Prices Since 9-11 - 16th Oct 14
The Inflation Imputation, Dear Saver, May You RIP - 16th Oct 14
Flight To Safety - Gold Rises As Stocks, European Bonds Sink - 16th Oct 14
The March Of History And The End Of Nations - 16th Oct 14
Stocks Bear Markets Move Fast and Are Intensely Emotional - 16th Oct 14
Stocks Got Their Piece – Now It’s Our Turn - 16th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

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

© 2005-2014 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

Free Report - Financial Markets 2014