Best of the Week
Most Popular
1.Election Forecast 2015 - Opinion Polls Trending Towards Conservative Outright Win - Nadeem_Walayat
2.UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - Nadeem_Walayat
3.Gold And Silver - When Will Precious Metals Rally? Not In 2015 - Michael_Noonan
4.Preparing for the Next Stocks Bear Market - Forecast 2015-2016 - Gary_Savage
5.Is a Stock Market Crash Imminent? - David Eifrig
6.Gold Price Slumps as US Dollar Soars, What's Next? - Nadeem_Walayat
7.US Dollar Forex Pairs and Gold Chartology - Rambus_Chartology
8.Election Forecast 2015: The Day Labour Lost the General Election - Nadeem_Walayat
9.The ECB Should End QE Next Month - EconMatters
10.Silver Price Poised to Surge - Zeal_LLC
Last 5 days
Middle East Balance of Power Matures - 31st Mar 15
Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - 31st Mar 15
Gold and Misery, Strange Bedfellows - 31st Mar 15
Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - 31st Mar 15
Don’t Celebrate the U.S. Housing Market Recovery Yet - 30th Mar 15
A Middle East Nuclear Holocaust - 30th Mar 15
Peak Gold? – Goldman Sachs Research Warns of Peak Gold Production - 30th Mar 15
With Yemen Burning, Arab Spring II Is Underway - 30th Mar 15
No FED Bets From the BIS - 30th Mar 15
Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - 30th Mar 15
Economic Recovery, Geopolitics and Detergents - 30th Mar 15
U.S. Dollar, Commodities and the Gold Miners GDXJ ETF Analysis - 30th Mar 15
Stock Market Short-term Downtrend - 30th Mar 15
David Cameron Election 2015 Debate Facts Check - Employment, Immigration, Debt & Deficit - 29th Mar 15
Stock Market About Ready to Crash! - 29th Mar 15
Reflections in a Golden Eye - Gold Market Rejection, Repatriation and Redemption - 28th Mar 15
Stock Market Inflection Point - 28th Mar 15
Gold And Silver - What Moved Price? Bab el-Mandeb And Uranus Square Pluto. What?! - 28th Mar 15
Stock Market Investment Parachutes; Do You Have Yours? - 28th Mar 15
Peak Gold Misunderstanding, is Gold About to Run Out? - 28th Mar 15
Deflation Watch: Key U.S. Economic Measures Turn South - 27th Mar 15
The Hard-Earned Truth About Recreational Real Estate - 27th Mar 15
Bitcoin Price Still in Important Territory - 27th Mar 15
Stocks Bear Market Conditions - Index Market Range Warning - 27th Mar 15
BEA Leaves Q4 2014 U.S. GDP Growth Essentially Unchanged at 2.22% - 27th Mar 15
Brazil Economy Victim of Vulgar Keynesianism - 27th Mar 15
Gold to Fuel Silver Price Upleg - 27th Mar 15
Gold and Silver Stocks Will Rise Again! - 27th Mar 15
Risk of ‘World War’ between NATO and Russia on Ukraine as Yemen Bombed - 27th Mar 15
FOMC Minutes Turned The Gold Tide - 27th Mar 15
Sheffield Hallam Election Battle 2015 - Lib Dems Go to War Whilst Labour Sleeps - 27th Mar 15
Gold Effect On Mining & Shale Wasteland - 27th Mar 15
How Stock Investors Should Play the 2016 Presidential Race - 26th Mar 15
MidEast Energy Alert: Why the Crisis in Yemen Could Get Ugly Very Fast - 26th Mar 15
Stock Market Downward Spiral of Dumbness - 26th Mar 15
The Monetary Approach Reigns Supreme - 26th Mar 15
Stock Market Large Gap Down, Despite the Algos' Push Back - 26th Mar 15
Crude Oil Surges, Gold price Spikes as Middle East Tensions Escalate - 26th Mar 15
The U.S. Housing Market Recovery Is Fabricated Optimism - 26th Mar 15
Why Yemen Is The Next Saudi-Iranian Battleground - 26th Mar 15
The Crude Oil Price Crash and China Economic Slow Down - 26th Mar 15
Global Financial Markets Are More Distorted Than Ever Before - 26th Mar 15
One More Stock Market Rally and Then a Huge Drop Expected - 26th Mar 15
Danger Will Robinson - Stock Market Crash Warning - 25th Mar 15
Learn the Basics of Corrective Elliott Waves - 25th Mar 15
Why CNBC Is Hazardous to Your Financial Health! - 25th Mar 15
Will Your Retirement Accounts Survive The Coming Tax Code "Revolution"? - 25th Mar 15
US Dollar - Americas Phoenix - 25th Mar 15
California’s Epic Drought: Only One Year of Water Left! - 25th Mar 15
What’s Wrong With Silver? - 25th Mar 15
SPX Futures Appear Weak. WTIC and Gold May Be at Max Retracement - 25th Mar 15
We’re at the Dawn of a “New Energy Age” - 25th Mar 15
A Very Weak U.S. Economic Recovery - 25th Mar 15
Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing - 25th Mar 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy Still on Life Support

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

© 2005-2015 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