 | DrumBeat: May 18, 2008 | The Oil Drum | A quote from Obama in Oregon..."We can't eat as much as we want...and then expect other countries...to say OK" |  |
105 comments on POLL: Oil Breaks $127, Now What?
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105 comments on POLL: Oil Breaks $127, Now What?
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In my opinion, and this is just my opinion, the primary driver of oil price is developing country demand, mainly China and India but other economies as well. There are signs that China's economy may be facing problems soon but they are not strong signs and some of those signs have been there before. I am specifically looking for those signals because at that point I would begin to consider shorting oil rather than playing long. But so far I don't see enough strength to those few signals to warrant a change in outlook.
Oil demand in the Middle East is growing rapidly as well, and tends to spike up during the summer months.
There are certainly plenty of flaws and instabilities in the Chinese system. They have no shortage of environmental, social and infrastructure problems. And relying on exports to the USA will not be sustainable for much longer.
The Party knows it is trying to ride and steer a bucking bull, and it is not a stable situation. At the moment they are trying to rein in speculation and inflation (yes, their money supply is growing thanks to the trade surplus) to relieve dangerous overheating.
However, as exports to the USA slow I believe they will be forced to take stimulatory action to stop their economy slowing to the point where unemployment grows. This may include letting their currency appreciate against the dollar in order to make food and fuel cheaper locally, and embarking on public works & infrastructure projects to provide employment.
Thus their likely reaction to a recession would increase demand for food and fuel in the long term as they give their population more buying power in global terms.