<DrumBeat: February 25, 2008The Oil DrumDrumBeat: February 26, 2008>

63 comments on Whither The Bumpy Plateau?

Comments can no longer be added to this story.

JD on February 25, 2008 - 7:11pm Permalink | Subthread | Parent | Comments top

So the plateau of 2005 to now in Crude and Condensates (C&C's) seems to indicate that economic growth will be flat or declining.

The C&C peak in May 2005 has had no notable effect on growth in world output or trade, as you can see from the chart:

(Source: UN World Economic Situation and Prospects(pdf))

0
Comments can no longer be added to this story.
Termoil on February 25, 2008 - 8:08pm Permalink | Subthread | Parent | Comments top

The C&C peak in May 2005 has had no notable effect on growth in world output or trade...

Why would it? It's not the peak that's the problem and we have yet to see any serious shortages that would crimp economic output.

0
Comments can no longer be added to this story.
memmel on February 25, 2008 - 9:13pm Permalink | Subthread | Parent | Comments top

I don't think its that simple. Until recently the world was awash in borrowed money. A lot of people in the US had and additional 100-300k in disposable income from HELOC's and home sales and the housing bubble was pretty much world wide. Given the flood of cheap money its no wonder that the economy was insensitive to oil price. With this receding and people now forced to live only on their salaries oil prices have suddenly become important.

So expect high oil prices to suddenly become a very big issue in the US.

0
Comments can no longer be added to this story.
WeekendPeak on February 26, 2008 - 11:49am Permalink | Subthread | Parent | Comments top

One of the unintended consequences of high oil prices is a shift from consumption to savings. If gas costs 2 bucks at the pump, and the consumer has 3 bucks, the consumer will spend 90% of that dollar on, say slimjims. (The marginal propensity to consume (MPC) is about 90% or so). When gas is 2.90/gallon that additional 90c goes to the producer who is very likely to save it. In a way the sovereign wealth funds are dollars we did not consume.
The oil producing countries then take that money and for a good part of it (depending on the country of course) invest it. One way to invest is to buy US treasuries, which keeps rates low in the US. Another way is to buy stakes in, or complete US companies. (in this example I’m limiting myself to the US, but obviously it extends to other countries as well. The US is somewhat of a special example because oil is transacted in, and the savings of exporters are in USD, making it easier to buy US assets rather than farms in Zimbabwe).
So one can argue that the petrodollars have eased the pain in the US by virtue of the USD being the transaction currency.

0
Comments can no longer be added to this story.
memmel on February 26, 2008 - 3:53pm Permalink | Subthread | Parent | Comments top

I think your right at the macro scale. Its why the wealthy in the US don't mind the dependency on oil as long as the petrodollars flow back home. However its still a transfer of wealth from the poor to the rich the fact that the wealthy in both countries share in the profits is not so important. The lenders in the consumer countries are able to get consumers to accept more debt to subsidize the gasoline purchases at low interest rates.

Your making a mistake by assuming its cash transaction where in reality its credit transactions with the minimum return a transaction fee. Along with high interest rates on unpaid balances. A lot of Americans actually pay stunning taxes on gasoline just its hidden as CC interest and goes to the wealthy not the government.

So the inflow of petrodollars back into the consuming country to be converted to debt via loans is just part of the overall bubble. Once the consumer is toast then your right and it moves on to equity positions in various companies etc.

We played the same game with Japan finally selling properties at inflated prices that where later bought back at pennies on the dollar. Also China is just as involved.

At each round of the boom bust cycle real wealth and assets become more concentrated in the hands of the winners even as some take nominal dollar losses to be inflated away in the next bubble or simply defaulted on. Think Enron on steroids.

However this time around I think the middle class has finally been squeezed to death so I think we will see a massive conversion back to commodity based simpler economies. Where the wealthy sell necessities at inflated prices. When I lived in Vietnam I noted that the milk distributor was one of the wealthiest in the country. This reversion to extracting wealth via control of the land, rental housing and commodities seems to be in progress right now. People are reduced to living month to month with some having slightly better lives than others depending on skills.

Depending on the final levels most people end up at and if the the wealthy are willing to sustainably extract wealth from the workers it could be a decent life. It seemed to me in Europe that in a lot of ways they where already at this level and that for the most part the rich where satisfied with a long term fleecing of the poor without grinding them down. Maybe because they have already done that a few times in the past so there is no sport in it for them.

0
Comments can no longer be added to this story.
Jack on February 26, 2008 - 9:33pm Permalink | Subthread | Parent | Comments top

Oil is priced in dollars, not transacted in dollars. Oil can be, and is, sold in whatever currency the buyer and seller agree on. The EU does not use dollars to puirchase oil from Russia, for example, nor need to store any for this purpose.

Aside from this, I agree with your post.

0
Comments can no longer be added to this story.
memmel on February 26, 2008 - 10:16pm Permalink | Subthread | Parent | Comments top

The concept that petro dollars don't matter.

Well lets say that your holding US dollar and the dollar declines in value then you have to buy a few Mansions or Jet Planes. You can either buy US Mansions or Planes which are now relatively cheaper or buy European which are more expensive. The point is not the transaction but the holding currency. The petrodollar consists of several things.

A reserve currency thus as its value decreases vs other currencies goods from other countries are expensive. A currency for a transaction. A currency for denominating savings.

If the currency did not matter why not say use Mexican pesos ?
Why does the US care about the petro dollar ?
What happens to the trillions of petro-dollars floating around the world if it chooses new currencies for oil transactions ?
What about Asian countries that use the dollars too by oil ?

Because in general because of its status the US is in a unique position its able to print as many dollars as it wants and they are absorbed by the global economy and better the value does not decrease. Other countries like Asian manufactures play the game to keep their currencies low for trade.

Its been a grand game for a long time with the US effectively able to print as much money as the world could take.

Its been a three way trade.

1.) US produces dollars
2.) Asian Manufactures produces goods and accept dollars and buy more using other currencies to keep the dollar high because of real or effective pegs.
3.) Asian Manufactures and US and Europe send dollars to OPEC for oil.
4.) OPEC reinvests dollars in US T Bills or other dollar denominated Assets. OPEC also
has a dollar peg so it periodically buys up dollars to protect the peg.
5.) US produces more dollars as needed.

Understand that the US has exported more dollars than any other export. If you counted the flow of dollars out of the US its our top export.

But its coming to a end.

0
Comments can no longer be added to this story.
Gail the Actuary on February 25, 2008 - 9:20pm Permalink | Subthread | Parent | Comments top

What the run-up in oil prices has had an impact on is the financial system. We don't think of that as a problem, partly because the connection is not as obvious, and partly because there hasn't been any huge crash (yet).

THe direct impacts are most clear. The current high oil prices are having an impact on people's ability to pay for other things, like restaurant meals. It is also clear that food prices are also being affected, and these are causing feedbacks into the system as well.

What is probably not as clear is how this fits into the broader context. Over the years, we have developed a huge balance of trade problem. This is to a significant extent related to our desire to continue to buy oil, and products made by oil, even though we are not producing nearly as much as we used to, and the willingness of other countries to let us do this. The balance of payments problem started about the same time we started importing large amounts of oil.

Our country was growing rapidly during the time when energy costs were decreasing. During this time, it was easy to make investments that had decent yields. Once the decent yields went away, our financial folks managed to design products (depending on infinite growth) that would give decent yields. The infinite growth really isn't there, so these products are falling apart.

These aren't impacts we would expect, so we don't look for them.

0
Comments can no longer be added to this story.