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Will the oil price trigger the long-predicted double dip?
Back in March 2008, I put down my prediction that later that year the oil price would reach $145 - from the $110 it had reached then - and bring an end to world economic growth. Now we're back at $90, will it happen again?
Some of the fundamentals of that analysis are certainly coming round again. particularly the long slow upward drift of the oil price as demand begins to approach supply. The IEA Oil Market Report predicts world oil demand rising to 88.8mb/d in 2011, up from 87.4mb/d in 2010, and peaking at 89.6mb/d in the third quarter of this year. In the same report, world oil supply is shown as reaching 87.4mb/d in the third quarter of last year.
No need here to repeat all of my early 2008 analysis, which you can read for yourselves, but on the face of it there is the potential for the mid-2008 scenario to repeat itself in at least some of its fundamentals: demand for oil could begin to exceed supply by a margin too large to be met by raiding stocks, and the price could rise rapidly until it is high enough to severely curtail world economic growth.
The next steps in the dance will necessarily be different: the sub-prime collapse won't happen again this time, but on the other side there is essentially zero chance that we will see a repeat of the coordinated global fiscal action (aka government spending) to mitigate the depth of the slowdown.
Indeed, most of those governments that are pulling deep cuts to reduce their deficits are relying on continuing or even increasing general economic growth to mitigate the impact of the cuts and to provide increased tax revenues to contribute to the deficit reduction. If there is no growth, let alone another recession, the impact of the cuts will be magnified substantially and probably lead to some of those economies - not just the PIIGS, but also the UK and a number of other second-rank economies - having considerably worse deficits than they started with before the 'deficit reduction' exercises.
So, more likely a sovereign debt crisis than a banking crisis, but with cuts in spending all around, and no real chance of action to reduce the length and depth of the downturn. With demand potentially in free-fall and compounded by government spending cuts coming through to fruition, it would be unlikely that this time the Chinese economy can repeat the 2008-9 tricks, and thus the insulation of the Australian economy from the downturn won't be repeated this time round.
'Course, could be wrong, might not happen, maybe the supply curve can accelerate to meet Q3 demand. But maybe not.
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The Washington Octopus
I wonder if the Tunisian- Egyptian situation will be a trigger for a new version of the seventies oil shock. I dont think so though, its more about retreiving global democracy from the oily oligarchs. Its true that the Tunisians and Egyptians are unhappy with austerity to bail out and or entrench the rich, as are the people of Britain.
But right across the world the oligarchy is coming down like a brick outhouse wherever/ whenever the politics and poleconomics of the neolib system wedded to imperialism and nepotism, again actually impede rather than encourage freemarkets and healthy communities, alike.
Actions And Outcomes
I'll make three points.
1. Economic data can only tell us with certainty what happened in the past. All investment decisions are assumptions relating to future events.
2. The rapid price increase of a purely monetary commodity such as gold isn't a freak coincidence. You'll find a direct correlation with so called quantitative easing.
3. If you believe oil will reach its previous peak price (relating to supply and demand repeating), the only conclusion is that in purely dollar terms it'll surpass the previous price peak. Mathematically it must because a dollar today holds less value than a dollar in 2008.
A predictable world
Currency devaluation will eventually result in higher prices. That is simple mathematical logic. Commodities are traded in US dollars, therefore the price of said commodities will eventually be reflective of dollar strength.
There isn't a right or wrong when it comes to economics, there's only actions and outcomes. When it comes to outcomes, it's often fair to say, one mans trash is another mans treasure. Helicopter Ben and the Treasury can use monetary tricks for all they're worth, their problem is that they're not tricking anybody (market). Such tricks have never worked, and they'll never work. Not even once.
Production drives growth, not consumption, thus making monetary trickery a pointless exercise. That is of course if health growth, and general national well-being is your number one priority. And until this FACT is accepted the western world will continue to transfer the middle class to a region such as Asia - a region that understands this FACT only too well.
PS I think on a similar thread about two years ago I was asked my investment recommendation, I wrote truthfully that "precious metals" is something worth looking at. Am I gloating? No. I will write that a ten dollar history book is the most important book in my house though.
REMEMBER: There is no right and wrong when it comes to economics. There's only actions and outcomes!
David R: Paul, if you go back to the original March 2008 piece, you'll find an analysis of prices vs devaluation that shows that this explanation for price rises doesn't explain more than a very small amount of the changes.
Same difference
"Production drives growth, not consumption"
Production without consumption will lead to over-supply and collapsing prices. Consumption without production will lead to inflation. For growth we need both production and consumption.
Maybe we get the recession before the price rise
An obvious alternative to the scenario above is raised by the appalling UK GDP figures for the last quarter of 2010: maybe the global fiscal tightening and deficit reduction exercises will be enough on their own to stop economic growth, an therefore keep oil demand below supply and the price down at the $100-ish level.
Optimism.
I whistle a happy tune, when I'm afraid.
Unfortunately, by this reading, governments of the Cameron Tory species become default. No rest for the wicked if you are a pleb in this version of the brave new world.
I actually agree with the sense of David's article also. There is only a limited time before ignorance and complacency again reach critical mass, followed by more foulups and the ultimate protracted recession affecting just about everyone, bar the fairly rich.
We seem to be moving from seduction to outright rape, with this latest phase of a never ending class war that only receives criticism when the little guys fight back.