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Trading Lessons

Oil Shocks From The Lost Ark

Politics / Crude Oil Sep 25, 2012 - 12:33 PM GMT

By: Andrew_McKillop

Politics

Best Financial Markets Analysis ArticleTIME WAS
On Sept 24, 2012 Bloomberg ran an article probably written way back in the 20th century - perhaps 1974 - but strangely lost in transmission to Bloomberg's editorial offices. For reasons best known to Bloomberg, it decided to publish this article unchanged with all its original, laughable errors.

The article by Jeff Rubin starts by telling us that "for most of the last century" (probably not the 19thC), cheap oil powered global economic growth. Rubin adds that when oil prices doubled, and then doubled again, this "permanently shackles the growth potential of the world’s economies". He adeptly forgot to mention that when oil prices halved, and halved again little or nothing happens to un-shackling economic growth.


Since the probable date of writing of this article was the 1970s, we can assume Rubin doesn't know this process has happened several times over since he penned his magnificent insights, providing plenty of proof that massive changes in oil prices, up or down, never had a major economic impact - and even less so since the year 2000. But myths live on and journalists need to sell their copy.

Showing how times change, Rubin talks about the time when oil was $20 a barrel and times were good for economic growth. Before 1973, the barrel prices was stuck at around $1.50 per barrel, although in QE3 dollars corrected by Ben Bernanke for real purchasing power, inflation, and all the rest that may equal $20 of the 2012 variety. Rubin's article also claims that using Lost Ark metrics he could predict that today in 2012, in our present high oil price times, the real rate of US unemployment will affect 13 million Americans - Obama, for starters, would be delighted if that was true, but Bloomberg editorial workers are low paid with low morale, even if they do still have a job. Correcting copy is a bore.

The bottom line is simple: Lying about unemployment being low is very similar to lying about the growth-damaging effects of oil at more than $1.50 a barrel. The second is a sideshow, the first is a tragedy.

LOST ARK ECONOMICS
The Rubin article may in fact have been written these past few days using newfangled computer things or dictated by voicemail and transcribed by user friendly software. Also it is possible that Rubin imagined that oil prices had gained (not lost) $10 a barrel in the past week's trading, but whatever the reason, Rubin gives us plenty to laugh about. He says that countries guzzling the most oil are taking the biggest hits to their potential economic growth, which should be especially bad for countries like the US, Qatar and Saudi Arabia, which waste the most oil in the world as measured by their oil consumption by person. Two of them seem to have no problems with economic growth, although Bearded Prophets do pose all of them a threat, the mass media says.

Rubin should have told us that Lost Ark Economics says oil guzzler countries which also import most of their wasted oil have the biggest economic problems, but again this isn't sure and certain. He could have compared Germany importing a little more than 95% of its oil, with the US importing 46% of its oil: which one has the biggest trade deficit? Germany doesnt even run a trade deficit at all! He misses out on telling us that most EU27 countries with a current average filling station price for gasoline around $9 per US gallon, or $378 per barrel, also have more than a few problems with economic growth, but the best joke is that oil exporting Norway has the highest filling station prices of them all - and the highest economic growth.

Lost Ark Economics may be complicated but the real world is even more so!

Rubin says that current oil prices are "sobering news" for the US which consumes about a fifth of the oil used in the world every day. Contrasting present Obama times with the happy times of the early 1990s when US unemployment was at a 40-year low, he says that "central bankers and policy makers have failed to fully recognize the suffocating impact of $100-a-barrel oil".

In the US, since 2008, Obama and helicopter Ben Bernanke, with help spending the loot from all the big names in banking, insurance and brokering have increased total US sovereign debt by around $3750 billion. This is enough to buy rather a lot of oil, even at the $100 a barrel price that friendly old Saudi Arabia is (it claims regretfully) forced to sell the stuff. The good news for Rubin and other Lost Ark Economists is that in any case this will soon be a forgotten price of oil. It can only fall, and will fall. The present 100-dollar sticker price for oil will become a Lost Ark oil price dating from the early 21st century, just before the Giant Cobra emerged from the sands and drastically changed the global economy almost overnight. Steven Spielberg is working on the film script.

Rubin will have to explain why falling oil prices, along with ultra low gas prices, giveaway priced coal, and renewable energy operating on totally zero cost "fuel" does nothing at all to or for economic growth or unemployment.  Ask Mr Obama what has happened to the US economy since the shale gas revolution cut US natural gas prices by 85% in 6 years: not very much, and especially little for his re-election chances. This will be an interesting follow-up article for Rubin to send by roadrunner couriers, the US postal service, or by iPhone, or as he likes, to Bloomberg Editorial.

STRUGGLING TO RESTORE GROWTH
Rubin concedes the US is not the only country getting squeezed by the slowdown. He needs to be more generous with the dimensions of the problem. From Europe to Japan, and from Brazil to Russia and India, not forgetting China, governments are struggling to restore growth - or more precisely slow the rate of slump into recession. Rather likely, even Zimbabwe is trying to restore its economic health, and Rubin could tell us how $100 oil has ruined Mugabe's standing, but he prefers to tell us the economic remedies being used to fight the effects of overpriced oil  are doing more harm than good.

He tells us the reason is etched on the Sacred Stones of the Lost Ark: because these would-be remedies are based on "a fundamental belief that economic growth can return to its former strength without cheap oil" In other words, only cheap oil can save the day. Otherwise, we are doomed!

Running huge budget deficits and keeping borrowing costs at record lows cannot be long-term substitutes for cheap oil, Rubin says, forgetting to say that this was in fact the original and founding miracle of Reaganomics, with the sole difference that interest rates were sky high, in Reagan times.

In January 1980, with oil prices in current QE3-type Bernanke dollars at about $135 per barrel, and interest rates for Fed funds at 17.2% per annum, Reagan and Volker were however unable to totally destroy the US economy. Also, in real terms, US unemployment was slightly less than it is today, with Obam-o-Nomics. Without high oil prices in the early 1980s, we can argue, Reagan would not have felt confident enough to rack up high street bank lending rates well beyond 20% pa. It was a No Brainer or what Reagan's British talkalike, Maggy Thatcher called No Alternative.

Obama could take a leaf out of Reagan's book, or he could leave it to Mitt Romney: pushing interest rates back up to 20% pa will have "very interesting results". They could likely drive down oil prices almost as fast as they drive down the economy. To nothing.

To be sure, oil-economic hysteria was easier in Reagan times. Using IEA data, oil covered 52.6% of total energy demand in the OECD countries in 1973, against 36% in 2009. It was like they say in UK ark studies, a piece of cake for Reagan and Volker to decipher the hieroglyphs on the Lost Ark and decide that twenty-percent-a-year high street interest rates were a great thing to add on to $135 oil.
It was a real economic miracle - that the global economy survived!

USE LESS OIL AND AVOID ECONOMIC CRISIS
Rubin adopts a scary tome by telling us that oil provides more than a third of the energy we use on the planet every day, more than any other energy source. In fact only just: oil energy is now only a whisker ahead of coal energy, on a global basis. Oil is on its way out.

Not using oil has literally powered ahead. Rubin should try a trip to Germany or Spain. On a summertime weekend in Germany's case, but the "problem" is similar in Spain, the output from their windpower and solar power plants is either more than, or close to their total national electric power demand. Next he has to compare the Spanish economy and the German economy. Both of them import an awful lot of oil, and are plastered with windmills and solar panels  - but the similarities stop dead at that point.

Rubin tells us we "can draw a straight line between oil consumption and gross-domestic- product growth". In fact we can draw a straight line through econmic growth, in almost any OECD country. This sorry state of affairs needed little help from oil, either high priced or low priced. Since at least the 1990s (long after his article was written) Rubin's folksy claim that "the more oil we burn, the faster the global economy grows" is only true when oil prices are high or very high: enabling Russians and Arabs to play rentier gentlemen farmers, pump a little oil (or a lot) and buy Mercedes Benz saloons, even an occasional Cadillac, and plenty of iPhones. Work? Whats that got to do with it?

Folksy and antique ideas of the type Rubin has no shame repeating, like a 1 percent "bump" in world oil consumption supposedly leading to (not resulting from) a 2 percent increase in global GDP just simply is not shown by real world facts and figures. Take 2008 for example: oil demand declined but world or global GDP growth, at least using IMF figures (which only the churlish would doubt) was about 2 percent. To be sure, this level of growth was crisis level. Why oil prices leapt in 2009-2010 (after crashing in 2008-2009) is a question Mr Rubin needs to ask Goldman Sachs.

Rubin's econometrics goes wild by adding that if global GDP increased at 4 percent a year -- as it often did before the 2008 recession -- oil consumption will increase by 2 percent a year. Maybe in the Old Times before 2008, but likely not any longer, Mr Rubin. The folksy economic sums he offers, like a 2 percent "bump" in oil demand being fine and dandy if the price is $20 a barrel, but out of the question if its $100 a barrel, has no relation to the real economy.

Fortunately, this long lost economics of the Lost Ark is unrelated to modern times. After the big decline of oil demand in 2008, smaller-type declines but real declines all the same, are the emerging reality. Rubin gets at least one thing right on that score, towards the end of his article. He says "the best cure for high oil prices is high oil prices". US natural gas prices averaging about $2.50 in Q2 2012 price this energy at $17 per barrel equivalent; US Powder River basin stripmined coal is priced at around $8 per ton, or $1.60 per barrel equivalent. A we already said, windpower and solar power run on "fuel" that has a perfect zero cost. What chance does $100 oil have, facing those rivals?

What Jeff Rubin however does not want to know is the reality: oil prices have little or nothing to do with causing an economic crash. Debt, de-industrialisation, deficits and a dysfuntional and criminal bank-insurance-trading system are all that is needed.

THE OLD TIMES
Because the Rubin article was written about 1974, but curiously lost for decades, it is filled with cozy insights on Lost Ark oil-o-nomics. The article recounts the first oil shock after the Yom Kippur War in 1973, when OPEC's Arab members turned off the taps on roughly 8 percent of the world’s oil supply by cutting shipments to the US, Holland and other Israeli allies. Crude prices spiked, and by 1974, real GDP in the U.S. had shrunk by 2.5 percent. Using data from just a little afterwards, 1975-1977, US economic growth rebounded, but the Rubin article had already been transcribed on the stones inside the Lost Ark and missed out on this tidbit. Also missing, by about 1977, nobody cared too much about oil prices which had risen 400% in 1973-74: they were getting ready for Iran oil shock of '79. 

The second OPEC oil shock happened during Iran’s revolution and the subsequent war with Iraq. Disruptions to Iranian production during the revolution sent crude prices higher, pushing the North American economy into a recession for the first half of 1980. Generously or otherwise, Rubin misses out on the role of high street bank interest rates far above 20 percent-per-year. We could ask him or any other surviving Lost Ark economist what they think 20% rates would do to the global economy today?

Would it survive more than one week? Maybe a month? Tell us all about it.

Come a little closer to today's reality, in fact right now, we could look at Germany and Spain again, both of them squeezing oil out of the economy pretty fast - and ask what interest rates apply to financing Germany's massive national debt, and what rates apply to Spain's incredible debt? How much does their debt cost relative to their oil import costs?

Rubin genre-writers tells us that Saddam Hussein's invasion of Kuwait increased oil prices to a little less than one-third the price that Nymex brokers and traders managed to lift it, in 2008, but the Kuwait experience was enough to send major oil-consuming countries into a recession in the fall of 1990. Curiously enough, in 2007 with oil prices a lot more than double the price of Kuwait times, the global economy expanded at a record high rate, above 4.5 percent growth.

Rubin however lacks the wit to tell us, from his 1974 standpoint, that switching cheap oil for high interest rates or "expensive money", and then trying high priced oil and cheap money, does little or nothing for the global economy: it keeps on sailing, just like the Titanic. On balance, maybe, the fact that when oil prices are high people have little choice but to open their wallets is a Bernanke-style way of forcing them to spend, the same way as paying them nothing on their savings - so they dont save. The zero sum game claim of Rubin, that paying more for oil means less cash to spend on food, shelter, furniture, clothes, travel and anything else and means the economy can only tank, is Lost Ark economics. The sideshow deflects attention from the real problems of the Titanic Economy.

The traditional old world claim that when oil prices go up, so does inflation has been disproven for decades. When oil prices go down, as in the 1990s, inflation had already been crafted out of the CPI data of almost any major country, so falling oil prices did nothing to cut inflation - because inflation didnt exist anymore. The old world claim that when inflation goes up, central banks will raise interest rates to keep prices in check is baloney: they are unable to raise interest rates above symbolic near-zero token rates, because the financial sector will collapse if rates are raised even to 10 % pa.

Rubin-genre journalists claim that we are facing a double whammy of rising oil and food prices, but  this has one immediate and massive logic problem: oil prices are falling but food prices do not have to fall. For the answer to this conundrum try Goldman Sachs, Sucden, RJ O'Brien or other specialists. The inflation fears of these genre-writers should focus on the real threat: insane money printing feats, called "QE". The amounts printed and "eased" should then be compared with the world value of physically produced and consumed oil, food, metals or any other basic commodity: experts are still working on the mathematical and quantitative logic of Lost Ark hieroglyphs, but if Rubin ever comes back to Earth he may be able to tell us all about it.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 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.


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