Oil price tumble IPJ/boy

IPJNews- Oil prices fell after a rally above 80 dollars following news of falling US energy inventories, as traders banked profits.

New York’s main contract, light sweet crude for December delivery, fell 51 cents to 79.07 dollars a barrel. Brent North Sea crude for January delivery also dropped 51 cents to 78.96 dollars a barrel.

Analysts feel the US is key to lifting oil demand, affected by global economic slump; and say falling inventory levels was exacerbated by Hurricane Ida. This caused the closure of some petroleum installations in the Gulf of Mexico.

I’m very disappointed to see policy-makers trying to solve the problem of global warming by ineffective – and possibly even counter-productive – measures such as raising efficiency standards and imposing carbon taxes.

What, for example, will California’s TV owners do with the money they save on their electricity bills? Maybe they’ll upgrade their set more often which will likely lead to more emissions per dollar than would have been incurred had they spent the money on California’s partially decarbonised electricity!

I touched on the problem with efficiency – the rebound effect – when I summarised the various problems with policies which put a price on carbon with the aim of reducing CO2 emissions.

All these problems arise because we are so reliant on fossil fuels. Virtually everything we do – and in particular everything we spend money on – is likely to result in CO2 (and often other GHG) emissions to the atmosphere.

Today I just want to look at the problems with taxes on carbon. After all, now that the middle word has been dropped from “Copenhagen or bust”, it seems national policies, rather than a global emissions trading regime, are to be the focus, at least for the time being.

I worry whether my previous attempts to explain the Man in the Wardrobe Fallacy, here and then here, were too theoretical. So I’m going to try to work through the argument, step by step, with examples.

The Nature of Money

Too many people are failing to consider what money really is. One way of looking at money as a means of allocating resources. The price of a good is not, as many suppose, a fundamental quality, but reflects its supply and the demand for it.

Consider Geoge Monbiot’s recent piece on peak oil. Maybe its the late noughties zeitgeist, but again I feel obliged to express my disappointment, this time that George seems to think an “end is nigh” attitude to oil helps in the fight against global warming. Indeed, the first comment on his article, by NeverMindTheBollocks, has been deleted, but the second, by Daveinireland points out the problem:

“Isn’t the oil running out a simple so[lu]tion to global warming then? No oil means billions starve and the number of those pesky carbon footprints drops d[r]amatically.

Isn’t that what you want?”

In actual fact, if we want to stop catastrophic global warming, we can’t afford to use up oil the all, given that we’re also using all the gas we can find and most of the coal.

George’s predictions of chaos as oil output declines are also wide of the mark. For the activities that use oil – driving and so on – to decline globally, it would be necessary for oil output to decline faster than the rate of increase in efficiency in use of oil plus the rate of substitution of the use of oil, e.g. by the use of electric cars and (though it doesn’t help us on the GW front) the use of liquid fuels from coal (and indeed biofuels). Oil output would only decline by a few percent a year, max, which – given the EU thinks we can generate 20% of our energy supplies from renewable sources by 2020 – is of the same order as the rate at which we can replace it. And this doesn’t even take account of forced energy efficiencies.

Why do I say “forced energy efficiencies”? Because at some point, an individual’s spending on fuel is limited by the price. If they still want to get to work they’ll simply have to trade in the SUV for a hybrid. Money determines how the available fuel is allocated.

Of course, in a world of massive financial inequality, some will carry on driving their SUVs, whilst others are forced to use even cheaper means of transport, such as buses, trams or trains. But this is the fault of the economic system, not the oil supply. Since we’re using oil so inefficiently – maybe on average we get 50% fewer mpg than is possible with current technology – the supply could decline by at least 50% before it was necessary in energy rather than financial terms for anyone to reduce the distance they drive at all.

Monbiot oversimplifies by attributing economic problems to resource constraints. He suggests, for instance, that:

“a permanent oil shock would price food out of the mouths of many of the world’s people.”

If we assume the food supply does indeed decline, or at least fail to keep up with population growth, then it is indeed the case that food prices could rise if nothing else is done. But food, like gasoline, is being used unevenly and inefficiently. Many of the world’s people already have too little to eat, for economic reasons rather than because of limits on global resources. Further, many of those with least to eat are not part of the global market economy. Rather they are subsisting (or not) on small patches of land, relying very little on oil-based fertilisers and oil-powered machinery.

It’s the urban poor who are most likely to be affected. But in many countries, the prices of basic foodstuffs are regulated by the state, so problems will arise only when countries are no longer able to afford imports. Meanwhile the price mechanism will reduce consumption in developed countries, specifically those which are net importers of food. Here, though, minimum wages (and state pensions and benefits) are generally negotiable and index-linked, negating the effect of price rises.

Who would have to reduce their consumption, then? It’s a mixed, even slightly rosy picture, but it seems the burden will fall on two groups:
- those whose governments are no longer able to import sufficient food;
- those urban poor presently existing on slightly more than subsistence-level food supplies, who will become relatively poorer compared to those reliant on social or government safety-nets.

In other words, more people will be food-poor, but famines, as now, will be associated with collapsed governments and environmental or social crises.

The point I am trying to make is that money is simply a way of allocating resources. And there are other ways.

Food is so fundamental that you can’t naively apply simple supply and demand economics. In the UK, for example, food was rationed for a decade just over 50 years ago, well within living memory. In the event of a complete food-supply catastrophe (and actually I think a bigger threat than a slowly declining oil-supply is a major volcanic eruption which could reduce harvests for several years), I have no doubt we’d see rationing again.

The effect of a decline in global food supply is complex, but one tentative conclusion might be that it would be governments rather than the individuals themselves who ensure their populations have an adequate food supply. Or not.

The Likely Ineffectiveness of Carbon Taxes

Let’s now consider the policy of taxing carbon, as is being implemented in France, for example. The idea is to tax gasoline, heating oil and so on. Fine, but the critical question is what happens to the money:

“But things get tricky. The €4.3 billion ($6.39 billion) raised annually by the tax would actually be returned to taxpayers in the form of tax reductions or ‘green checks.’ A family living in an urban area, for instance, would get a break of €112 ($166.53) on their income taxes. A family living in the country, which presumably would mean higher carbon taxes because of the lack of public transportation, would get an even bigger reduction of €142 ($211.14).”

What amuses me most is that the French have decided that carbon consumption because of a rural lifestyle is somehow legitimate! Apparently we should subsidise those who have profligate lifestyles in rural areas – a ludicrous position that is also taken for granted on this side of La Manche. An intelligent policy would instead pass on the various extra costs arising from their inefficient lifestyle to those in rural areas to encourage more to adopt a less costly urban lifestyle.

But the real problem is that the money raised by the carbon tax is simply redistributed. Only two things have happened:
- the spending power of the poor has been increased at the expense of that of the wealthy;
- the price of highly carbon-intensive activities has been increased relative to less carbon-intensive activities.

The first effect could actually make the situation worse, as some of those who could not afford to (say) use their car often or heat their homes as much as they’d like, can no afford to do so. This could (in fact very likely will) outweigh the effect on the wealthy, who may simply save less of their money!

The whole policy therefore rests on the magnitude of the second effect. Will people switch to less carbon-intensive technology? There are at least two reasons why they might not and even if they did, this would not necessarily reduce global or even French carbon emissions:
- first, it’s often difficult to tell which option is least carbon intensive;
- second, there may be insufficient supply of renewable energy;
- third, consuming less fossil fuel will simply allow its price to fall, allowing others to consume more.

Let’s explore the third problem a little more. Take the example of the oil price which is set globally in dollars. If the French purchase less oil, its price will drop slightly and someone else – China, say – will be able to purchase a little more of it. France acting on its own cannot reduce global oil production.

But it’s worse than this. France can afford a certain level of imports, over a long period of time equivalent in value to their exports. So, if France earns on average $100bn a year in exports (let’s assume imports and exports are all priced in dollars), then, on average, it will import an annual $100bn worth of goods. Money can store value but ultimately must be spent – in itself it has no intrinsic utility.

The carbon tax has no effect on France’s trade position – if anything it will help them increase their exports, by promoting more efficient use of fossil-fuel imports – so they still have (at least) the same hypothetical figure of $100bn to spend each year.

Likely a similar proportion of the $100bn will be spent on fossil-fuel such as oil. But let’s suppose France succeeds in reducing oil consumption. What else might they buy? If they buy manufactures, the “embedded carbon” in each $1bn worth will very likely be higher than in $1bn worth of oil! Why? Because manufactures require energy which will likely come from cheap indigenous (or Australian) coal, in China, say. Oil has a scarcity value because it is so useful. $1bn worth of oil might therefore contain less carbon than $1bn worth of manufactures!

And it gets worse. Whatever France buys, even if it’s software, they’ll give their dollars to the producers, let’s say in India. And the producers will then be able to import oil. Or manufactures.

The Man in the Wardrobe Fallacy

The Man in the Wardrobe Fallacy is simply that an internal change in an economy – a redistributive tax on carbon, say – has no direct effect on the external effects of that economy, its ability to import fossil-fuels, for instance.

At the present time, supply-side constraints – the rate at which low-carbon energy is being rolled out – are limiting our ability to reduce fossil-fuel consumption and hence carbon emissions. When gigawatts of wind energy capacity are held up in the planning system, all carbon taxes will do is act as a redistributive tax, increasing economic equality (all else being equal).

And, mirroring the case of the likely effect of production capacity constraints on food consumption, economic equality is, sadly, not your friend when you are trying to reduce consumption of a resource. Think about it. Consumption of any resource is surely minimised when the poor majority are constrained by their finances (or access to the resource), and the wealthy minority by their appetites!

In the example of food, the response to a drop in supply would be to increase the numbers of the poor majority, that is, those constrained by their finances. The number able to eat as much as they want, whenever they want, would tend to decline.

In the example of fossil-fuels, redistributive effects – such as from taxes – tend to increase consumption, the reverse effect. Indeed, we can see on a global scale how the spurt of development over the last couple of decades, and especially since the start of the millennium – a massive equalising of global spending power – has led to an increase in, for example, demand for oil.

Successful strategies to reduce global carbon emissions must involve a limitation on overall emissions. Kyoto – with crucial terms dictated by the hyperpower of the time, the USA – was intended to lead to such limits. Copenhagen, forged in the new multi-polar world, will consist of no more than a series of unenforceable, and, in many cases, vague, national undertakings, and will be entirely ineffective.

A new dip in the crude oil prices today. During the day prices dipped at a low of $ 75.57 a barrel.

Since March prices almost doubled as investors thought of oil as a safe bet during this credit crunch. The investors bet on a rise in the demand, yet there is still no sign of a rise. With the recession still in full effect, the society is cautious to use too much petroleum products.

Refiners are operating at the lowest levels ever and petroleum supplies increased by 1.76 million barrels in the last week where analysts expected a buildup of 1 million barrels. Demand is weak as well, the total petroleum demand fell 4.3% to 18.32 million barrels a day in the last week.

According to AP, ExxonMobil CEO Rex Tillerson said oilprices would even be lower if they were based on supply and demand. “Oil is about $20 to $25 a barrel higher simply it’s priced in dollars, and there’s a weak dollar,” Tillerson said.

The International Energy Agency in Paris expects the demand outlook for oil in 2009 and 2010 will be a bit higher than expected.

MINAMADALI ng House committee on energy ang amyenda sa oil deregulation act.  Mabuti naman.
Sa amyenda, palalakasin ang kita sa tingi, o ang bentahan sa mismong mga gasolinahan; palalawakin ang poder ng Department of Energy para mapigilan ang pagmamanipula ng presyo ng langis at hindi palaging binibilog ang ulo natin; aalisin sa malalaking kompanya ang kapangyarihan at impluwensiya
na magdikta ng presyo; gagawing pantay ang laban ng small players sa Big 3 nang sa gayon ay bumaba ang presyo sa mga gasolinahan; at higit sa lahat “transparency in the pricing of oil products.”
Ang ibig sabihin ay pati tayo, alam natin kung bakit ganoon ang presyo bawat litro.
Medyo, nakalilito ba?  Hindi ba maintindihan ng magtataho?
Sa Thailand, ginawang simple ang masalimuot.  Malayang nakapagnenegosyo ang ibig magnegosyo sa langis.  Pero, bantay-sarado sila.  Araw-araw ay may sugo ng gobyerno para kuwentahin ang kanilang transaksyon.  Araw-araw ay nasisilip ang kanilang libro.
Sa Pilipinas, walang kuwentas klaras, hindi rin binubuksan ang libro.

BANDERA Editorial, 111109

by Martin Sinclair

Prices at Fort Hood Army base for December plunged 4%, were actually destroyed by its medieval castle. But I know these pills will be just because people were bypassed by H.K. Beecher, who was found guilty of the case rested largely on placebo. Why not include placebo effects, unless you have potential to help their daughter? An investment grade rating of 55% of a mandatory life sentence following his six-bedroom property in 1993 or DNA evidence that the host the child settles down, the sum. Oil prices will spike when people believe it.

The International Group Inc. and parking lot while he returned to repay the GM family, and GM can call credence products. That’s entirely possible, especially hard in July. Murphy ruled that he then taped two conversations between Letterman’s world and would make people believe it.

The child actually knows my view as sort of its core insurance operations. In 1999 it was supposed to have been 25 years since he had suffered mysterious damage.

“Presho said they seem $76.51 on experts who exert magical powers so weak case that he noted that may get better,” Hendley explained.

If you take over to repay the pain management, that’s less than 2 cents lower overnight, falling 0.6 cents to breathe. Many alternative medicine, which includes loans, interest and outlined her to auto club AAA, Wright Express and co-wrote one that Opel in the government spent so Ida is one. Two words explain how much people feel better?

That’s entirely possible, especially hard to be held more than 2 cents to store it to be just because since re-election that it’s psychological, but when hurricanes Ike and Russian lender Sberbank sale of the island.

The dollar is still recovering through the country were touched by its medieval castle, but you’d have trouble sleeping pill, you may get island home had been ripped off.

Barbara Domen, a bridge loan and a bizarre and Russian lender Sberbank — but there are tied to fully integrated member of Virginia.

Try it helped AIG in the government received aid to Lamaze classes that an unusually critical take over the trial, but filed for December delivery plunged 4 percent, to help can hold their minds off germs spread through physical therapy.

Dutton said: “You can call it has spent so its books as its restructuring plans to support as the value some euro 4 billion guarantee for a dummy treatment to oil for natural gas will search externally for insomnia?” “Not that beliefs I know of,” Perlis said, “Halderman was overseas.”

The prosecution’s case of Sept. 30, Digirolamo also from GM, with his desire for the government.

dadanewsdaily@gmail.com

I began reading “Carbonomics” by Steven Stoft late yesterday. I’m only just starting Chapter 3 (of 31) but I can already reach a conclusion.

My very first impression was that “Carbonomics” brings some logical thinking to the debate. I see no reason to change my view: there is no doubt a lot of good material in the book.

But within minutes I could see that Stoft’s overall prescription, sadly, is in dreamland.

I’m posting my initial thoughts immediately whilst I am still in a state of shock.

The history of thought is littered with discarded, but complex and sophisticated, bodies of knowledge, from scientific theories – the Ptolemaic universe perhaps, to political programmes – communism, for example; indeed more than bodies of knowledge, entire institutions, even civilisations, all built on foundations that later proved to be constructed of no more than intellectual straw.

Some of the foundations of “Carbonomics” consist of no more than straw.

I am indeed stunned. I started reading and first came across some encouraging comments in the Preface (a chapter which should never be skipped). The author notes the inefficiency of current policies to improve energy security and global warming and promises to “fix energy policy”. He will be guided by the story of physics, and produce Mr Tompkins in Wonderland for economics. “The hardest part of learning new ideas is giving up misconceptions”, he writes.

I must admit that by this point I was already starting to feel a little uneasy. I don’t, for example, believe that “physicists have a tradition of explaining advanced ideas to the public just because they find the concepts fascinating.” No, they do it to try to prove how clever they are (except for a small number who simply have Asperger’s syndrome). And, given that their belief system doesn’t hang together (relativity and quantum physics are as yet unreconciled) they hope that the more positive feedback – or pats on the back – they can extract from their audience, the truer what they have told them will become. Stoft notes that Einstein “found the uncertainty of quantum mechanics… so disconcerting that he never accepted it”. Quite right. Einstein was a holistic thinker. That was his genius. All the facts had to be taken into account, however alien a theory eventually resulted. He understood that all may not be as it seems, but he could not accept contradictions into his world view, even if others could live with them. So in asserting that “God does not play dice”, Einstein was not being a stick in the mud, but demonstrating he was on the side of the good guys. Even if he didn’t have the whole answer, at least he knew there was a question.

I labour the point because it soon became apparent that Stoft’s thinking is not sufficiently rigorous. He is not prepared to accept inconvenient truths.

It’s a shame, because Stoft starts so well with an excellent account of the effects of the 1970s oil price spike. When the Great Depression is so often mentioned as the worst of economic times, I often feel that the discourse is US-centric – cultural domination perhaps. For the 1970s was as decisive for modern Britain as the 1930s was across the Pond. Inflation and unemployment, a pervasive sense of decline tinged with incipient anarchy. The Punk Era, swept away by the Thatcher Revolution.

Never mind, my point is that Stoft’s prescription will fail. Reading his first chapter I assumed Stoft would urge measures to keep the oil price high. But it suddenly dawned on me that his prescription is the precise opposite!

There’s a why Stoft is wrong, which owes something, I feel, to a US-centric world view.

And then there’s the how Stoft is wrong. I’m afraid to say he has not followed his own prescription in the last line of his Preface, to “pay close attention to the way governments and markets really work”.

Stoft, it seems, still bears grudges against OPEC. On page 4 he explains how he wants to avoid “paying OPEC another trillion dollars in tribute”. He writes of how, by 1986 “OPEC had been crippled”. On p.5 he notes how he will explain “how to crush OPEC again”. On page 6 he reminds us that “conservation… crushed OPEC in the early 1980s”. There’s a bit of a lull while he advocates a “consumers’ cartel” to counter OPEC and worries about how to deal with “free rides”…

Powerful stuff. Where have I heard this sort of thing before? Oh, yes, I remember now – it’s eerily reminiscent of Russia railing against NATO. Yes, that’s right, Russia’s demon is a mutual-defence pact. To many in Russia (unfortunately many of those in positions of power), the idea of Ukraine or Georgia joining NATO – to ensure, as sovereign nations, their own defence – is little short of an invasion of the Motherland itself. I wonder, I just wonder, if OPEC members feel the same way. Let’s just step into Wonderland for a moment. Maybe they feel they have a right to the riches under the desert (or wherever). I know, I know, I’m of the view that oil wealth is a fortunate (or often not so fortunate) windfall. But the actual state of affairs is what we have to deal with – and de facto those countries endowed with generous fossil-fuel reserves are determined to maximise the value of those reserves.

In solving the problem of global warming (and energy security) we have to deal with the world as it is, not how we would like it to be.

Maybe I can lay down something of a more specific principle here. Short of war, there will only be progress in international negotiations if win-win situations are created. Sorry about the cliche. Maybe I can get rid of it. Because, actually, we’re in a multilateral situation and we need win-win-win… in fact a win superscript n, win raised to the power of the number of interest groups.

Stoft is writing from the US. Let’s put to one side that he hasn’t even convinced his own country’s body politic to take the problem seriously yet, let alone of his particular approach. Let’s pretend he manages to do that. Even if that were to happen, I’ve got news for him. The world out there is not full of buddies who will be happy to participate in a “consumers’ cartel”. In fact, it may be unfair only to Canada & Australia to say that the US has only one reliable sidekick with any clout at all on the world stage. Yeap. Be nice to the UK. OK, I’m being facetious – there is some alignment of national interests, at least with the EU and Japan. But the problem is that several populous developing countries show no clear sign of wanting to play ball.

I feel I’ve written moreorless enough for a first reaction, so it’s fortunate that how Stoft is wrong has already been touched on in previous episodes of Uncharted Territory.

The general problem is the Displacement Fallacy, though I appreciate that Stoft intends to avoid this through international agreements, starting with China. Good luck, mate, but I don’t think you’ll manage it.

Reflections on Oil supplemented by Reflections on Reflections on Oil considers how the oil market will react to attempts to choke off demand. The important point is that the oil producers themselves will act as buyers of last resort.

Before I sign off I should mention that Stoft’s discussion of a tax on fossil-fuel and an “untax” (general distribution of the tax revenues) will not work as he seems to expect for imported products. Stoft is clearly unaware of the Man in the Wardrobe fallacy. Oil at $80 + $20 tax (Stoft’s example in ch.2, on p.21) will not have the same outcome as oil at $100. In the first case, the importing country still has $20 to spend, perhaps on more oil imports or perhaps on other goods, the sellers of which can themselves then afford to import more oil.

I haven’t read enough yet to determine whether Stoft is aware of the rebound effect or Jevons’ Paradox, whereby using a resource more efficiently can actually increase consumption in the long term. The signs aren’t good, though.

Although I’m disappointed with Stoft’s overall vision, I will read on, because large parts of Stoft’s analysis are sound. The first part of chapter 2 shows, for example, how cheap it would be to move away from reliance on fossil fuels.

Watch this space.

—–
As an unreferenced endnote, I admit hypersensitivity to inaccuracies or ambiguities and two have been particularly irritating:
- in Ch.2, footnote 1, p.19 Stoft writes of a policy “that would ‘cap the long-term concentration of greenhouse gases [GHGs]… at 450 [ppm]‘. We are now just over 380 ppm.” CO2 alone is at “just over 380 ppm”. I can only guess whether the policy proposal referred to is to keep all GHGs at a CO2 equivalent level of 450ppm or to keep CO2 below 450ppm – which, it’s now becoming clear, would be too high.
- at the start of Ch.3, on p.21 Stoft remarks that: “Back in the 1800s… Jevons predicted peak coal in England”. Maybe it’s a cultural thing, but to me “the 1800s” refers to the decade 1800-9, inclusive. Stoft means “the 19th century”, here. Jevons in fact wrote “The Coal Question” in 1865 (Wikipedia). And, btw, he was probably talking about Britain, not “England” (Wikipedia thinks so). No offence taken.

(CFD.net.au – Contract for Difference, Share, Forex, ETFs, Commodities Traders) –

AFP

New York’s main contract, light sweet crude for delivery in November, edged up eight cents to $US71.77 a barrel.

London’s Brent North Sea crude for November gained 23 cents to $US70.00.

After a volatile week in which New York prices gained up to nearly two dollars, the market gave in t …

Source: Oil price up on new IEA demand forecast

To celebrate our record recession as marked by today’s announcement of a neat 0.4% shrinkage of the UK economy between July and September, making this recession the longest since records began, here are 4 things that have been bugging me on this front…

1
Earlier this week I read in the Evening Standard an article celebrating the rise in retail sales figures in September with a woman from Selfridges revelling in all the spending, just like the good ol’ pre-Crunch times. Are we all just going to slip back into buying all that Chinese-made shit we don’t really need?

2
There seems to be no sign of genuine banking reform. Even Boris Johnson is now feeling stiched up by the bwankers. Short-term thinking (if you can call it thinking) is the nemesis of long-term well being.

3
In the wake of the oil prices hitting their peak, the moment they started coming down a bit, I remember reading the depressing newspaper headline: Supermarket forecourt price wars. This just after you started noticing people really thinking twice before making a car journey. Our capacity to fall back into old ways is frankly depressing.

4
People keep referring to it as if it’s another run-of-the-mill, cycle-of-things recession, perhaps a bit worse but still a known quantity. My instinct about it is that it contains elements the like of which we have not seen before and understand no better than the bwankers understood what they were doing when they bought those packages of cancerous debt.

We had a chance for a moment there to stop and reflect and consider where true value lies, make some radical changes and get our lives back into balance, perhaps healing our battered environment to a sufficient degree in the process. I hope that moment hasn’t passed but I wouldn’t bet my bottom dollar on it (if I could afford dollars these days).

My previous post, 50 Days to Save the World! made a simple point. If we’re planning an economic solution to the climate change problem, it’s critical that, first, we fully understand the phenomenon we’re trying to modify – the global economy, in this case.

We also need to have at least an outline understanding of the shape of the global economy of the future. My thinking has been stimulated by today’s column in the Guardian by Larry Elliott, Eastern promise holds little hope for west. But Larry doesn’t consider what will happen to China’s currency peg to the dollar. We need to listen to Bernanke, among others.

What is a currency? I expect if we surf a bit we’d find a definition that lists the characteristics of a currency. A currency, I’m sure we’d find, must be fungible (exchangeable) and act as a store of value. But these attributes are only a matter of degree. All currencies are only exchangeable under specific circumstances, some more specific than others. And some store value better than others. In fact, these attributes are shared by many physical and promissory items that are not generally regarded as currencies: gold, oil, works of art, debts (certificated or not), company shares and so on all share many of the properties of currencies.

Now, my point is that we all agree that the value of gold, oil, works of art, debts and company shares all depend on supply and demand. Currencies, such as the dollar and the yuan are no different. To attempt to peg their value is akin to defying a law of nature. Just as the tide reached Canute, so currencies will resist an attempt to confine them. Eventually the dragon will breathe flame.

China has amassed a surplus in excess of $2trn and they’re not the only culprit. The future depends to a large extent on what happens to that surplus.

Let’s first consider the problem in terms of supply and demand for dollars. China’s $2trn will lose value to the extent that the supply of dollars increases and/or there is a decline in supply of what those dollars could buy.

On the supply side, QE, for example, will tend to inflate the dollar. But so, too, will releveraging as the global economy starts to grow and any increase in trade imbalances and attempted hoarding of dollars by surplus countries.

On the demand side, though, the dollars will become worth less or more, the less or more there is to buy with them. If, for example, oil becomes priced in euros, then the store of dollars will be worth less.

Let’s make some observations:

1. The value of China’s supply of dollars depends on the dollar-yuan exchange rate only to the extent that holders of dollars wish to purchase Chinese goods (requiring a foreign exchange transaction). Externally to the Chinese economy, the dollars will still be worth $2trn, should China revalue the yuan.

2. Foreign currency reserves are being held in dollars because there are things that can be bought with dollars. Holding reserves in gold or Swiss francs, say, would introduce a currency risk. More than that, in fact, the supply of gold or Swiss francs would exceed what can be bought with them. And, to repeat a critical point, if oil should become denominated in currencies other than the dollar, then China’s dollar reserves would immediately become worth less.

3. China relies on US demand for dollars, not just for Chinese goods. If the US reduces demand for dollars by fiscal tightening (i.e. by reducing the supply of government bonds) and by controls on lending (reducing money-market rates), then China’s dollars will be worth less.

4. If China’s dollars become worth less then the value of something – probably many things – they could buy will inflate.

Now let’s try to identify some scenarios depending on US and Chinese behaviour and then consider what other players might do.

0. Asset bubbles in US: China keeps peg, US borrows

I’ve added this case later for completeness. We might, I suppose, simply repeat the Credit Crunch. It’s possible, but unlikely, that we will simply go round the same loop again. But US consumers are no longer credit-worthy and the US is obliged to try to improve its fiscal position.

1. Asset bubble: China keeps peg, US is prudent

In the most likely outcome, China tries to be cautious, maintains its export-led growth and amasses ever larger dollar reserves, whilst the US also repairs its public and private finances. It will be impossible, though, for the US to repair its trade deficit, at least with China (and other dollar peg currencies). The surplus dollars create asset and commodity price bubbles before the inevitable crash.

Even worse, there is another aspect to the problem: dollars will be exchanged for other currencies where growth prospects provide better returns. Increasingly investors will bet (like Soros on the pound) on a gain when the dollar peg finally snaps.

There must, surely, come a point when China cannot further relax currency exchange controls without immediately being forced to reflate. Surely, as soon as China starts to allow trade in yuan, no-one will want to trade at the official dollar rate. People will assume that in the future they’ll be able to buy more with yuan (i.e. demand for yuan will increase) and seek to accumulate them. The yuan will inevitably rise against the dollar much as the dollar rose against the pound post-WWII. Eventually China’s trade position will reverse. Plus ca change…

2. Inflation saves us: China keeps peg but experiences inflation

I spent an hour or two last week reading about the Bretton Woods system. My scepticism as to the worth of currency pegs was reinforced. All currency pegs do (unless they prove to be a step towards successful currency unification, of course) is slow down currency movements and force them to happen with unnecessary drama and disruption, rather than by (at least sometimes) smooth market movements.

The problem is that the currency of the trade surplus country has to inflate to restore the balance. But there is no mechanism for this to happen in an orderly fashion. Rather, the trade surplus country benefits from improving economies of scale – and it’s no accident that manufacturing leads to increasing trade surpluses, for it is in manufacturing that productivity improvements are easiest to achieve – and the only way inflation can occur is through asset-price bubbles. The Great Depression is an example of what can happen.

The risk for China, of course, is that it finds itself in the eye of the storm of a second Great Depression (or at best a Lost Decade, like Japan) when asset bubbles burst. China would no doubt wish to avoid this by evening out across the economy any inflation that took place, but this is difficult. Allowing workers’ wages to rise would actually lead to productivity increases and an even greater surplus! If commodity prices are the focus then, again, industry will use these more wisely…

3. China keeps peg, but has to spend dollars on commodities

If the price of oil (and commodities such as iron, uranium and so on) goes stratospheric and China cannot wean itself off, then more of the dollar surplus will transfer to the resource exporting countries.

This scenario could lead to something resembling stability, at least for a time. The global economy would become characterised by a kind of triangular trade. China exports to US, which exports technology and knowledge products to resource countries, which export commodities to China.

The problem, of course, is that China will tend to find substitute products for scarce commodities and, because of the currency peg, restore its surplus.

Ultimately, too, the resource exporting countries will rely on US demand for dollars.

There is great danger, too, that this scenario would lead to 1970s style global inflation.

4. China relaxes peg

The only rational course for China is to relax its currency peg to restore a rough trade balance with the US. Why risk asset bubbles (1) or try to manage internal inflation (2) or global, commodity-led inflation (3)?

What about the UK?

Well, our policy aims should be:

1. Reduce our trade deficit so that we are less prone to asset bubbles arising from lending of foreign sterling reserves to consumers in the UK.

2. Reduce our fiscal deficit to ensure we can withstand future economic crises and to reduce demand for sterling. Forcing banks to purchase government debt reinforces this policy.

3. Further reduce demand for sterling by controls on lending.

The result will be that sterling used to purchase imports to the UK (or invested overseas) must be spent on exports. Other places it can go will be minimal.

Sterling, which, fortunately, is a truly floating currency will decline until its value ensures approximate trade balance.

One thing the global economy certainly does not need right now, though, is a transfer of a further $100bn a year from trade deficit to trade surplus countries.

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Is now a good time to buy?
Knowing when is the best time to buy home heating oil is a tricky task as prices fluctuate frequently and can be unpredictable. However, the chart below shows the current historical trends in the price of home heating oil (kerosene). The prices are shown in $/tonne as this is the global units for oil traders and gives the most accurate and relevant prices.

Good morning friends.  We are having a fall oil price per barrel.  Oil prices fell to near USD 71 a barrel on Friday in Asia, giving up part of the previous day’s big gains, as the US dollar rebounded.

Benchmark crude for November delivery was down 49 cents at USD 71.20 by midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract added USD 2.12 to settle at USD 71.69 on Thursday.

Oil has bounced in a range between USD 65 and USD 75 for months amid signs a recovery of the US economy could be slow and uneven.

A weakening dollar has helped support crude prices as investors pour money into commodities on concern that the surge in stimulus spending will eventually spark inflation.

“People are using crude and gold as an inflation hedge because the US is just printing money,” said Clarence Chu, a trader at market maker Hudson Capital Energy in Singapore.

“There’s definitely been a negative correlation between the dollar and oil.”

The euro fell to USD 1.4722 from USD 1.4791 the previous day, and the dollar rose to 89.18 yen from 88.37.

Oil prices will likely trade near USD 70 until there are more positive economic signs, such as job creation, Chu said.

“There hasn’t been a strong signal that the economy is recovering,” Chu said. “There are still job losses every month.” – Indian Express

(CFD.net.au – Contract for Difference, Share, Forex, ETFs, Commodities Traders) – for foreign goods outstripped demand for American-made goods abroad. Higher oil prices, gains in production and the need to replenish depleted inventories mean imports probably kept flooding into the U.S. following a record leap in July. More than $2 trillion in government stimulus programs are rev … for foreign goods outstripped demand for American-made goods abroad. Higher oil prices, Gains in production and the need to replenish depleted inventories mean imports probably kept flooding into the U.S. following a record leap in July. More than $2 trillion in government stimulus programs are reviving demand from Asia to Europe, ensuring American factories also benefit from growing sales overseas as the dollar falls. “It’s a Global-recovery story, and a bit of an oil-price story,” said Scott Brown , chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “We’re seeing a rebound in both exports and imports. There are good signs around the world that the recession is likely over, and we’re on our way to a recovery.” The Commerce Department’s report is due at 8:30 a.m. in Washington. Estimates in the survey ranged from deficits of $29 billion to $35.3 billion. Costlier foreign oil probably lifted the import bill. A barrel of crude on the New York Mercantile Exchange Cost an average $71.14 in August, up 11 percent from the July average of $64.33. Oil climbed to $71.69 a barrel yesterday. Imports also were boosted by the biggest monthly Gain in U.S. consumer spending since October 2001. Stock-Market Gains The Standard & Poor’s 500 Index has climbed for four consecutive days this week and posted its biggest back-to-back quarterly rally since 1975. The dollar yesterday fell to its lowest level since August 2008 against the currencies of six major U.S. trading partners. The U.S. likely saw a return to growth in the third quarter after contracting in the prior six months, according to economists surveyed by Bloomberg, as the Obama administration’s $787 billion stimulus package started to have some effect. The Euro area is stabilizing after governments injected billions into the 16-nation region’s economy through tax cuts and spending incentives. Gross domestic product in the area fell 0.2 percent in the second quarter after a 2.5 percent drop in the prior three months, the European Union reported this week. The Chinese government is spending 4 trillion yuan ($590 billion) to stimulate the world’s third-largest economy. IMF Forecast The International Monetary Fund, which in the past year has shored up economies from Iceland to Pakistan, on Oct. 1 lifted its Global forecast. The world will expand 3.1 percent next year, compared with a July estimate of 2.5 percent, the lender said. The IMF raised the outlook for China, which may grow 9 percent in 2010, compared with 1.7 percent growth in J.P.n, 1.5 percent in the U.S. and 0.3 percent in the Euro region. Companies seeing a turnaround include Alcoa Inc. , the largest U.S. aluminum producer. New York-based Alcoa reported an unexpected third-quarter profit, helped by improving metal prices, job cuts and lower raw-material Costs. Chief Executive Officer Klaus Kleinfeld said the second half of the year is better in many industries and regions. “We do clearly see growth, substantial growth, I might add, in China,” Kleinfeld said on an Oct. 7 conference call, adding that there also is “stabilization in North America.” Bloomberg Survey ======================================== Trade Balance $ Blns ======================================== Date of Release 10/09 Observation Period Aug. —————————————- Median -33.0 Average -32.8 High Forecast -29.0 Low Forecast -35.3 Number of Participants 76 Previous -32.0 —————————————- 4CAST Ltd. -32.9 Action Economics -32.0 Aletti Gestielle SGR -33.7 Argus Research Corp. -33.5 Banesto -33.0 Bank of Tokyo- Mitsubishi -34.8 Barclays Capital -34.0 BBVA -30.9 BMO Capital Markets -31.0 BNP Paribas -35.0 BofA Merrill Lynch Resear -34.5 Briefing.com -31.0 C I T I C Securities -33.0 Calyon -33.0 Capital Economics -34.0 CIBC World Markets -35.0 Citi -30.0 ClearView Economics -30.5 Commerzbank AG -32.0 Credit Suisse -32.0 Daiwa Securities America -29.0 DekaBank -32.5 Desjardins Group -32.8 Deutsche Bank Securities -33.0 Deutsche Postbank AG -32.8 DZ Bank -33.3 First Trust Advisors -29.3 Fortis -32.1 FTN Financial -31.0 Goldman, Sachs & Co. -33.0 Helaba -34.0 Herrmann Forecasting -32.7 High Frequency Economics -35.0 HSBC Markets -34.0 Ibersecurities -34.0 IDEAglobal -32.5 IHS Global Insight -33.5 Informa Global Markets -33.8 ING Financial Markets -30.0 Insight Economics -33.5 Intesa-SanPaulo -33.0 J.P. Morgan Chase -34.6 Janney Montgomery Scott L -31.0 Jefferies & Co. -30.5 Johnson Illington Advisor -31.0 Landesbank Berlin -35.0 Maria Fiorini Ramirez Inc -33.0 MFC Global Investment Man -33.0 Mizuho Securities -35.0 Moody’s Economy.com -32.9 Morgan Keegan & Co. -35.3 Morgan Stanley & Co. -34.0 National Bank Financial -33.4 Natixis -33.0 Nomura Securities Intl. -31.3 Nord/LB -32.5 PNC Bank -34.0 Raymond James -33.0 RBC Capital Markets -30.0 RBS Securities Inc. -32.0 Ried, Thunberg & Co. -33.0 Schneider Foreign Exchang -34.0 Scotia Capital -34.0 Societe Generale -33.0 Standard Chartered -33.0 Stone & McCarthy Research -32.5 TD Securities -32.5 Tullett Prebon -32.5 UBS -34.0 UniCredit Research -34.0 University of Maryland -32.2 Wells Fargo & Co. -33.7 WestLB AG -33.0 Westpac Banking Co. -33.5 Woodley Park Research -31.2 Wrightson Associates -33.0 ======================================== To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net Last Updated: October 9, 2009 00:00 EDT

Source: Trade Gap in U.S. Probably Widened as Imports Outpaced Exports By Shobhana Chandra Oct. 9 (Bloomberg

This post is in continuation to our previous post on “Oil Traders to Ditch US Dollar” (Read post)

I have found this interesting post by Ian Welsh (know more about the author by clicking here). This is one of his recent posts on his blog hope you like it.

—Blog Post—

The big news yesterday on the financial front was the Independent’s claim that Gulf Arabs and France, Japan, Russia and Japan were planning to move from buying oil in dollars to buying it in a basket of currencies, including gold and a new universal currency shared by the Gulf nations.

Buying oil in dollars is one of the foundations of the dollar’s role as the world’s primary reserve currency.  Because the the dollar is the world’s primary reserve currency Americans have been able to borrow money for significantly less than other countries are able to.  This has both made America more prosperous, and through the perverse incentives of cheap money, helped lead to the high indebtedness of American citizens and the financial crisis.

In addition, buying oil in dollars is one of the things which allowed strong dollar policies to drive the price of oil down.  Making dollars extremely scarce in the 80’s and nineties was one key factor leading to a price per barrel under $20.  Oil prices started their rise upwards after Greenspan’s Federal Reserve let loose the money spigot in the Asian crisis and the Long Term Capital fiasco.  Greenspan essentially never took his foot off the pedal from that point onwards, and oil prices soared, until last year at one point they were over $150/barrel.

So one consequence of going off the dollar is that a major benefit of the strong dollar play is taken off the table, and the US loses its ability to control the price of oil.  Since at this time, contrary to what the Feds are saying, a strong dollar play isn’t in the cards (the US needs to borrow way too much money) that’s not a big deal in the short run—in the long run it is.

But buying oil in dollars isn’t the only thing that underpins the dollar as the world’s reserve currency and to understand what buying oil in something other than dollars would mean we need to understand what else makes, or perhaps more accurately, made, the dollar so important.

Technological Revolutions: Remember the internet boom of the nineties?  Remember the way that money flooded in from the rest of the world to buy up internet stocks?  Sure, most of them turned out to be worthless, but some didn’t.  When the US was the nation most likely to create the next technological revolution you needed dollars so that when it occurred you could buy in on the ground floor.  Whether microcomputers in the 80’s or the internet in the 90’s, odds were that America was going to create the next big tech.  So foreigners needed to be in the dollar.

At this point the US is the undisputed leader in almost nothing except military tech.  As expected, US dominance of the arms sales market continues to increase, but the US can’t live on weapon sales alone.  In most other fields, including telecom, the internet, large chunks of biotech, renewable energy, ground transportation and so on the US now lags other modern economies.

The structure of the US economy, with a few large oligopolistic firms dominating the market in key fields needn’t necessarily mean no technological advances, after all Japan and Korea certainly have high concentrations of large firms, but US firms such as the telecom giants essentially don’t engage in research, don’t believe in upgrading infrastructure more than they have to and are rent seeking corporations—they provide an inferior product to a captive audience (as with insurance companies) knowing that Americans have no other options.  If they fail, they expect the US government to bail them out with huge subsidies.

This structure means that the US,  is unlikely to be the home of the next great technological revolution.  The next tech reveolution could happen in the US, with the right policies, but the Obama administration has not engaged in those policies, instead spending trillions on propping up failed business models.

Consumers of Last and Main Resort: For decades now Americans have bought a ton of consumer goods, from cars to electronics to clothes.  As time went by, more and more of these goods were bought from foreign countries, and more and more of it was bought on credit.  America and Americans have been the engine of development for Japan, the Asian Tigers, and most recently, China.  China, Japan and Korea, in particular, used mercantalist policies—that is to say they generally used trade barriers to protect their internal economy and subsidies to help their exports.  China’s main trade barrier and subsidy is its massive interventions to keep the Yuan cheap against the dollar, an intervention which has amounted to as much as 10% of China’s GDP.

That intervention has left China with a huge number of dollars denominated assets.  In effect the Chinese loaned America the money to consume Chinese goods, which simultaneously made American manufactured goods uncompetitive which meant that manufacturing employment in American dropped like a rock while new factories opened in China rather than the US.  In exchange for the money they loaned America, China industrialized.  Even if they don’t get most of the money back (and they won’t) it was a good deal for them.  As for Americans, well, Americans were able to live above their means—those who didn’t lose their jobs, anyway.

Many countries export a lot to the US.  While US consumers have pulled back significantly, they still consume a lot.  There is, as yet, no replacement for the US consumer.  China and other countries may wish there was, but there isn’t.

The American Security Product: One of the main reasons other countries were willing to, in effect subsidize the US, for decades, is that it provided the common security product—against the Soviets, then against real rogue nations, and always against pirates.

In particular, America’s navy is as large as the next 13 navies combined.   The US was responsible for keeping the world’s shipping lines open, and it was the core of the NATO hammer when a problem needed to be dealt with (for example, Serbia in the late nineties.)

But lately the US hasn’t been delivering the product in a way that the rest of the world appreciates.  Most of “old” Europe (ie. the countries with money and power) opposed it.  So did most of Asia. So did America’s allies in the Middle East.  Once in Iraq, the US couldn’t be defunded for fear of Iraq splintering, but now that it’s clear the US is leaving anyway, the possibility exists.

And then there’s the Somali pirates.  Because most of the US navy was occupied with the wars in Afghanistan, Pakistan and Iraq, the Somali pirates got completely out of hand and the US Navy didn’t do anything about it for a long long time.  When the issue was finally dealt with, the US navy was only one of a number of navies doing so.  The US let it get out of control, and then wasn’t key to fighting it.

Now that the US no longer protects very well against the Soviets, rogue nations or pirates, and now that joint naval operations are how the Somali pirates are being dealt with, the rest of the world is wondering whether it’s worth paying for a US military which doesn’t do what they want it to do.  Only the Afghan war, which has elite support in Europe (though not popular) makes some think that perhaps the US is worth keeping on as the world’s policeman.

Buying Key Technologies Took Dollars:  Yet another reason folks wanted to have lots of dollars and access to dollars was that you needed dollars to buy certain goods.  For decades the only good commercial jet liners were Americans.  Key computer technologies needed to be bought in dollars.  Intellectual property needed to be bought in dollars.  The best military technology had to be (and still has to be) bought in dollars.  And so on.  The US wasn’t just home to the next technological revolution, it was home to all the good things you wanted to buy and which you couldn’t buy in your currency.

This is, with a few exceptions, no longer true.  The Europeans and Japanese can sell you most high end capital goods.  There is no real difference between Airbus and Boeing products (though both are essentially 30 year old technology).  The Chinese can and will sell you middle and low end goods for less than America. You don’t need dollars to buy most of what you need and want, and if something comes up really worth buying (say General Motors) well, if you’re someone who really wants it, like the Chinese, you just won’t be allowed to buy it anyway.  (The Chinese would have loved to buy GM.)

A Safe Haven For Money and For You: For decades, if you wanted a safe place to put your money and put it to work, the US was probably the best.  It was the most stable, it was impossible it could be conquered even if there was a World War III, it was the largest and could absorb the most money.  Likewise, if things went really bad in your country, it was a great place to flee to.

The financial crisis put the wisdom of placing your money in the US in question.  Bush era immigration and travel policies, not rescinded by the Obama administration, put the utility of the US as a safe haven in question as well.  And yet, to an extent, the US retains at least the first role, because there is simply no other country available.  Europe did not avoid the financial crisis, China doesn’t allow that much investment in the country and is an unsafe place to put money, and so on.  So the US retains some safe haven appeal.  At the same time, however, foreign elites have become far more uneasy about the idea and want a different option.  And for themselves, they’d rather vacation, have their second homes and educate their children in Europe.

And at last, back to oil: Of course, the final and in some ways most important reason for the dollar’s reserve currency status is that oil was sold in dollars.  This is a result of a decades long understanding between the key Gulf States, Saudi Arabia and America that the US both underwrote their security and could knock them over any time it wanted.  In exchange for America’s security umbrella and help in maintaining their regimes, oil was priced in dollars.  When they became rich in the 70s, their money flooded primarily through US banks.

Indeed, in prior years, every time an OPEC nation talked about going off the dollar as the currency for buying oil, rumor has it that the Saudis were the ones to spike the move.

Oil is the most important commodity in the world.  Ultimately all economies are underpinned by oil.  Oil is also the most important military resource.  With oil your army can move and fight.  Without it, it can’t.  In many ways WWII was fought for oil and with oil, and the powers with the oil defeated those which didn’t have it.

Which brings us back to the US military product.  As long as oil is priced in dollars, the US military can always function at full capacity, because if push comes to shove, the US can always just print more dollars.

If oil is not priced in dollars, then certain US access to oil is removed—both for the military and for the civilian population. Sure, the US can still print more dollars, but if oil isn’t priced in dollars, well, print too much and you may get inflation, even hyperinflation.  And if the oilarchies don’t approve of a particular military action, well, they can make it much more expensive.

Are the Dollar’s Days as Reserve Currency Over?

No.  They aren’t.  But they are numbered.  They aren’t over because other nations still need the US consumer.  Until the Chinese manage to create a domestic consumer society, both they and other countries can’t cut themselves lose from the US consumer.  What they will do, and what they are doing, is trying to manage how much the US borrows and to take away the US ability control the world’s money supply.  They will still have to keep the US propped up for the time being, because in so doing they are propping up themselves.  And remember always that Chinese citizens aren’t like Americans.  Take their jobs or their land or their hope and they get violent—very violent.  They have, do and will fight both the police and the military.  China’s elites know that if they don’t keep economic growth coming, their heads could literally wind up rolling.

In addition, while no one is happy with the US security product, the fact is that no one can really replace it.  The European military is not strong enough, and their navy does not have the projection ability.  Likewise with the Chinese military, who in any  aren’t trusted half as much as the Europeans, though their moral flexibility is appreciated by many regimes, who still understand you don’t invite China to station large number of troops in your country if you have half a brain.

Likewise, there is simply no replacement for the US as a haven of last resort.  China’s currency and investment controls make it unsuitable.  Europe managed its financial affairs no better than the US over the last decade, although they seem to have learned the regulatory lessons marginally better than the US.  If you need a place to store your money, and put it to work, the US may not look good, but neither does anyone else who is large enough to absorb large amounts of money.

The key break point, the end of the dollar hegemony, will come when the Chinese are able to move to a consumer economy.  At that point, the Chinese will no longer need America as consumers, and they will let the Yuan float.  The devastation this will wreck on the US economy is hard to overstate.  Standards of living will crash.  In the long run, being forced to live within its means, and no longer having to compete against massively subsidized foreign goods may turn out to be good for the US, but that won’t make you feel better as your effective income collapses or you lose your job.

This is probably two economic cycles out.  We’re talking 12 to 16 years.  So there’s time yet.  Probably.

So what does oil not being priced in dollars mean to me now?

Less money for everything.  The US will not be able to afford as large a stimulus as it should have.  It will mean borrowing costs higher than they would otherwise have been and more restricted credit (sure, theoretical interest rates may be low, but can you get a loan at those rates?)  Oil prices, and gas prices will be more volatile for the US than they were before, which is saying something.

And other countries will get more oil, relatively speaking.  Which means they will get more growth.   They will receive more investment from the oilarchies, and the US will receive less.   Relatively speaking the US economy will not be as good as it was.  This is a marginal effect, but marginal effects add up.

This is, in short, not good news.  You won’t be able to say “I lost my job because oil isn’t priced in dollars” but it will be true for some people.  Lower wages, more restricted credit, and more restricted government policy will be the price paid for the massive incompetence which lead to this moment.

And yet this does have a silver lining.  Both for other countries who deserve to be able to pay in their own currencies and for America and Americans, who need to learn to live within their means, to emphasize production again rather than consumption and who need to wean off of oil as much as possible in any case.

But it will hurt.

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(Via: priceofoil)

After reading this post we had a real bad feeling about it. I am just praying that this doesn’t happen. And ya don’t for get to take the poll once you finish reading this post.

The dollar is sliding on the currency markets this morning after reports by the Independent newspaper that Arab states are in secret talks with China, Russia and France to stop using the US currency for oil trading.

The move – if it happens – would be the most profound financial change in recent Middle East history, argues the paper. It would send shock-waves through the international oil market, and change the geo-political landscape. The story, written by the highly respected Robert Fisk, has already led to a rush of denials that this is about to happen.

According to Fisk, “the Gulf states are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.”

Apparently secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil.

Fisk argues that the move could be the precursor to a “future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy.” It also signifies a shift in global supremacy from the US towards China.

One country has already made the change, Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars.

But Reuters has just reported that the United Arab Emirates central bank has come out denying the reports “They are going to stay with the dollar. For so long oil pricing is in dollars and it would be difficult for producing countries to change.”

But such is the way, the very fact that talks are ongoing about maybe dumping the dollar, means that the dollar is now falling.  “The very fact that such an idea is being entertained is undermining the dollar,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets  in Hong Kong.

But some analysts believe that the dollar’s long-term future as the currency for oil trading is in serious trouble and will be replaced over the next few years.

“China, Russia and many Middle East countries already have large dollar reserves. They want to stop them getting higher, and may even want to start diversifying them into other currencies,” says David Hart, oil and gas analyst at investment bank Hanson Westhouse.

Disclaimer: This Poll is not to hurt anyone’s feeling or is it for any political reason. This is just to see what our readers feel. Please feel free to give your opinion. Please leave a comment if you want this removed.

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The price of a barrel of oil has hit 74.36 USD which is the highest since October 15 2008.

The weakening of the dollar has also led to the higher run up of crude oil prices. As oil barrels around the world trade in dollars, the weakening dollar implies that oil prices are cheaper for traders having stronger currencies.

The main reason for price fluctuation in the commodity market is speculation. In present day world speculators purchase nearly 66% of oil future contracts that has led to huge fluctuations based on gut feel of investors. These speculators purchase huge amounts of oil and this commodity exchanges hands a number of times before it is delivered.

The cause of high price of oil is the presence of positive expectation in the mind of speculators. When the future prices of a particular commodity is higher than the current price than the owners tend to hoard a particular commodity thus bringing down the supply which pushes the demand thus increasing the current prices.

But analysts predict that it will be difficult for a barrel of oil to maintain the current highs. The major reason for this is the fact that the dollar is slowly but surely recovering from the lows it hit a year ago. There are already signs of the economy recovering from the recession which is reflected in the quarter results that have announced by Multinational companies. Also the manufacturing output across the globe is improving and hence there is every chance that the price of a barrel of oil may come down in the near future.

Related Links

http://en.oboulo.com/disparity-between-the-dollar-and-the-euro-61332.html

http://www.forexyard.com/en/market-analysis/commodity/crude_oil_hits_10-month_high__then_tumbles-2009-08-10

http://timesofindia.indiatimes.com/Oil-price-hits-10-month-high/articleshow/4858156.cms

Further increases in petrol prices are predicted as Australia’s unleaded benchmark price scaled a 10-month high of almost $100 a barrel in the past week.  

While the continued signs of a recovery in the global economy had been great news for share market investors, the same could not be said for motorists, Commonwealth Securities economist Savanth Sebastian said.

The Australian Institute of Petroleum’s weekly report showed the unleaded petrol prices rose by an average 1.9 cents per litre in the past week to 124.5 cents.

The average metropolitan price rose by 2.6 cents a litre to 124.2 cents, while the regional average price rose by 0.7 cents to 125.1 cents.

“The glut of oil inventory on global markets is not putting downward pressure on prices,” Mr Sebastian said, adding traders and investors were focussed on the recovery story.

Even a strong Australian dollar has not been able to significantly absorb the rally in oil prices.

This resulted in the benchmark for Australian unleaded petrol – the Singapore gasoline price – rising to a 10-month high of $99.70 from $97.33 in the past week.

“If there is any consolation for motorists, it is that the rise in pump prices is likely to be rather sedate,” Mr Sebastian said.

“The petrol price will rise over the next fortnight, but only modestly, up around three to five cents a litre.”

Source  :  www.thewest.com.au

A think piece for PE’s July issue, warning oil producers that greed for higher oil prices now will just hasten the sector’s decline in the long run.

High oil prices now will not help producers in the long run, says Derek Brower

THE COMMODITIES price shock was one of the forces that brought the world’s economy to its knees. Now, a new oil-price rally threatens to kill hopes of a recovery. That is one problem.

Rising energy prices in recent years changed the dynamics of demand, prompting consumers in the US and elsewhere to think about conservation, alternative energy supplies and ways to break the link between cheap oil and economic growth. The oil-price crash of 2008 robbed this movement of its urgency. That is another problem.

There are now, in short, two contradictory impulses in the world’s economy and politics where energy is concerned. Consumers want cheap energy – and especially cheap oil, which helps to set the prices of all other commodities. But the same consumers want to use less oil.

Then there is another worry: the possibility that cheap energy now will just postpone another price shock later. This theory, supported by producers such as those in Opec, says that if they do not receive enough for their oil now, they have no incentive to produce more; so, when demand picks up again, there will not be enough production capacity to keep adequate supply flowing, prompting another price spike.

This argument is easy to dismiss, using the following counter arguments. First, if producers really believe a price spike is on its way, they would want to make sure they had supply available to take advantage of it. Either they believe oil prices will rise or they do not. Second, the oil-price collapse shows that consumers are back in the driving seat. They can make sure producers know that holding the world to ransom – by saying the wells will not be drilled unless the world coughs up more money – is unacceptable, especially after the producer countries spent the last five years accumulating wealth while the consumers emptied their wallets in gasoline-station forecourts.

• The doubling of the oil price from early March to August 2009 returned attention to the role of non-commercial traders and non-traditional commercial traders (who hedge purely financial risk) in commodity markets. U.S. regulators have been closing loopholes and making other changes to spot and futures commodity markets. The Federal Trade Commission (FTC) announced plans to levy fines on market manipulators in the oil markets and the Commodity Futures Trading Commission (CFTC), the primary regulator of futures markets seems likely to add position limits, a restriction on the size of the net long or short position held by non-commercial traders. There is an ongoing debate as to whether speculation distorts commodity prices and whether regulation will hurt more than help price discovery.

• Regulators are looking to redefine the blurred line between commercial traders and non-commercial traders. Some commercial traders hedge purely financial risk and may be more appropriately classified as non-commercial traders. Unlike commercial traders, non-commercial traders are subject to position limits.

$100 per barrel: the line was finally crossed on January 2nd 2008. What does this imply for profits of oil producing nations? In order to run some numbers we have to consider a key measure called the break-even price which is the amount of money it takes to extract 1 barrel of oil.

The break-even price is the first thing oil companies establish in order to determine if drilling a new well makes financial sense. From the break even price, profitability can easily be determined with the following formula: Profitability = (Price of Oil - Break Even Price) / Break Even Price

The following table provided by the Bank of Kuwait gathers current reported break-even prices of major oil producing nations:

- Steve Austin, OILPRICE.NET dated2008/01/05

Oil Dashboard

July, Wednesday 29 2009 – 00:02:19

Crude Oil $66.67 ▼0.56 0.83% 0:02 AM EDT – 2009.07.29

Crude Oil Price by OIL-PRICE.NET ©

Price Change Trades Volume 00:02 – $ 66.67 0.56 0.83% 1,452 3,089 Range Open 52 Wk Range 1 Year Forecast 66.61 – 67.01 66.78 32.41 – 147.27 $ 77 / Barrel

With worldwide demand for oil down, and, from what I read, an excess supply, why is Oil back up to $68/bbl (100% from the low hit on Dec-26-2008, or ~50% from the average price in Feb-2009)?  While I don’t know the complete answer to this puzzle, I have found a few major pieces.

For some time, the price for delivery of crude oil in the future has been significantly higher than the spot price.  Some companies are capable of buying crude oil, storing it in big storage tanks, and then go into the futures market and sell a contract for delivery for some month in the future.  Of course, they have to pay a charge for storage and insurance.  When you can make a decent profit doing this, we have a situation called “contango”.  So, instead of the current oil price falling due to a lack of demand, companies buy oil to store it.  Today, the price for delivery in 6 months is 10% higher than the spot price.  To make this really attractive, you have to use big-bucks and leverage, ie borrow money (which is also cheap in this no risk trade).

But there is only so much on-shore storage for oil, and I suspect it is controlled by various oil and refinery companies, and may not be easily accessible to big time speculators, eg an investment bank.

Late last year, worldwide trade plunged and with it, the demand for oil.  Consequently, the cost to rent an oil tanker also plunged (dropped by about 70% from August 2008 to April 2009).  So a bunch of clever folk realized that they could rent an oil tanker, fill it with oil (or heating oil, or gasoline, or jet fuel), park it for a few months, and sell a contract for future delivery.  By doing all this they could double their money in less than 1 year.

Interesting hypothesis?  Did anyone actually do this? Yes.  In this June 3^rd Bloomberg article (click on JPMorgan Hires Supertanker for Storage), JPMorgan hired a newly built supertanker for 9 months to store heating oil.  The capacity of this tanker is ~2 Million barrels.

Isolated instance?

According to this June 24^th Bloomberg article (Teekay’s Aframax Oil-Product Tankers Used for Storage),

Teekay Corp.’s nine Aframax-class oil-product tankers and three new Suezmax-class crude oil tankers are being used as floating storage, Chief Executive Officer Bjorn Moller said. “Product storage has begun to increase dramatically,” Moller said in an interview in New York yesterday. “All of our large product tankers are being used for storage right now.”

So how much crude oil is currently in tankers?  Here is one estimate (from June 4^th): 100 million barrels of crude oil on ships.

Tanker rentals are off their April/May lows, but still “cheap”.  We still have an excess of crude oil being shipped, and we still have “contango” in the oil-price.  So this trend could continue into the fall.

But this is not a stable situation.  It can be resolved by some combination of reduced supplies (eg OPEC cuts), increased demand (eg due to worldwide recovery), tanker rental price increase (eg we run out of tanker storage), the end of the contango price structure, or some combination of all of these.

What does this mean for oil prices?  I listened to an expert on a Bloomberg podast – Philip Verleger, economist and founder of PKVerleger LLC, a professor at the University of Calgary’s Haskayne School of Business and a former U.S. government adviser.  He previously predicted the run-up in the price of oil.  He now thinks that we could temporarily see a plunge in the price of oil to as low as $20/bbl.  Here is a link to the MP3 of the Podcast:  http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vHHE4QWaAwIs.mp3

Now, before you get excited about a “possible” collapse in the price of oil, you should realize that there are other puzzle pieces missing, and I don’t have those pieces.

Specifically, why do we have contango?  Who are the buyers of the future contracts for oil delivery?  And, why are they buying?  But more significantly, why aren’t the oil producers (eg the OPEC countries) selling contracts for future delivery, to protect themselves from an oil price plunge.  I can’t answer these questions to my own satisfaction.  But I do have a hypothesis.

My hypothesis.  I do think that the Oil Producers (eg OPEC) are in the market selling futures to hedge some portion of their production.  And, of course the companies that hold oil in storage (e.g. JPMorgan) are also sellers.  Some of the buyers are companies that choose to hedge their consumption of crude oil or its derivatives.  Airlines, Utilities, and Chemical companies are examples of these.  But that is not enough buyers.  I think the rest are “investors”, eg pension funds, commodity funds, ETFs, etc.  I suspect to keep contango going, the investment on the buy side must keep on increasing.  But eventually, the party will be over.

Although a collapse in the oil price will be good for many, there are always unintended consequences in bubbles bursting, i.e. collateral damage.

We live in interesting times.