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Enough on China … let’s talk petrodollars

by Brad Setser
November 21, 2006

One thing consistently surprises me: how little most folks in the US markets – including folks active in international markets — know about the growth in reserves of the oil exporters.    China, everyone gets.     But not Russia and Saudi Arabia.   Estimates of oil reserve growth at the Euromoney fx conference in New York were stunningly off (and way on the low side).   And there is a lot less talk of petrodollars than Chinese dollars these days. 

There are reasons for this.  China buys directly from the US broker-dealers.  It is on track to buy over $100b or so directly from the broker-dealers this year (as well as building up its short-term claims).   No doubt its total purchases are higher.

The oil exporters tend not to buy directly.   They buy through intermediaries, build-up bank accounts in London (which help finance London hedge funds and others buying riskier US assets) and invest directly in hedge funds and other money managers.  They aren’t as visible a presence, at least in the US.   

Russian reserves are up $94.8b through mid-November.  Setting the second quarter aside (for seasonal reasons), Saudi Monetary Agency foreign assets are growing by a bit less than $25b a quarter, so its total reserve growth for the year should top $75b.  That's real money.   The Emirates doesn't report how much it is putting into its various oil investment funds, but $40-50b seems reasonable.   And so on.

Some oil exporters are so conservative that they haven’t been a big player in the debt market — Russia, for example, has a very conservative portfolio of portfolio of short-term agencies and bank deposits.   Other oil exporters hold a very diverse portfolio – one that includes equities and emerging market debt, reducing their impact on the US fixed-income market.  ADIA (Abu Dhabi’s Investment Authority) is a good example.   No doubt some oil exporters also farm out management of some of their portfolio to US and London and other fund managers, effectively financing a lot of “private” market activity.

As a result, it is hard to find oil related flows in the US data (this RGE proprietary paper has the details).   It is also hard to find all Chinese flows – but it is easy to find about ½ of them.

Still, it is worth remembering that the Gulf (the GCC countries) will have a current account surplus that is only slightly smaller than China’s surplus this year.     Only about ½ of that surplus goes into formal reserves (counting all SAMA foreign assets) – the rest goes into oil investment funds.    So GCC reserve growth lags Chinese reserve growth.   But if you combine Saudi and Russian reserve growth, it is comparable to Chinese reserve growth …  but it also attracts a lot less attention.

Two graphs illustrate the impact of oil exporters on the global balance.

The first comes straight from the IMF.  It compares the expected surpluses of the major oil exporting regions (The Middle East, Russia and Africa – think Algeria and Libya as well as Nigeria and Angola) with the expected surpluses of emerging Asia (including the NIEs) and other emerging economies (Eastern Europe/ Latin America).    The measure of oil exporters misses Venezuela, so it isn’t perfect … and the IMF’s calculations use an average oil price that looks to be about $5 too high for 2006, so its estimates are likely on the high side for the oil exporters and the low side for Asia. 

Enough throat clearing.  The picture speaks for itself: oil exporters are currently the dominant source of the emerging world’s current account surplus.

oil_surplus_1
 

The second graph compares the gulf’s (GCC countries – Saudi Arabia, the Emirates, Kuwait, Qatar, Bahrain and Oman) cumulative current account surplus since 2000 with China’s cumulative surplus.    China’s cumulative surplus lags the Gulf’s.

oil_surplus_2

China’s cumulative reserve growth leads the combined growth of GCC reserves and the increase in the GCC’s oil investment funds (at least that portion of the increase that comes from new funds, not capital gains), as China has attracted large (net) capital inflows.    And now that China has a $230-240b current account surplus, it is on track to build up its current account surplus more rapidly than the Gulf.

But it is still impossible to make the global current account balance – or to find out how the US has financed its “almost inconceivably large” current account surplus — without taking into account the oil windfall.    But absent more visible flows, lots of folks don’t recognize this.

37 Comments

  • Posted by Rueff

    Imagine when oil is denominated in euros.

  • Posted by Dave Chiang

    Thanks to the US military protection racket, the Arab Gulf Oil states will continue to stockpile their foreign reserves in mostly US Dollars. In terms of military protection, no other nation but the US can ensure the political security and survival of the Arab Gulf Oil regimes. Neither the European Union, China, nor Russia have the global military power projection capability to defend the Arab Sunni regimes from the rising Iranian-backed Shite muslims in the region. It is well known that the Bush family has close personal ties with Saudi Arabia and the Kuwait regimes. In return for the vast US military deployment across the Middle East, the Arab Gulf Oil states have pledged allegance to US Dollar hegemony with oil sales denominated in only US Dollars. The monetary value of the US Dollar is implicitly backed by the Middle East energy reserves of the Gulf Arab oil states. The Chinese and other Asian nations are required to hold large reserves of US Dollars in order to purchase this essential strategic commodity from the Middle East. The Chinese hope to diversify energy imports from Russia, Central Asia, and Africa in order to escape the US energy chokehold over their rapidly industrializing economy.

  • Posted by Guest

    Brad can you clarify.

    What about the actual flows and their direction? Presumably oil importers including Asia are paying oil exporting entities. Where are these located and where would the payments take place. Perhaps some payments (parts of payments) remain in the transaction location (though not accounts).

    Are Asian exporters then also financing part of the oil exporters surpluses.

  • Posted by bsetser

    Guest — I am not following you at all. Of course, Asia pays $ for its oil, and it imports its oil. However, Asia earns more dollars exporting to the US/ europe than it has to pay on its oil/ commodity bill, so it runs an overall current account surplus … see my first graph. on a global level, the deficits that offset the emerging world’s surplus are found in US (above all) and to a lesser extent in europe. Surpluses add up at a global deficit to roughly match the deficit … not quite sure how transaction balances influence that, or why they matter.

  • Posted by Rueff

    Brad- Guest has a point. How are those oil purchases financed?
    We know from the current accounts that
    Asian exporters use their c/a surpluses
    Europe c/a is flat so net net their impact on $ is negligible
    US consumers borrow a ton of $ to buy oil or better said print a ton of $. So the higher the oil price the bigger the printing machine. When are we running out of green ink?

  • Posted by JohnH

    Back in the day, Western colonial powers used to bankrupt less developed nations and turn them into protectorates. In the 1990s the IMF used the Washington consensus to privatize less developed nations’ economies and auction off key industries to Western investors.

    Does anyone have the sense that the unaccounted flows are going to third parties who are secretly buying up the commanding heights of the US and European economies? Could we be in danger of waking up to a dollar crisis one morning and find that the US government has been forced to essentially become a protectorate, explicitly approving the sale of the commanding heights of the economy to the Japanese, Saudis and Chinese to preserve the economy?

  • Posted by Guest

    First, I am asking if a part of the tracking difficulty may result from the transaction location vs. physical trading locations. Much may be “left” at the transaction location.

    Second as Rueff points out running oil dollar deficits with oil exporters and dollar goods surpluses with US and some others.

    Or is that wrongheaded/muddying the situation

  • Posted by bsetser

    Eurozone = deficits with asia and oil exporters (tho smallish deficit with oil exporters because europe sells lots of goods to countries that export oil to asia), surpluses with eastern europe and the USA, overall small deficit.

    Asia overall surplus from exports to USA/ Europe despite deficit with oil exporters.

    ME oil exporters — huge bilateral surpluses with Asia (and for those that sell oil to USA bilateral surpluses with US), some may have bilateral deficits with europe because they import european goods even tho their oil flows east (Europe’s oil comes from norway, russia, north africa and to a lesser degree west africa)

    USA — deficits with europe, oil exporters and asia …

    add it up.

    Guest — why would any be left in the “transaction” location? Sure, $ from the oil exporters buildup in london, but they are then invested elsewhere … it has little to do with the transaction location and a lot to do with not wanting to be in the legal jurisdiction of the US.

    What specific transactional locations are you thinking of and why would an oil exporter keep funds there rather than park them in an internaitonal financial center and put them to work?

  • Posted by Guest

    How about this scenario? What might ‘China’s’ purchase or non-purchase of this asset mean – if anything?

    KAZAKH MINISTER OPPOSES CHINESE PURCHASE OF OIL ASSET
    “Kazakh Energy Minister Izmukhambetov said in televised remarks on November 17 that China must not be allowed to acquire a Canadian-registered company that owns oil assets in Kazakhstan, AP reported. “We must take extreme measures to stop the agreement on the Karazhanbas [oil field],” Izmukhambetov said. China’s International Trust & Investment Corporation (Citic) recently announced plans to acquire Nations Energy for nearly $2 billion (see “RFE/RL Newsline,” October 27, 2006). According to the company’s website, Nations Energy acquired the rights to Karazhanbas in 1997, and the field has proven reserves of more than 340 million barrels, according to AP.” DK – RFE/RL Newsline, November 20, 2006

  • Posted by Guest

    And this, the following 2006 report helpfully in Arabic, but it was the best example I could find during a quick search. You’ve addressed this topic before, but might we assume the problem extends beyond Iraq, and wonder how it may distort the bigger picture?

    “This document, the second transparency report produced by the inspector general of Iraq’s ministry of oil, describes corruption in the oil sector, and particularly the multi-billion dollar smuggling of crude petroleum and refined products.” http://www.iraqrevenuewatch.org/reports/052206ar.pdf

    Still thinking about the ‘coming end of oil’, also wondering why the entire system was centered on one of the few USD priced and traded commodities that is non-renewable or recyclable. Surely the petocurrency system is much more complex than a few key CB’s or exchanges committing to price and trade oil in USD, euro or yen or whatever. But if nothing else forces an ‘end’ to BWII, then assume it would have to be a diminishing supply of oil. Somehow, I doubt that we’re going back to gold, so interesting to think about the petrocurrency’s successor.

  • Posted by bsetser

    Chinese purchase of Canadian company = BoP outflow from China, BoP inflow into Canada –the Canadian owners then have to decide what to do with the dollars. but if there is no transaction well, it doesn’t matter. corruption financed out of oil revenues that ends up in swiss bank accounts is a balance of payments outflow (increase in private bank deposits abroad) that substitutes for reserve growth. And so on … all of this matters, but it is small change compared to the official flows out of Russia and the Gulf.

    as oil gets scarce, its price goes up — up until there are substitutes. and the gulf isn’t running out of oil that quickly … BW2 will end before we run out of oil. mark my words!

  • Posted by AC

    A naive question: why those countries which are not friends of
    the USA, or not dependent on the USA sell their oil for dollars?
    For example Norway or Russia in one hand or Iran and Venezuela,
    on the other hand could ask e.g. euro for their oil. I understand that the dollar-based investments are considered to be the safest and most liquid, but is it not just a mirrage? It is like a pyramid-scheme: everybody knows that sooner or later it will collapse, because it is unsustainable, but everybody hopes that they can get out just in time without any loss. In any case, the fact that Iran and Venezuela sell their oil for dollars seems complete nonsense to me. Why would they indirectly help the US to use these dollars eg. to finance possible future wars against themselfs? Or simply, why would they help the US to keep the dollar stable?

  • Posted by Dave Chiang

    The Russians dislike US Dollar Hegemony based on Arab Gulf Oil reserves, and are doing something about it. Russia is altering the foundations of the current US Neo-liberal global oil-market order, insidiously working to undermine its US-centric nature and slanting it toward serving first and foremost the energy-security needs and the geopolitical aspirations of the rising East. US Senator Richard Lugar, who recently labeled Russia an “adversarial regime” that increasingly uses its growing energy dominance as a powerful geopolitical weapon, has warned of economic “catastrophe” for the United States, notwithstanding its status as a superpower.

    http://www.atimes.com/atimes/Central_Asia/HK22Ag01.html

  • Posted by Guest

    Boy – if you want to believe they dislike Americans.

    “…Russia’s Far East is among the most sparsely populated areas on Earth. Many in Moscow fear that, over time, legions of Chinese migrants could tip the political, economic, and social balance in Russia’s eastern provinces in China’s favor. This anxiety feeds an anti-Chinese xenophobia that has existed in Russia for centuries…” http://www.slate.com/id/2145544/

    Who knows, perhaps any suggestion of closer ties to China might help explain the recent, apparent improvement in Russia-US relations.

  • Posted by gillies

    “as oil gets scarce, its price goes up ”

    brad, i wonder if you can back this up with a graph from the last 30 years of the oil price in real terms ? my impression is that the price of oil does not reflect the current remaining reserves, and can go up or down even while reserves are steadily and relentlessly depleted.

  • Posted by bsetser

    gillies — fair point. what matters for price is available capacity (And spare capacity) v. demand — not reserves. there was a period in the 80s where a lot of capacity came on line (and the saudis took lots of capacity off line to keep up prices) and demand growth was modest relative to the available capacity. my sense is that things have changed — global production capacity isn’t increasing all that fast, the oil that is available is hard to extract (and expensive — think tar sands), there isn’t much spare capacity and Chinese demand (And indian demand) is making a real impact on a market that used to be more dominated by US/ Europe/ japan (and Korea).

    p.s. in 97/98, the emerging market crisis clearly triggered a big fall in prices, so eM demand mattered even then … a real big fall. capacity exceeded demand for a while … and as prices fell, folks pumped more to maintain revenues and so on. that experience shaped decision making in both oil companies and oil producing countries recently.

    but i do believe that the era of easily found cheap to produce oil (relative to demand) is drawing to a close

  • Posted by JohnH

    Dave Chiang provided a link to the first of Joseph Stroupe’s series. All three articles about the West’s Achilles Heel deserve to be read. I think Brad is absolutely correct about the role of spare capacity, which I believe to be the West’s real achilles heel. From 1985 to 1999, excess capacity was ample, resulting in a buyer’s market and the growth of the existing liberalized trading market, including extremely liquid oil-futures contracts. After 1999 oil markets changed to a seller’s market, conducive to long term, bi-lateral contracts favored by producers.

    In my mind, the first real challenge facing the West is how to recreate the excess capacity of the past. With most reserves in the possession of OPEC and Russia, supply can be freed up for the liberalized markets only by occupation. This motivated the attack on Iraq, which has the theoretical potential of producing 10-12 million barrels per day, enough to break the OPEC/Russian nexus. Failure of the Iraqi venture has put the liberalized markets in dire straits. Now they must find sources, new or recovered, outside the Caspian Sea and Persian Gulf or depress their economies enough to create the necessary slack. There is still the hope that new exploration and development, depressed during the cheap oil era of the 1990s, will be sufficient. However, China alone can probably absorb any new capacity and stymie the attempt to create excess capacity.

    The second challenge is partially is result of the oil situation, imbalances with China and Japan being the other part. If the West is unable to increase spare capacity and depress oil prices, imbalances in the entire trading system can only grow. Ultimately the US and perhaps most of the West may be faced with a terrible dilemma–let its currency and its trading system collapse or permit the sell off of the commanding heights of its economy: Exxon, Chevron, BP, Shell, Halliburton, Schlumberger, etc. to preserve the dollar. Oil producers, China and Japan simply cannot be expected to accept worthless paper forever. Eventually the paper will have to be converted into assets with real value.

  • Posted by HK

    Brad–I think we have to differentiate analysis from folklore (or conspiracy theory). I have a few analyses to offer.

    First, the so-caled “dollar hegemony” is a complex phenomenon that cannot be simply explained by oil transactions being based on the dollar. Nor can it be understood easily that China and oil producers continue to peg their currencies to the dollar and invest in the dollar. I would think that these are the results of the US dominance in military, eoconomic, financial, and technological power as well as the willingness of other countries (including China and oil producers) to accept the “dollar hegemony”.

    Second, if they so wish, China and oil producers can at any time stop pegging their currency to the dollar and investing in the dollar. There is absolutely no involuntary holding of the dollar. However, if they try to depeg their currency and/or discontinue investing in the dollar, their currency will appreciate and they will incur huge loss; because of their unwise past decision, they are “locked in” the dollar. But this is their falt, not the US.

    Third, the US is in a much more advantageous position compared with China and oil producers. If China and oil producers stop dollar peg and investment, the dollar will depreciate and interst rates will rise. But that is really needed for the US economy, and would not affect the economy so much in the long run, since exports will increase and imports will decrease, the external net debt position will improve (because the US has big non-dollar assets while practically no dollar debts), and macroeconomic policy (fiscal tightening and monetary easing) would at least partially mitigate short-run negative impact of interest rate hike.

    Fourth, the dollar would eventually depreciate by 25-30% (30-40% against the renminbi), and that would make China and oil producers as well as the EU and Japan purchase the US assets cheaper than otherwise. But that is not so high price to pay. In any case, it is new ventures and busnesses that make huge profits and gains, not established companies which might be acquired by foreigners. Almost all foreigners, including German, Japanese, Gulf, etc., failed to acquire really promising assets in the US. Chinese and Rusian are not likely to be different this time.

  • Posted by Anonymous

    JohnH: Non-Opec oil production peaks in 2009. In oil industry terms it’s the day after tomorrow litterally. From that date the only hope for production increase is Opec.

    HK: this is no conspiracy. You’re ignorance is dangerously conspiratory.

    Brad: You cannot forecast petro$ without linking them to non-opec peak production.
    Have you wondered why GCC countries are working to launch a common currency by 2010?

    The simple answer is that by having a credible enough store of value more investments will be channeled locally.

    The GCC is being mentored by the ECB by the way.

  • Posted by HK

    Anonymous–I don’t know which Anonymous has criticized my analysis, but I think it preposterous to simply argue that “this is no conspiarcy. your ignorance is dangerously conspiratory”, unless you can show some convincing analysis or fact.

  • Posted by Anonymous

    HK: don’t take it personally.
    I did offer an analysis.
    You’re walking blind.

  • Posted by Cassandra

    HK said: Nor can it be understood easily that China and oil producers continue to peg their currencies to the dollar and invest in the dollar
    I would suggest using so-called “inverted commas” when using the word invest in this context, since it is arguable precisely what the objective of the asset accumulation actually represents.

    HK also said: However, if they try to depeg their currency and/or discontinue investing in the dollar, their currency will appreciate and they will incur huge loss; because of their unwise past decision, they are “locked in” the dollar. But this is their falt, not the US.
    Blame all around, rather than absolution, is probably a much more correct statement. US fiscal policy is perhaps first and formost in the list of culprits for it dwarfs almost everything else except US’s energy import deficit. But Japanese fiscal policy is close behind, as is ZIRP, as is The_Peg, as is the lack of a US Energy Tax policy and a consumption-skewed US tax regime, as is the USA’s unrequited openness & laissez faire-ism. China’s reserve accumulation is but one (albeit large and meaningful) interest rate & FX market distortion in a bevy of ignoble causes.
    http://nihoncassandra.blogspot.com/

  • Posted by Guest

    There is an economics-textbook myth that foreign-exchange rates are determined by supply and demand based on market fundamentals. Economics tends to dismiss socio-political factors that shape market fundamentals that affect supply and demand. The current international finance architecture is based on the US dollar as the dominant reserve currency, which now accounts for 68 percent of global currency reserves, up from 51 percent a decade ago.

    World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world’s interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies.

    This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973. By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy.

    A strong-dollar policy is in the Washington Consensus interest because it keeps US inflation low through low-cost imports and it makes US assets expensive for foreign investors. This arrangement, which former Federal Reserve Board chairman Alan Greenspan proudly calls US financial hegemony in congressional testimony, has kept the US economy booming in the face of recurrent financial crises in the rest of the world. It has distorted globalization into a “race to the bottom” process of exploiting the lowest labor costs and the highest environmental abuse worldwide to produce items and produce for export to US markets in a quest for the almighty dollar, which has not been backed by gold since 1971, nor by economic fundamentals for more than a decade.

  • Posted by another Guest

    Guest: “globalization into a “race to the bottom” process”
    beautifully succint

    Brad: what do you think of the race to $ paper cheerled by cnbc?

  • Posted by Anonymous

    how soon a mandarin language CNBC? as part of the effort to ease the recycling?
    CNBC Arabia already exists: petro$ are covered.

  • Posted by HK

    Anonymous–I still don’t see any analysis or fact presented by you.

    Cassandra–I can agree that the US fiscal policy including tax policy is a huge problem for the US as well as the world economy. However, as far as exchange rate and reserve accumulation are concerned, China and oil producers have more serious problems than the US.

    Guest–The “dollar hegemony” is supported by the US, which has paramount military, economic, financial and technological power, and China and oil porducers, which peg their currency to the dollar and invest in the dollar assets.

  • Posted by Guest

    No single economy can profit for long at the expense of the rest of an interdependent world. There is an urgent need to restructure the global finance architecture to return to exchange rates based on purchasing-power parity, and to reorient the world trading system toward true comparative advantage based on global full employment with rising wages and living standards. The key starting point is to focus on the hegemony of the US dollar.

    To save the world from the path of impending disaster, we must:

    1. promote an awareness among policy makers globally that excessive dependence on exports merely to service dollar debt is self-destructive to any economy;

    2. promote a new global finance architecture away from a dollar hegemony that forces the world to export not only goods but also dollar earnings from trade to the US;

    3. promote the application of the State Theory of Money (which asserts that the value of money is ultimately backed by a government’s authority to levy taxes) to provide needed domestic credit for sound economic development and to free developing economies from the tyranny of dependence on foreign capital;

    4. restructure international economic relations toward aggregate demand management away from the current overemphasis on predatory supply expansion through redundant competition; and restructure world trade toward true comparative advantage in the context of global full employment and global wage and environmental standards.

    This is easier done than imagained. The starting point is for the major exporting nations each to unilaterally require that all its exports be payable only in its currency, so that the global finance architecture will turn into a multi-currency regime overnight. There would be no need for reserve currencies and exchange rates would immediately reflect market fundamentals of world trade.

  • Posted by Guest

    re: “Almost all foreigners, including German, Japanese, Gulf, etc., failed to acquire really promising assets in the US.”

    question this, especially given recent M&A.

  • Posted by Guest

    re: “Eventually the paper will have to be converted into assets with real value. ”

    “…the United Arab Emirates are fast reinventing themselves as a cultural and recreational hub, with tens of billions of dollars of investment… Abu Dhabi, whose petrodollars give it one of the highest per capita incomes in the world, is styling itself as the cultural alternative to Dubai’s more ritzy holiday and retail destination. The emirates capital plans an “upscale cultural district” on Saadiyat, with the $400m Guggenheim museum part of a $27bn government-funded development that will include museums, a concert hall and art galleries alongside two golf courses, hotels and an “iconic 7-star property”…” http://www.guardian.co.uk/france/story/0,,1953901,00.html

  • Posted by gillies

    brad: “what matters for price is available capacity (And spare capacity) v. demand — not reserves.”

    yes, i accept that, and i accept that available capacity will in general decline. but i do not accept that it will decline v. demand. . . .

    peak oilers talk as though civilisation, industrial growth, or whatever, has some inbuilt momentum such that ‘demand’ is self generating. but when you get to the max on your credit card – your longing for luxuries may remain or actually go up, but ‘demand’ is zero. so with oil. longing for industrial growth may go up, but as the unemployed park their hummers and walk the dog in the park, wondering where it all went wrong, demand for oil, and thus the price of oil, contracts.
    – and if alternatives to oil were found, as they would be in a situation of extreme deprivation, they would take 25 years to become universally available, anyway.
    it is as unsupportable to assume continuing demand for oil, as it is to assume continuing spare production capacity for oil.
    in a post peak energy society (i use ‘energy’, not ‘oil’, deliberately ) industrial activity declines, and demand and thus price, along with it.
    economists are trained to see complexities. does this sometimes blind them to the very simple ?

  • Posted by gillies

    i am going to put this even more simply -

    1. america is the biggest shopper for oil.

    2. some uses of oil are a necessity, others are a luxury.

    3. america, your credit card is nearly maxed out.

    4. when you actually get there, your ‘demand’ for oil on credit will be zero, even if your thirst for oil remains undiminished.

    5. so you will cut back on the luxuries, (and some of the things you insist are necessities, will turn out to be luxuries.)

    6. so demand for oil may contract faster than available capacity is declining, and as in the past, the market price of oil – not all of which enters the freely traded markets – will decline.

  • Posted by gillies

    i read elsewhere that it does not matter if ‘dollar hegemony’ survives in the oil market, because what is leaving the oil market is the oil. where to find it ? – in bilateral trading deals between producers and consumers. suppose the dollar denominates 100 % of the deals in an oil market which trades only 10% of the oil ? can that happen ? what then ?

    you should take out that guy who wrote that ‘history is over’, and lynch him.

  • Posted by koteli

    Hi gillies,

    It’s interesting your posting, but I’d like to read some more points in your comment, talking about the consequences in auto industry, electricity supply, flight companies, UPS, Fedex, price of californian tomatoes for newyorkers, and the economy in general. The disctintion between need and luxury, is very easy, but I don’t think its a problem of luxury driving what sets the demand.

    Go a bit further, please.

  • Posted by Guest

    the systemic assumption being that demand falls, energy price falls with decline in demand, household costs and costs of production decline with decline in price of energy, again increasing consumers’, transporters’ and corporates’ spending power which in turn supports and rapidly increases demand for energy and presumably puts upward pressure on price again. Other question is how the oil price fluctuations may increase agricultural commodity prices and land and soft commodities are converted to ethanol, or the price of components that may be used in more energy efficient technologies – platinum perhaps being one, looking at the way it is spiking. Slowdowns and pick-ups also feeding into metals prices.

    beyond that, just how heavily the oil price is leveraged into the system – the massive complex of derivatives and correlations are likely part of the uncharted territory – for example how many Amaranths may be generating profits by placing massive bets on a range of energy price related trades – including the swings in the commodity currencies/markets – and currencies/markets that benefit from lower energy costs.

  • Posted by Guest

    that “worthless paper” has a whole lot to do with determining the “real value” of the world’s ‘assets’.

    perhaps we should be paying more attention to the possibility of a catastrophic supply shortage of something else – like zinc or nickel, or an implosion of the global cheap labour trade:

    “…”We have been investing with the view that the free-trade agreement would be approved,” Garibaldi said. “What will happen if hundreds of thousands of people lose their jobs?”…” http://www.washingtonpost.com/wp-dyn/content/article/2006/11/22/AR2006112202170_2.html

  • Posted by gillies

    “The disctintion between need and luxury, is very easy, but I don’t think its a problem of luxury driving what sets the demand. 
    Go a bit further, please.”

    there is a theoretical list for each consumer of the order in which you give up buying stuff. call the topmost items on the list the luxuries, and the bottommost items the necessities. other stuff comes in between. just to guess – facelifts and foreign holidays come high, bread and milk come low. for investment, hope of long term capital gain comes higher on the list than guarateed regular dividend income.

  • Posted by Juan

    Interesting, but normal, that in all this opining re. oil prices, no one has mentioned the price formation role of futures markets, both exchange and OTC,,,and that these same have facilitated the introduction of a large speculative component. Simply, the price of light sweet and Brent has come to be determined not by real economy supply/demand relations but, instead, the trade in paper barrels. Now I guess one might argue that these markets are efficient and perfectly capture underlying fundamentals but, from that perspective, we run into difficulties explaining a run from ~25 to ~80 while during the latter part of the period supplies were very evidently building and China’a internal consumption was flat for ’05. On the other hand, though, the speculative surge was evident in Nymex trading volumes and COTs, and also from the ICE.

    I found it, well, humerous, that so many true believers in so-called peak oil used the rising price as a proof that ‘the end is near’, i.e. worked backwards from price to the desired, not accurate, fundamentals.

    Even one of the most prominent members of the ‘peaker’ community, Matt Simmons, forgot(?) what he had written in early 1998, that hedge funds and individual speculators had come to control the price of WTI and that ” price is not the beacon for fundamentals.”