Print
Email
Share
Facebook
Twitter
LinkedInA condensed version of Dr. Roubini's latest post:
"I was wrong about the impact of $40 oil, but I'll be right about the impact of $70 oil."
I know Dr. Roubini was wrong about the impact of $40 oil because my name also appears on the 2004 note. We both were wrong. We thought high oil prices would be a drag on the economy in 2004. They often are.
Yet, global growth was very, very strong in 2004. Judging from the evidence, the magic formula for global growth is an undervalued Chinese RMB, high oil prices and a growing US current account deficit financed by the central banks of really poor countries and a few really rich oil sheiks. The formula is just so counter-intuitive that it took a long time to discover .. 2005 wasn't quite as good as 2004, but it wasn't bad by any means.
OK, maybe high oil prices aren't really tonic for the global economy. I think James Hamilton would say that a strong global growth has been a tonic for oil producers. Oil prices are high mostly because demand for oil is high. The key point, though, is that higher oil prices – and the resulting transfer of purchasing power from oil consumers to oil producers – hasn't been much of a brake on the world economy.
Nouriel identifies a couple of reasons why high oil prices might be a bigger drag going forward:
- The current run-up in oil prices seems to be driven at least in part by concerns about supply. Iran. Nigeria's delta. And, more generally, the folks that have oil are far more interested in renegotiating the terms of their existing contracts with big oil companies than in reaching agreement with the big oil companies on a new round of investment.
- The ever-resilient US consumer may not prove to be quite as resilient as before. Home prices may still be rising, but sales aren't. Since there hasn't been any shortage of investment in residential real estate in the US, that should eventually have an impact on prices. In 2003, 2004 and 2005, consumers tapped into their rising home equity (or just saved less as their homes appreciated) and kept on spending even as oil prices rose. Nouriel thinks that this process won't continue. The Fed will get in the way, pushing up short-term rates until long-term rates have to go higher. Or US consumers will simply burn out, and lose their desire to take on more debt.
That is still a rather condensed version of Nouriel's argument. I certainly wouldn't rule it the scenario he describes. But at least so far, there isn't much evidence the US consumer is cutting back. And I have been very struck by one thing that Nouriel doesn't put a lot of emphasis on. Call it the oil savings glut.
There is no doubt that the spare savings of the world's oil exporters – savings in excess of their investment – is now enormous. And with oil at $70, it will only get bigger.
And there is no doubt that the United States' need to borrow savings is enormous. And it too is getting bigger.
I suspect one of the reasons why oil didn't exert more of a drag on the world economy is that the US had – by that time – entered into a cycle of expansion fueled by a surge in residential investment and rising consumption spurred by consumers' ability to borrow against rising home values.
The oil exporters spare savings stepped into the breach left by the reduction in the pace of Asian central bank intervention. Non-Chinese Asian central bank intervention that is. China is a special case: its current account surplus grew even as its oil import bill grew.
By holding US real interest rates down, the oil exporters reinforced a process that got started with the Fed cut rates, and got further fuel from Asia's unwillingness to allow their currencies to appreciate against the dollar from 2002 on.
There is a certain lovely symmetry:
The countries with the highest propensity to save – China and the oil exporters – financed the country with the highest propensity to borrow in order to spend.
Everything worked out.
If the US had been less willing to spend, all the oil savings – about ½ the oil windfall has been saved, according to Alessandro Rebucci and Nikola Spatafora of the IMF (try their podcast too) and in some key gulf countries, about three-quarters of the windfall has been saved – would have implied a shortage of aggregate demand.
And if the oil exporters had been more willing to spend, that too would have created problems. The oil exporters don't buy American. Their spending would have benefited Europe and Asia, not the US. The US – Guy de Jonquieres not withstanding – doesn't have an economy geared around the export of manufactured goods. The US is really good at producing debt – and splicing and dicing that debt into collateralized debt obligations, collateralized mortgage obligations, synthetic CDOs and the like – and then selling that debt to foreigners. But not so good at producing goods the oil exporters want to buy.
So long as the oil exporters are willing to buy US debt, though, everything works out. The oil shock didn't preclude the US from continuing to do what it is good at (producing debt). It just meant that the US sold its debt to a new group of buyers.
Moreover, as Rebucci and Spatafora note, a permanent increase in the price of oil increases the wealth of the oil exporters, not just their current income. So equilibrium requires not just that the US borrow against the rising value of their homes but also that the oil exporters not borrow against the rising value of their oil reserves, and instead finance the US.
And to be honest, that is what I think happened.
But there is one part of this story that is deeply unsatisfying: the absence of any evidence showing that oil exporters are buying long-term US debt.
The flow of financing from Japan to the US from 2002 thourgh 2004 was very visible, the flow of financing from China to the US is pretty visible too, though I suspect China provides more financing than shows up in the US data. The flow of financing from the Gulf to the US, by contrast, is invisible.
The formal reserves of the big Gulf states aren't growing.
And according to the US data, they aren't buying US securities.
Yet David Lubin of HSBC convincingly has argued that the Gulf states are building up their deposits in the international banking system either. Higher deposits in the international banking system from the Gulf have been roughly offset by higher loans from the international banking system to borrowers in the Gulf.
He thinks the Gulf states' surplus has been invested in securities – the banks have been disintermediated. The IMF's data tells the same story. In aggregate, the oil exporters are buying more securities this time around, and putting far less into the international banking system.
It just doesn't show up in the US data.
However, if you look carefully, you can find traces of this flow.
Look, for example, at the debt the US sold to "UK" investors. If the Saudis buy US debt through a custodial account at a UK bank, it shows up as the purchase of US debt by a private buyer in the UK.
Or look at the growth in the non-reserve assets of the Saudi Arabian Monetary Authority, including their holdings of international securities. They just report this data in riyal …
Or look at the surge in Russian holdings of short-term claims on the US. That doesn't quite fit the story though – since Russia seems not to have bought much long-term debt.
The fact this flow is invisible – or least well-hidden — means that it hasn't gotten the attention it deserves. You cann't go to the Treasury web page and get the data needed for a story on petro-sheik financing of the US.
But I am pretty sure this flow is big and important.
That makes me a bit more cautious than Nouriel. Higher oil prices means that the oil windfall will keep on growing faster than oil states can spend it. Which means more oil savings. And more demand for international debt.
And that plays into the United States competitive advantage.
Nothing precludes – or so it seems to me – a repeat of 2005. The US keeps on churning out debt that the Gulf states (and the People's Bank of China) buy. They buy it through London, just to confuse everyone. And to allow a few analysts who haven't figured this all out to argue that the US really finances its deficits by selling to private investors.
Interestingly, work by Laura Kodres and Frank Warnock (embedded in the IMF report) suggests Asian buying has more impact than (indirect) Gulf buying. But they concede that the data problems make any conclusion tentative.
Still, there is little doubt that foreign demand for US debt – including demand from the oil exporters — keeps US long-term rates relatively low. And housing prices relatively high. That supports consumption growth. And demand growth.
But even though I cannot convince myself that this pattern will break, and I do worry that it might. Nothing guarantees a repeat of 2004 and 2005.
The Fed may push up short-rates to the point where the oil states are happy to hold short-term claims. And that will push long-rates up.
Even if real rates remain relatively low, they may not fall. And without the fall, housing prices may not rise. And the 2004-2005 pattern hinges not just on high housing prices, but on rising housing prices.
Or the petro-sheiks may decide that they don't like US debt anymore than they like US goods. Has anyone done a chart showing the evolution of US treasury yields after the US said no to Dubai Ports World?
All this speculation has resulted in a long post.
So I should probably do an abridged Setser.
The oil savings glut has supported housing and debt-centric growth in the US. The associated financial flows were well-hidden, but they still left a few traces. The oil savings glut looks set to get bigger in 2006. And it may – or may not – support continued strong US growth.
I am now gun-shy. I have been wrong too many times. The world looks out-of-whack to me. But so far, nothing has kept it from getting even more out-of-whack.
As global central banks wonder what is next for the dollar even the British Government is hedging its bets; the British government has just updated its plans for changing over to the Euro- just in case the British pound starts to wobble and goes into a freefall again as it did back in the early 1990′s….
The British Pound has been basically locked into the Euro at a rate of GBP 0,69/Euro for the past 3 years and as Britain does over 60% of its trade with the massive EU and Eurozone it would make a lot of sense for Britain to simply switch over to the Euro and unburden the British economy with the tremendous currency exchange commissions, currency and investment risk, and higher interest rates that burden the British economy.
Below the link to the updated Euro changeover plans from the British Government (HM Treasury) to switch all of Britain to the Euro:
====================================
HM Treasury Euro Changeover Plan
http://www.hm-treasury.gov.uk/documents/international_issues/the_euro/assessment/studies/euro_assess03_studmiddlesex.cfm
Currencies: The UK Has Joined the EMU, in Case You Have Not Noticed
way off topic, but tis true that Asian central banks (and others) do seem to have been big buyers of pounds as an alternative to both the euro and dollar.
Ships with unfixable leaks can sink very slowly but ramming a ship into a nuclear war iceberg means ours will sink quite suddenly after oil tops $150 a barrel if there is any to pump….and we aren’t nuked to oblivion, too.
VINOD KHOSLA: I was recently at a conference where one of the senior executives of a major national oil company from Saudi Arabia, Aramco, came up to me and said, “Be careful.” It was almost a warning. He said, “Be careful, because if biofuels are successful, we will drop the price of oil.”
Biofuels: Think Outside the Barrel
China to Ease Foreign Exchange Rules, Allowing Greater Overseas Investment: China’s government will ease its controls on capital, allowing companies and individuals to hold more foreign currencies and qualified financial institutions to invest abroad, the People’s Bank of China said.
India Must Open Rupee Debt to Global Investors: With burgeoning investor interest in local-currency emerging-market debt, it’s surprising that global money managers have no use for bonds denominated in Indian rupees. Blame it on policy makers’ reluctance to open the market.
High oil prices widens global imbalances – IMF
http://today.reuters.com/investing/financeArticle.aspx?type=bondsNews&storyID=2006-04-13T150111Z_01_WAT005292_RTRIDST_0_ECONOMY-IMF-IMBALANCES.XML
” Rising oil prices are fueling global distortions in trade, with oil producers raking in profits while the current account gaps of fuel importers move further into the red, the International Monetary Fund said on Thursday.
In the first chapters of its semi-annual World Economic Outlook, the IMF said that over the past two years, higher oil prices had accounted for one-half, or about one percentage point of GDP, of the deterioration in the US current account.
The Washington-based global lender said the impact of higher oil prices on global imbalances would likely linger longer compared to similar oil shocks of the 1970s and early 1980s.
This was mainly because producers were saving more of their revenues and because inflationary consequences have been limited and oil consumers have not been forced to adjust as quickly, it said.
It also found the recycling of petrodollars through international capital markets was helping to keep interest rates low in the United States and so was adding to the current account deficit, already 6.5 percent of GDP, by encouraging consumption.
High international capital inflows — some of them oil-related — have depressed yields on U.S. government bonds by perhaps three-quarters of a percentage point, the fund said.
But this time current accounts are adjusting more slowly largely because interest rates have not risen as much.
It also pointed out the global environment is very different today than it was in 1970s, when large deficits were concentrated in oil importing developing countries. This time, the deficit was in the United States, aggravated by high oil prices.
The IMF said its analysis suggests that for global imbalances to be corrected both oil consuming and oil exporting countries would need to implement policy steps. ”
- Reuters News Agency
Brad, I think we all agree that the chinese and oil exporters have a good incentives to keep the game running. So does the US government and the Fed.
But why would an american household invest in now very unaffordable houses and risk lose lots of money ?
I think the housing market may be the key. Even if lenders continue to be willing to lend and lend and lend, it is possible that borrower may be afraid of being unable to repay, of losing their equity.
THis is true also of private asian investors, and private oil investors.
THe risk is so high now, that even though monetary and governmental authorities still have an interest in keeping bretton woods 2 so to speak, private investors increasingly do not. I believe they will this year overrule the authorities, It’s probably the good time for new Soros to act.
Have a look at what mish says, this may be “anecdotal” evidence in a “frothy” market. But if word spreads … I can’t see why an individual would be foolish enough to sacrifice its home and life long security to the pursuit of a game with ever rising imbalances
http://globaleconomicanalysis.blogspot.com/
Brad: Great post. Some thoughts.
1) I don’t think evidence for consumer slowdown is so scant. There are touches of grey in the silver lining of the retail report. Ex-auto / ex-building material, retail spending was up only 0.27% (Mar vs Feb., seasonally adjusted). Sales of electronics and appliances were very poor (-1.1% from feb). Department stores were negative, and the Wal-Marts of the world were disappointing (+0.07%). Boutique-y retail may have benefited from service sector inflation. Obviously I’m rotton-cherry picking by pulling out the headline-making auto (+1.6%) and builing materials (+1.2%) numbers. A spike in building materials is consistent with the surge in construction spending. If you buy the story that builders are rushing to completion in the face of housing market uncertainties, than it’s unsurprising that some of this would leak into Home Depot “retail” sales. The jump in auto related sales is more mysterious, but not necessarily bullish. Consumers dumping SUVs for smaller cars or hybrids, for example, might be evidence of stress. Gasoline retailers were flat (-0.08%). The overall number was good, you can hardly claim the consumer is giving out. But nor can you claim that he’s gleefully throwing around his credit cards.
2) In an earlier post, you argued (if my paraphrase is fair) that it wouldn’t really matter if petrodollars became petroyen or petroeuros, because in the end, funds from the world’s net lenders will find their way to fund the world’s net borrowers. The path of flow might matter to a certain degree, as intermediaries might take the opportunity to consume rather than relend petromoney that falls into their hands. But in the end, either savers (oil surplus and asian) have to save less, the US has to borrow less, or others have to increase consumption/investment for anything to change, no?
Steve — nice parsing of the retail numbers. and your paraphrase is accurate — unless the oil surplus (and asian savings surplus) shrinks absolutely, it has to finance someone. and if there aren’t enough borrowers in europe or the us or the emerging world if interest rates are X, then interest rates have to fall to the point where folks borrow more/ save less. that said, if some current petrodollars become petroeuros, the equilibrium that brings those funds to the US (or leads Europe to spend those funds) probably involves some combination of lower European rates and higher US rates. So big portfolio shifts in the oil exporters would matter.
Enjoyable post, Brad – almost a stream of consciousness at times.
Forbes had an article back in October about petrodollar flows:
Where’s The Money?
“Adds a U.S.-based investment adviser to private Saudi wealth, “There is a lot more focus eastward than there is westward, particularly toward China, India and to a lesser extent Japan.” When Citigroup launched a $1.5 billion venture capital fund focused on the emerging markets of Greater China, India and Eastern Europe, Middle East money took up a “substantial portion” of the offering.
In the end, Nemir Kirdar, chief executive of the Bahrain-based Investcorp, seems to offer the most plausible take. Kirdar says if you look beyond the sensationalist headlines, you’ll find the current government technocrats and private investors are far better informed than the 1970s generation. They are generally making sure this new excess capital formation is adequately diversified, not just geographically but also in different assets classes–from U.S. Treasurys to complex alternative investments.
An example of the new know-how: A collective of prominent Dubai families have, through their vehicle Istithmar, recently acquired both One Trafalgar Square in London and the Helmsley Building in New York, in back-to-back deals worth more than $1 billion.”
Hmm. The ‘new know-how’. Haven’t we been here before?
If the US puts tariffs on the Chinese products, maybe China should revalue RMB and put tariffs on the US products.
It is very possible that 2006 and 07 will be a repeat of 2005. But sooner or later, RMB must be revalued. I don’t think anybody will dispute with that. So when RMB revalues, China must quickly and smoothly make a transition from exporting country to “non-importing” country. Otherwise, China will face severe unemployment problem from the deterioration of export industry. Chinese can certainly import a lot from abroad with strong RMB; but it would rather consume within itself. Thus, the tariffs on the US products. That should force Chinese to consume within itself, maintain high GDP growth, and torture the US export industry. And China can certainly buy a lot of US equities with strong RMB too.
I think it is very unlikely that oil prices will stay at 70 dollars :
Oil stocks are rising, if non speculative market forces had their say the oil prices would fall
BUT
Iran is at stake, if no action is taken, then prices should fall, if action is taken, probably prices will rise higher.
DF – “Oil stocks are rising, if non speculative market forces had their say the oil prices would fall.”
Maybe, but in the US at present that’s not totally the issue, at least in the short term.
3 major refineries are still down from last year, accounting for some 4.5% of US refining capacity. Last week refineries ran at 85.6% capacity, whereas on the same week last year they were running at 91% capacity. Last week gasoline stocks fell by 3.9m barrels, same week last year they rose by 0.8m barrels (granted, only one data point, but stocks should start building about now).
So, as gasoline demand begins to ramp up for the summer, more refining capacity needs to come back online, or gasoline imports need to increase. Problem with the latter is that many refiners abroad struggle with US fuel requirements. Maybe these will have to be waived if stocks get too tight.
This might just be a temporary problem but its beginning to look more structural, in which case US consumers may have to live with gas prices above $2.50 for quite some time. Hard to believe this won’t have significant effects on the economy, though as Brad’s world-weary last paragraph notes, nothing seems to upset the applecart any more.
All the same, not looking good for GM and Ford.
question for the viewership here:
the easter bunny is he/she pc ????
that is an anachronism
just like any talk about right and wrong savers
for land’s sake
ain’t that among much else
what globalization is for ???
the transfer of ready funds
to big spenders
okay so you scotsman would prefer
we were using the inter oceanic credits to develop
the productive capacity of say
south africa
not buy digital trinkets
for america’s ballooony lotholders
but please focus your vodka gimmlet eyes
on the spenders not the savers
“the British government has just updated its plans
for changing over to the Euro- ”
years ago
in local trading circles at least
i was known… no
i was
in fact
a legendary brit b buster
and accordingly
i’ve prayed for this folly
for 10 years
please please
in the name of all thats merciful
do it do it
lock yourselves inside
that shrinking cell of horrors
make my life complete
join that brothers grimm tale
on the other side of the channel
you belong in a monetary vice
GCS, what’re ye doin for Bloody Sunday? (just a hunch)
David Brooks: They say it’s unacceptable, but do they really believe it’s unacceptable for Iran to get the bomb? I don’t think they’ve really come to that conclusion. They may think, eh, it’s deterrable. They may think, eh, let’s let the next administration worry about this.
Vinod Khosla Presenting on Biofuels
Indeed gazoline prices have every reason to rise, in the USA, but why oil, globally ?
Those prices should be completely unrelated. Oil stocks are rising globally, not only in the USA.
I made the calculation sometimes ago on Calculated risk blog and the rise in Oil stocks is significant relative to world oil demand.
So it’s really either or, either no war on iran, and oil prices should fall quite a lot, or war in Iran and they should rise quite a lot.
So the only reason for worrying about 70 dollar oil is if the USA and other countries decide to posture a long time and threaten to act and not to act. In this case there will be further rise in oil stocks and another rising imbalance.
If I were the US president, I would wait till the recession has hit the chinese and US shores before acting tough on Iran. In a context of falling oil demand, rising output,huge stocks, and unemployment at home it might be easier to justify a war.
Of course noone knows how China would react and it makes me want to move into some far away place in africa say madagascar or some pacific islands.
Washington Consensus blaming Chinese for high Energy prices
http://www.washingtonpost.com/wp-dyn/content/article/2006/04/14/AR2006041401682_2.html
” Freeman warns against blaming China for rising oil prices. He notes that U.S. imports have increased more than China’s in recent years. “It’s a wonderful issue,” he said. “We get to blame the Chinese, the enemy of choice at the Pentagon. And then we get to blame the Arabs, perfect villains upon whom to heap blame.”
- Washington Post
Well, the latest IEA data has just been released, and stocks don’t look that high to me:
“World oil supply fell 125 kb/d in March to 84.5 mb/d. OPEC, North American and North Sea production outages outstripped higher non OECD production. A weaker first half trims 35 kb/d from 2006 non OPEC supply, but new field start-ups still boost this year’s growth to 1.2 mb/d, supplemented by 275 kb/d of OPEC NGLs.
March OPEC supply fell by 215 kb/d to 29.7 mb/d on Nigerian outages and lower Iranian and Iraqi exports. Damage to Iraq’s northern pipeline suggests exports to Ceyhan are unlikely for some time. Cold weather and supply outages lifted the 1Q ‘call on OPEC crude and stock change’ 700 kb/d above OPEC supply, pointing to a draw in 1Q global balances.
OECD total industry oil stocks fell by 13 mb in February as draws in distillates and other products in the Atlantic Basin outpaced builds in US and Pacific crude stocks. Upward revisions to January preliminary data put total inventories at 2616 mb, 46 mb above last year. OECD forward demand stock cover came to 53 days, one day higher than last year and last month.”
We’re currently on a world production plateau (hopefully temporary), demand is forecast +1.5mbd in 2006, we’ve got Iran, Iraq, Nigeria troubles, a hurricane season on the way, and Russian export forecasts have been cut.
Against this OECD countries have 1 extra day oil stocks vs last year. Not enough to deter the speculators I suspect, at least for now.
ftx
i was never one to track the oil game
the price moves vs the real moves always
struck me as well ….rigged
the thought seemed to me
the core specs and press pundits
were
at best unconcious oilers cats paws
at worse
the crude king’s whores
not that the game can’t be clocked and anticipated
sure there’s a regularity to it all
and money to be made once you grasp
the only slightly problematic rules of that regularity
but to talk as if its a text book open market
where
original supply and final demand dictate the outcomes ….
hmmmmmmmmmmmm !!!!!
as with pro wrestlingseems to me
at every juncture
we must point out to the tots
” its all staged kids
staged to play on our credulity “
so i guess the question to stick in my face is
what constrains em ????
who can stop em ???
the rest of the trans nat universe
mostly thru the finance boys
i like the oil price dimension of this iran caper
but i say this context spells
bluff protracted bluff
and a reversable set of actions
ie
no big conflict …..now
i like df ‘s take
i think of
some lion headed
wall street tower type
screaming
at one of those thin lipped
houston claim jumpers
” tell your f in’ friendsdown there in the district
to f in’ save it for the next recession
you f in’ dopes “
Well, a policy of confronting Iran is also a policy for making our “Friends” in Russia, Saudi Arabia and Venezuela very, very rich …
D. Chiang — the article you link to is interesting, even if your spin is ridiculous. As the Post notes, the US certainly is a big contributor to growing oil demand. All of our (soon to be Chinese assembled — that is a joke) SUVs.
“From 1995 to 2004, U.S. oil imports grew by 3.9 million barrels a day while China’s grew by 2.8 million barrels a day, thus “making the United States much more of a rogue element than China in the world oil market over the past decade,” Herberg and Lieberthal wrote”
But all credible analysts believe booming Chinese demand — in % terms, 2.8 mbd is a bigger increase than 3.9 mbd ’cause in our unequal world, the US already imported a ton back in 95 to fuel its oil intensive economy, while China didn’t, even tho it has a relatively oil intensive economy too — has contributed to run up in a range of commodity prices, including oil.
Of course, had the US adopted measures to reduce its energy consumption, that would have helped to offset the rapid increase in demand from China. but we didn’t.
We can debate a bunch of things, but I don’t think it makes much sense to argue against two points: China generally has been an inflationary force on commodity prices globally, and generally a deflationary force on manufactures.
And to be fair and balanced, the absence of an energy conservation policy in the uS (combined with the depletion of US oil fields) meant that the US added to china’s inflationary impact on commodity prices, while the Fed’s monetary policy induced a surge in domestic demand that generally has worked to offset China’s deflationary impact on manufactures — in part by, as FTX has noted in the past, pushing up the price of some non-traded services to keep overall core inflation in its desired range. tho with higher commodity prices feeding thru, right now, it doesn’t feel the need to do this as much.
Disagree?
brad writes:
“China generally has been an inflationary force
on commodity prices globally,
and generally a deflationary force on manufactures”
very concise in fact its the squeezing by labor relocation to china
of more and more of the manufacturing value added share
that has reduced the inflationary pass thru of commodity price increases
ie
why this is not the mid 70′s all over again
btw i find the hunt for culprits tedious
whjats worth pointing out
is mostly internal elements operating
on both national sides of the system
ie here
the north trans nats
both
as exporters of capital
and importers of goods
nations persuing their own interests
can not be weighed on the same scales as individuals
GCS — I’m armchair theorizing (Occam’s Razor version). Take it with a large pinch, although I do think ‘rigging the market’ is more difficult in a capacity-constrained industry (and I do believe in the short term refining constraints are genuine).
Brad — not sure what’s going on with China oil imports. Officially they dropped in 2005, though this article suggests inventory issues were involved.
Also, doesn’t seem to square with passenger vehicle sales:
China Takes to the Road
“Passenger vehicle sales in China are once again blowing the doors off expectations. In 2005 auto sales posted a muscular 27% year-over-year gain — and the year ended with the market recording November and December as the two highest-ever sales months. The auto market expanded last year by 661,234 vehicles.
The momentum, it seems, is continuing. In the first two months of 2006, passenger vehicle sales have increased more than 80% vs. the same period last year.”
To Brad,
Some comments from Doug Noland on the US Credit Bubble impact on global Energy prices. Doug correctly identifies Energy inflation as a consequence of and additional stimulus to US Credit inflation, with Credit excess begetting higher oil prices, begetting only more Credit and higher prices. Alan Greenspan and the Washington Consensus efforts to blame the dysfunctional current global currency regime on Chinese Energy demands represents nothing more than “whitewash” propaganda.
http://www.prudentbear.com/creditbubblebulletin.asp
Doug Noland – ” Even today, we are subject to the bullish propaganda that the “efficiency” by which the U.S. economy now uses energy ensures that surging crude oil prices exert only a minimal restraining influence on GDP. But this dynamic has little if anything to do with actual efficiency. Rather, it is indicative of a major transformation in the nature of economic output, as well as an Economic Sphere commanded by the Inflating Financial Sphere. Surging energy prices today neither stymie output nor elicit tightening from the monetary authority – but they are efficiently “monetized.” Energy inflation is a consequence of and additional stimulus to Credit inflation, with Credit excess begetting higher oil prices, begetting only more Credit and higher prices.
From a Credit Bubble prospective, the economic system’s pricing mechanisms now largely operate without adjustment or self-correction. Virtually unlimited “output” readily expands to meet demand, rather than the market force of rising prices working to crimp demand. It is the unstable financial boom dictating an inflated and highly imbalanced level of economic output. In a replay of the Twenties, an atypical economic backstop warranting determined policy restraint is misinterpreted as one permitting of monetary looseness.
Alan Greenspan and others’ efforts to blame the current global currency regime (“pegged” Asian currencies, in particular) for mounting imbalances recalls analysis that pinned late-‘20s instabilities and the depth of the Depression on the vagaries and then breakdown of the global gold standard. Again, the focus must be first and foremost on underlying Credit systems and conditions. Greenspan, of course, is keen to point fingers at foreign governments and their “pegged” currencies, when the impetus for the Great Credit Bubble can be traced back to “pegged” U.S. interest-rates, in conjunction with Fed assurances of abundant marketplace liquidity and a persistent inflationary bias. Such an unparalleled financial backdrop beckoned for reckless excess. “
FTX –
China’s oil import data is wierd. I don’t have a good grip on it either. Still, it is pretty widely accepted that two things were going on:
a) China was growing so fast for a while in early 04 that its demand for energy outstripped the energy generated by burning china’s bountiful supplies of coal. At the margin, 100% of all energy demand was being met by oil for a while. generators and the like. Then new coal fired electricity came on line, and demand fell.
b) China’s domestic price controls gave China’s big oil companies every incentive to minimize imported oil, since every barrel imported was sold at a big loss (Sometimes offset by a state subsidy).
Brad: “Well, a policy of confronting Iran is also a policy for making our ‘Friends’ in Russia, Saudi Arabia and Venezuela very, very rich … ”
You forgot to add ‘Houston’ to the list of friends we are making very, very rich.
I spend much of my time (including now) outside the US. Occasionally I choose to hang out in a bar (here in Constanta, Romania). More than likely, when my newest friends learn I’m American, the conversation will turn to politics. I spend a good deal of effort trying to be an informal ambassador, and much of that involves debunking really loony conspiracy theories. I’ll bet you didn’t know that the US caused last year’s killer tsunami with a well-placed nuke because America is worried about world overpopulation. Inventing and releasing AIDS wasn’t enough, apparently. The list of our alleged nefarious conspiracies goes on and on.
So it pains me to remark that, however we’ve arrived here, the most obvious and naive conspiracy theorist of the Bush presidency would have done very well in the markets. A Texas oil man is elected President in Y2K? Buy oil, fast.
sw writes:
“You forgot to add ‘Houston’ to the list of friends we are making very, very rich. ”
ain’t that the hidden story
forget the pan oceanic ops
and the refinery stage of so much of everywhere’s crude
don’t
we still pump a lot of oil out of the ground here ourselves????
Yep, Lee Raymond got paid very well for denying global warming exists … and being in the right place at the right time. His investment in W paid off, big time.
I travel a bit too, and know well most of the world vastly overstates the power of the US government. I say that knowing full well that the US government really does have capabilities few others have. There used to be wild rumors about a secret Treasury trading room that moved markets … when the reality was a couple of guys with a bloomberg terminal writing reports on daily market moves for the Secretary. The Treasury can intervene in the fx market, of course. It just uses the NY fed’s traders. And it doesn’t intervene very often. It also can indirectly intervene by lending money to other countries so that they can intervene. It just prefers to do so through the IMF. And so on.
FTX, thanks for the link. It seems I commented on old unchecked and extrapolated data … My feeling of course is that current demand for oil is not sustainable, and driven by credit debt. So even if stocks are not that high in a number of days of consumption, I fear that given that demand is bound to fall, the stocks may be much higher than perceived. ANyway, I was wrong.
Thank you Dave for your post, that article froum Doug Noland caught my eye.
About conspiracies, I always thought going to Iraq was just sheer hubris and stupidity. Suddenly thinking about how Egypt has bashed the iraqi shiites and Iran, and the possible confrontation between kurds and turks, Suddenly I thought : my god it’s obvious, wether it’s purposive or not, the Iraqi mess is having a perfect effect. As civil war spreads, as sunnites turn against shiites, the USA have a perfect opportunity to hit Iran hard with the sunnite majory of islamists doing nothing. Division is spreading in ME and that’s good for the USA and their military presence in the gulf.
Boy, I knew I shouldna started that ball rolling.
DF, I think the claim that division and unrest in the ME is in any sense good for the US broadly is completely untenable. The US economy, and therefore its ability to project military power depends upon a stable ME. An unstable ME may be good in the short term for the very few Americans who have more to gain than to lose from high oil prices. This fact may or may not enter at some level into the calculations of policymakers who happen to be connected to that narrow segment. But a factor is not a cause or conspiracy. The antecedants of the Iraq War (which I supported) and the current imbroglio with Iran were not fabricated.
I think it’s interesting to point out cui bono in policymaking, because hidden interests really can affect decisions at the margin. But only at the margin. The Iraq War was no grand conspiracy to divide the ME, and has not worked out thus far in US interests, aside from those who profit from a larger risk premium in the price of oil. An expectation that a transformational projection of power into the ME post-911 would be profitable for their friends may have influenced policymakers, to some degree. I think there has been a bias, broadly speaking, for policies that help support oil prices. (Low taxes, loose money, loose CAFE standards, fiscal stimulus, ME adventurism.) But a bias hardly amounts to a conspiracy, and any such parochial bias on the part of policymakers undermines rather than supports the pursuit of the broader US national interest to which American policymakers are supposed to attend.
Brad, you mean you didn’t used to work for the Plunge Protection Team at the Treasury, bidding up index futures so that Wall Street arbs can make free money bidding up the markets? The cousin of the cat of a friend of a trader I used to know swore she saw you there. I’m so, um, deflated.
I’ve never said that the USA planned the mess. I find more plausible to believe (and I surely prefer this idea) that the neo conservatives were just stupid and arrogant people who thought that american “liberators” would be welcome in Iraq, everything would go smooth, since as you well know God blesses america.
It just happens that as it was selfevident from the start, the war created mayhem in Iraq, an increase in terrorism etc. And now more than ever shiites fight sunnites (and arabs persians), Turcs resent Kurds autonomy (did a wonderful Rambo like film about a turc soldier fighting in Iraq opposing kurds, Huge success at home …) …
Invading Iraq with no well founded motive has made Iran more powerful and created more resentment against it.
I’m not saying anything of this is making americans better, but possibly it is making the US military forces in ME more necessary, and giving the USA more control over oil reserves and production, which is useful in case of a confrontation with China.
My take is not that this was planned, but just that if the aim was to prevent middle east countries to unite under a single leadership (the way europe has, Asian countries try under asean, or south american countries try) well, that is a success so far. The middle east may (not sure yet) engage in such internal wars that they will be ruled by the USA for some more decades.
In fact my take is only that going there was a stupid decision and that as time goes by events happen just as foretold, so the only ones who may gain in the process are those who favor in fact exactly the opposite aim than the one they have publicly endorsed : control over divided ME and not free democratic and united ME.
DF, to understand current US policy, all one needs to do is study PNAC. They made clear what their plans were and they are currently carrying them out. So far, no surprises. After the next 2 or 3 elections, policy will most likely shift rather dramatically. Hey, you can’t blame the neo-cons for giving it their best shot, can you? They will keep going untill they get voted out.
(war with Iran, seems a sure bet)
Because such a large fraction of any rise in the prices we pay the oil producers is immediately lent back to us — and in dollar-denominated loans — the effective drag on the US economy of higher oil prices is less by that fraction.
If we pay $10 more per barrel for oil, but $8 of that is immediately recycled back to us through purchases of US securities …
FTX – As no one mentioned it, the refining ‘constraint’ has most to do with (i) maintainance, some of which was postponed last year as result of hurricanes, (ii) mandated switchover from MTBE to ethanol, (iii) marginally, the need and desire to modify throughput tech as part of the changing composition of the crude supply, from light/sweet to heavier/more sour, with the latter selling at substantial discount, i.e. lower RAC.
Recall that futures prices on the merc, or the ICE, are not identical with what is in fact paid — recall that in a vertically integrated and global industry, transfer pricing is the mode of acct, and that this is not a market price in any event.
The world is not running out of oil, unless a few trillion bbls = ‘running out’.
Production is not, nor has been for a century, conformable to free market ideology (theory), but is managed.
Speaking only to above ground stocks misses the point of reserves.
The IEA is not known for its accuracy in any event.
Vast majority of futures contract holders Never Ever take delivery, this is trade in Paper Barrels, not real
It may be germane to interject here something I’ve heard from outside the country: that the Europeans, and particularly Middle Easterners and Chinese, believe that the name of the US game now is to control Mideast and other resources in order to run them out, and that we’re holding back Alberta and our own resources until the others are run out.
In my own view the first part of this process is certainly so; the bush crowd has clearly, from before day one, intended to control the world’s access to the reputed Caspian elephant fields by, for example, controlling the projected Afghanistan pipeline. Quasi-independent Kurdistan depends on shipping its oil out via American proxies. Perhaps the bush people have had some connection with the Chechen resistance too? (By my reckoning, the Russian pipeline/railroad from the Caspian runs through Grozny, and I think Putin suspects bush involvement.)
Far more than price–though high prices have their rewards– controlling market access would historically be the great prize in the oil biz. Compared to this, state interests and indigenous people are as nothing.
alarm beyonce lyric ring katrina halili private voyeur
bad credit debt consolidation kelly ripa rolex replica
angel locsin bounty dog hunter credit card consolidation
billy gilman bridge fergie london lyric brookfield zoo
debt consolidation brinkley christie chris daughtry
famous daves bronx zoo daisy fuentes
gold digger corporate gift idea ronnie coleman
golds gym lead mlm snow patrol lyric
chell rell lead mortgage term life insurance quote
bob esponja pepsi cola tony matterhorn
consolidation federal loan student acid battery lead sealed weider
bobs furniture power ranger spd dannii minogue
insurance lead corporate gift basket destinys child
consolidation loan jennifer beals dierks bentley