Oil and the dollar
Oil is once again quite strong. Last summers’ rally was driven in part by a rise the geopolitical risk premium. This summers’ rally seems a product of both strong global growth and relatively restrained supply growth. The latest IEA report certainly seemed to suggest that high oil prices are here to stay absent a lot more investment in either oil or renewables.
The dollar is once again quite weak. It is now very weak against almost all the G-10 currencies. Every day it seems that Bloomberg has a new headline indicating that some currency – the pound, the euro, the Australian dollar, the New Zealand dollar – has hit a multiyear high against the dollar. The yen is the obvious exception: According to Mitsubishi UFJ securities, the yen is now weaker in real terms than in was before the Plaza accord.
The dollar isn’t weak against most emerging economies – and it isn’t hard to figure out why. I smile when I read that the dollar floats. It is true that the US doesn’t intervene in the market. But that doesn’t mean the dollar floats – not when other central banks intervene like mad. Right now, the dollar floats v about half the world. That matters. A growing fraction of US trade is with those countries that do not let their currencies move (by much) against the dollar –
It certainly seems though that neither high oil prices nor the weak dollar are attracting as much attention the second time around. Back in 2004, the magazine cover indicator was screaming red – as all sorts of publications did big stories on dollar weakness. Not now. And it certainly seems like the risks stemming from high oil prices were a much bigger topic of discussion back in 2004 – and in the summer of 2006 – than they are now. Now there seems to be more talk about sub-prime, private equity and the Dow …
Tim Duy is right. The longer the US economy sort of absorbs various shocks – I say sort of because housing clearly has reduced the pace of US growth recently even if it hasn’t slowed the stock market – the less attention certain shocks get. Financial markets have come to expect that central banks will finance the US when private markets don’t want to – so they expect (correctly, at least so far) that dollar weakness won’t push up US rates, at least not by much. And if the US absorbed the last oil shock, why won’t it be able to absorb the current shock?
Still, there are some differences between the current strong oil/ weak dollar combination and the strong (tho not nearly as strong as now) oil/ weak dollar combination of late 2004 — or for that matter, the strong oil/ strong dollar combination of much of 2005.
For one thing, a lot more voices argue that it no longer makes sense for the oil-exporting economies to peg to the dollar. The Morgan Stanley currency team – or at least Serhan Cevik – notes: “pegged exchange rate regimes in the Middle East have led to even greater currency misalignments and therefore come under more pressure. We see no valid justification for delaying currency revaluation.”
For another, Europe was in the doldrums in 2004. Now it is doing reasonably well. That may not be an accident.
While oil has gone up by a factor of between 3 and 4 against the dollar since late 2001 (when brent traded at $19 a barrel/ 21 euros to the barrel), it has gone up by only a factor of between 2 and 3 against the euro or the pound. That helps. As does the fact that Europe’s economy is far more energy efficient than the US economy. I agree with Paul De Grauwe. The discussion of structural reform shouldn’t just focus on labor market rigidities; other kinds of rigidities matter too. The US capital structure – think of a dispersed housing far from mass transit/ many workplaces and an automobile fleet that is biased toward bigger, heavier and less fuel-efficient vehicles – makes it a bit harder for the US to adjust to an energy shock.
Then throw in the fact that Europe simply sells a lot more goods – and I mean a lot – to the oil exporters, and well the US might have a bit of a problem. Europe sells ten times more stuff than the US to Norway, Russia, Algeria and Libya. It only sells two times more stuff to Saudi Arabia and Kuwait – but even that number is overstated. Europe accounts for 34% of the UAE’s imports, and the US only accounts for 1.5% (2005 data) – and Dubai is a big transshipment hub for other parts of the Gulf. Some European exports to Dubai are re-exported, and there aren’t any US exports to Dubai to speak of.
At least the US does well in Venezuela, and OK in Nigeria.
The oil exporters almost certainly still buy more US financial assets than European financial assets. If you look at the net flow of oil from oil-exporting economies to oil-importing economies, the US and Europe both account for a bit less than 1/3 of net oil imports (the US uses more oil than Europe, but it also produces more oil) and Asia accounts for a bit over a third.
If you look at the net financial flow from oil exporting economies to oil-importing economies, the US certainly accounts for well over a third of the net flow, and Asia accounts for far less than a third. That incidentally is why there is huge potential pent-up demand for an Asian reserve currency that yields more than the yen …
Norway exports a lot more oil than most realize – and it saves most of the resulting oil revenues, so it has a huge financial surplus. And among the oil exporters, it probably puts the least into dollars – only about 1/3. Russia chalks in at about 50% (unless it has diversified some more).
The big Gulf investment funds are harder to track. ADIA likes emerging economies and Asia, and it is big. But at least in 2006, it also preferred US treasuries to bunds and JGBs. KIA likes European equities. DIC has more assets in Europe than it wants, but it is small, and mostly plays with borrowed money. Some of the big Gulf investment funds may be putting only 50% of their funds in dollars – and the Emirates, Qatar and Kuwait account for about ½ of the gulf’s current account surplus.
Saudi Arabia has the other half, and it doesn’t have an investment fund. The Saudis are super-secretive. I would guess that SAMA has a higher dollar share in its foreign assets than the big Gulf investment funds, though perhaps a bit less than the 90% dollar share of UAE’s central bank (there are hints that the UAE wants to go lower; in general, Gulf central banks generally hold more dollars than Gulf sovereign wealth funds).
Venezuela has reduced the dollar share of its reserves, but not by all that much – 80% of its reserves are in dollars. Or perhaps were in dollars – who knows what has happened since December. Some of the African oil exporters also have a lot of their reserves in dollars. I am thinking of say Nigeria, but countries like Algeria and Libya that sell almost all their oil to Europe still seem to hold a decent share of their reserves in dollars.
Put it all together, and well, the US still likely gets a substantial financial inflow from the oil exporters – or rather the US sells a lot of financial assets to Europeans managing dollars for the oil exporting economies. Lots of petro-savings are in dollars but not in the US – but they still support the dollar and allow European intermediaries to buy lots of US assets without taking the exchange rate risk.
But relative to say 2004 or even 2005, the oil exporters are spending and investing a lot more, which means that they are importing a lot more – and thus spending a lot more on European goods.
And relative to 2004 or 2005, I suspect that the oil exporters are putting a somewhat smaller share of their savings into dollars. Russia is the most obvious example – it lowered the dollar share of its reserves from around 70% to 50% or less. And some of the Gulf countries likely have been paring their exposure to the dollar as well –
Though if they are investing in Asia, well, they are just supporting Asian reserve growth, and letting Asian central banks take on the burden of financing the US. Someone is still buying. The Fed’s custodial holdings are up $20b or so in the first three weeks of July, and almost all the inflows are going to Treasuries, not Agencies. And today at least, the central banks seem to have had some company in the Treasury market …
Update: Richard Berner’s thoughts on this subject; he thinks OPEC — and specifically the Gulf — cuts supply to try to increase dollar prices to try to increase dollar revenues in the face of dollar weakness. And he also hints that diversification by oil-exporters may be contributing to dollar weakness. That sounds like a vicious circle. Maybe the Gulf should see what happens if they stopped pegging to the dollar instead.
49 Responses to “Oil and the dollar”
As last post was very hot, I’ll post again here, just in case:
Sorry you all, but there is too much “The sound and the Fury” in this excellent post by Brad.
It seems to be funny (though it should be very sad) that citizens from the the most polluting country in planet earth are complaining of pollution L.A. making guilty the people in China.
I never thought that USamerican miss-information could reach so far. I supposed that people in this blog were quite sensitive to energy and pollution problems.
A month ago I put a comment about coal-burning in China (the only reason explaining why the oil barrel is lower than one hundred bucks today).
You, US people deceive the rest of the world quite often (it doesn’t matter asians, europeans, south-americans or japanese; let’s Africa appart) because you think that the US media say and explain what’s happening in the world and you beleive it.
It’s amazing that in the only one world made by Internet with all the tools it gives us, along with all serious people like Brad showing and teaching us their best, some people could be so blind about the worldwide reality.
I’ve been very surprised even by LC (I generally appreciate your comments!) accusing of an inflammatory post to DC for his defense on air pollution in L.A.
Let’s take a bit of common sense, the most needed commodity of our brains now a days, and have a good discussion, without policemen and bashing out anyone, and arguing with a bit of information.
I understand that the lack of control of USA about energy consumption and monetary police, makes you nervous, but DC and Asian Man write their opinions as anybody else.
The consequences of an Armageddon would be very bad for everybody, and eventually, everybody will take his blame!
Some info about CO2 emissions (not in LA):
About Chinese coal production:
It would be good that USA would reduce his energy demand and incease savings. Don’t blame to China for all your sins. Take some of the blame, please!
I think an implicit theme of this post is that the United States high energy intensity is a structural problem, and one the US can and should fix on its own. another is the weak dollar. and another is how high oil prices — and the resulting increase in oil spending and oil savings — is impacting the dollar.
thoughts on those themes would be more welcome than a continuation of the discussion about LA air pollution here — if that discussion hasn’t run its course, it can continue on the previous post. thanks.
Nice to read that you smile when you read that the dollar floats!
And nice see that you write about oil and that the US does well in Venezuela ¿Who would say that in USA media?
As I’m not an economist, I let someone else (peter Schiff) talking about the dollar:
“During his testimony before Congress this week, Ben Bernanke didn’t hesitate to opine on a number of topics that had very little to do with his mandate as Fed Chairman. The wealth gap, racial factors in income inequality, and the impact of capital gains tax policy were all fair game. But when queried about the one issue where his impact is unrivaled, the value of the U.S. dollar, the Chairman quickly passed the buck to the Secretary of the Treasury. Conveniently, the Secretary was nowhere in sight.
This should come as a surprise to no one, but the Fed sets monetary policy in the United States. The last time I checked, money in the United States is the dollar. Therefore monetary policy is in fact dollar policy. The supply of dollars is regulated by the Federal Reserve, with ostensibly no interference by the Federal government. The Fed also independently sets short-term interest rates, which are a huge factor in determining the dollar’s value. In other words, the Fed controls both the supply of and yield on dollars. Bernanke claims to be worried about inflation, yet will say nothing about the value of the dollar. Prices rise as a result of the dollar losing value. How then can he ignore the persistent weakness in the dollar and refuse to comment on its effects on domestic inflation?
Why defer to the Secretary of the Treasury? Other than signing the bills, what does he have to do with monetary policy? As a member of the Cabinet, the Secretary’s job is to advise the President on economic matters, manage the finances of the United States, help plan the budget and oversee appropriations. He has no control over either money supply or interest rates. That power was delegated to the Fed in 1913. Potentially, the Treasury Secretary could authorize using our meager foreign exchange reserves to buy dollars, but given our limited bank account of foreign currency, such intervention would be more embarrassing than effective. There is literally nothing the Secretary can do except repeat the useless mantra “A strong dollar is in our national interest.”
Another interesting exchange occurred when a Congressman asked Bernanke what he would tell his Chinese counterpart in order to help convince the Chinese government that an appreciated yuan was in China’s interest. First, Bernanke noted that a free-floating yuan would enable China to pursue an independent monetary policy. Unburdened by the need to print yuan to buy U.S. dollars, China could end the domestic inflation which is now causing Chinese consumer prices to rise and which has caused the formation of asset bubbles. The Chairman neglected to mention that if this were to occur, China’s retreat from the U.S. Treasury bond market would send interest rates in this country significantly higher.
Second, Bernanke correctly stated that a higher yuan would create additional purchasing power in China, resulting in a higher percentage of China’s resources being devoted toward satisfying domestic rather than foreign demand. The Chairman neglected to mention however, that such a re-allocation would result in fewer exports to the United States and higher prices for American consumers.
So if China actually adopted Bernanke’s suggestions, the result in America would be that both consumer prices and interest rates would rise. For someone who claims to be worried that inflation will fail to moderate or that the subprime problems might spread to the overall housing market and the economy, it seems odd that Bernanke would encourage China to take steps that significantly raise the likelihood that both scenarios occur simultaneously. ”
Going back to oil, let’s go to it:
“As I posted here a month ago:
Production (mboe/d) ExxonMobil Shell BP Chevron Total ConocoPhillips
Q1 2006 4.56 3.75 4.04 2.64 2.44 2.09 Q1 2007 4.44 3.51 3.91 2.64 2.43 2.01
That table tells us that none of the big oil companies has been able to increase its oil production over the past year – in fact, most have seen a decline in their production.
Big Oil is unable to increase its oil&gas production. And this, after almost 8 years of almost non stop oil price increases.
What’s going on? Aren’t markets working? A price increase, especially such a longlasting and massive one, should be a signal to producers to produce more, and to consumers to consume less. As we know, consumers are burning more oil thanks to record economic growth in China and elsewhere, and demand appears to not be very sensitive to prices in both emerging economies and oil producing countries as the good times roll. Despite flatter consumption growth in the developed world, demand is going up overall, and drives prices up.
But supply should then have delivered. And indeed it has, as spare production capacity around the world has been put in service. But new capacity, in particular that developed by the oil majors, should have followed. And yet we see from the above numbers that it hasn’t. Again, BigOil has been unable to increase production in the past 5 years.
One thing is obvious – it’s not for lack of money. The companies are enjoying record income and profits, thanks precisely to those high oil prices. It’s just that this money has been used to a much larger extent to buy back shares (effectively handing the money back to shareholders) than to invest in oil&gas production.
BigOil is effectively telling the market that it thinks its shareholders can use their money more profitably in other sectors of the economy.
Despite the significant increases in their costs (everything has gone up: raw materials, rigs, qualified personnel, as well as tax rates in oil producing countries), the profits from those assets they have put in production are high enough to suggest that oil companies would invest if they could.
Thus it means that they can’t. Quite simply, they no longer have access to new reserves.
This was data from Jerome A Paris (TOD).
Conclusion: BigOil lost his power and OPEC and the main producer countries decide the price. So, petrol won’t be anymore cheaper than bottled water, and we’ll learn to use it like we use the good wine!”
You probably read from James Hamilton this info:
I expect you’re right about Saudi Arabia’s dollar holdings: John Perkins (Economic Hit Man) described how the US Treasury serves as the bank for the kingdom’s petrodollars and even writes the checks to American contractors working in the kingdom.
With the Dow industrial average and oil prices both testing record highs, can we expect the Dow to hit 15,000 when oil hits $100? My gut (and history) tell me there is something wrong with this picture…
Koteli states: “Again, BigOil has been unable to increase production in the past 5 years.” Koteli, consider the possibility that the US occupation in Iraq, a country with the world’s third largest oil reserves, may be more than a coincidence to the lack of a world oil supply increase. On the other hand, I see little possibility that the US, a country with between 5% and 6% of the world’s population, can continue to use approximately 26% of the world’s oil in the face of increasing emerging market industrialization.
The US dollar, however, seems to be controlled more by the creation of credit than by the printing press. Therefore, a credit contraction could cause a deflating of assets in the US regardless of which currency oil producers wish to receive for their oil.
I would welcome an increase in the fuel tax and a carbon tax (and an increase in the EIC or some other tax credit to offset the impact on low income workers). The latest New Yorker has a rather interesting piece on our current situation and the Prisoner’s Dilemma.
bsetser said: “I think an implicit theme of this post is that the United States high energy intensity is a structural problem, and one the US can and should fix on its own.”
I am not sure I completely agree, I would at least rephrase this. There isn’t necessarily high energy intensity of the productive US economy. In fact, according to various studies, most of US business use less oil to produce one unit of a product than many other countries. So maybe there isn’t much to restructure there.
The real problem is the energy intensity of consumption. People in US consume way too much energy for everyday things. For one thing, they consume too much of everything, and we know everything takes energy. I don’t think there is an easy way to fix it. It’s not like GW Bush can address the population on TV and ask them to drive less, eat less, buy a condo and get out of the suburbs. Since consumers have money, they will spend it however they please, and they chose to spend it on homes 20 miles away from their offices… homes that are also too big and kept too warm (or too cold if you are in Florida). This problem cannot be fixed quickly, and it cannot be fixed painlessly. It is kind of late for that, and no politician would kill his career over something that supply/demand is going to fix in a few years anyway. I guess the recipe now is as follows: let the oil hit its peak (should be about now?), let the price climb to 200-300$ and once there, let the market do the fixing…
BTW – if you make a car about half the size of WV Beetle, put a hybrid engine inside and don’t drive over 45 MPH, you can easily achieve 300MPG and more – with an option of going purely electric. If those get made and prove popular, they may save suburban lifestyle.
I suspect the US Saudi economic relationship has changed since the 70s, and the US treasury doesn’t quite have the same role helping the Saudis now that it had then (and that is a huge understatement). David Mulford incidentally got his start managing Saudi money — but as a private banker in 70s, well before he started at the treasury.
To black swan:
The IEA report, Brad references, explicity talks about Iraq: “Without Iraq oil we hit a wall before 2015”, if I my memory still works.
Anyway, we are talking again about very old things for lack of memory or knowledge of history. An example:
“Back in 1929, Lawrence of Arabia wrote the entry for “Guerrilla” in the 14th edition of the Encyclopaedia Britannica. It is a chilling read—and here I thank one of my favourite readers, Peter Metcalfe of Stevenage, for sending me TE’s remarkable article—because it contains so ghastly a message to the American armies in Iraq.
Writing of the Arab resistance to Turkish occupation in the 1914-18 war, he asks of the insurgents (in Iraq and elsewhere): “… suppose they were an influence, a thing invulnerable, intangible, without front or back, drifting about like a gas? Armies were like plants, immobile as a whole, firm-rooted, nourished through long stems to the head. The Arabs might be a vapour…”
How typical of Lawrence to use the horror of gas warfare as a metaphor for insurgency. To control the land they occupied, he continued, the Turks “would have need of a fortified post every four square miles, and a post could not be less than 20 men. The Turks would need 600,000 men to meet the combined ill wills of all the local Arab people. They had 100,000 men available.”
Now who does that remind you of? The “fortified post every four square miles” is the ghostly future echo of George W Bush’s absurd “surge”. The Americans need 600,000 men to meet the combined ill will of the Iraqi people, and they have only 150,000 available. Donald Rumsfeld, the architect of “war lite,” is responsible for that. Yet still these rascals get away with it.”
So, don’t gamble too hard on Iraq’s oil. It won’t be for the USA alone. Even if USA military power could control it, they won’t be able to make the investiments to use it as last resource, in time. The countdown is working hard. And the Saudies spend lots of dollars in the USA, but they don’t want to produce cheap oil anymore.
We all will learn to live with less oil and energy.
Asia is starting to like “the american way of life”.
Let’s see who’s “american way of life is not negotiable”.
Maybe, the emperor has no clothes.
Using someone else’s PS:
The U.S., in Iraq, is in the classic Tai Chi posture: “Tiger grasping its own testicles and applying pressure firmly.”
eloquently stated, unfortunately, barring a miracle, we have 18 months left of “The Madness of King George”.
“I guess the recipe now is as follows: let the oil hit its peak (should be about now?), let the price climb to 200-300$ and once there, let the market do the fixing…”
The market and the armed forces of the United States.
People and groups of people often fight over important scarce resources. Nice sounding justifications are easy to make up to hide the fact that one is simply using violence to get what another possesses.
I hope it’s just the market that does the fixing but this way will cause much domestic suffering and a real change in the way Americans live their lives. And note that when the wise man said, “The American way of life is non-negotiable” he meant it not as a statement of American endurance but as a threat against others.
I think that there is a clear connection between the dollar’s strength and the oil price. If the dollar is weaker, then the oil revenue is worth less for the oil exporters, so naturally, the oil price goes up. Appreciating oil exporters currencies against the USD would not help, because what matters is the USD/EUR rate. As the oil exporters sell the oil for dollar and buy goods for euro as Brad said, the ryal/USD and similar rates does not have much effect on the dollar/oil connection.
If someone has got the time series of the oil price and the dollar rate relative to the euro (or to a basket of currencies) and could calculate the correlation between the two, that would be interesting.
Ac, ask…and you shall receive. Point 2 in the post below shows the correlation of the $ REER and oil going back 20 some odd years. Over the long run, the correlation is less than one might think.
One point touched on tangentially but not explicitly mentioned is that the price of a barrel of crude represents much more of the pump price of petrol in the US than it does in other large and/or industrialized countries. As such, comparing the the rise in the euro or sterling price of petrol with the equivalant rise in the dollar price of gasoline offers an even starker contrast: if memory serves, prices in the UK have only really doubled this decade (and that’s with the tax component rising every year), whereas in the US they’ve quadrupled.
What’s different about the current oil demand shock from previous demand shocks is that the source of demand is not American. In other words, a US recession or slowdown previously might reasonably have been expected to substantially decrease the demand for oil, and thus its price. Not so this time, what with the BRICS.
Ultimately, this might be a catalyst for real change in the US, spurring the sort of drive for energy efficiency that Japan underwent a few decades ago.
In the meantime, the effective tax hike of higher oil prices should encourage less consumption of non-oil goods , a trend which is indeed unfolding as we speak.
I wanna subscribe this news
World Crude Oil Production (Including Lease Condensate), Most Recent Annual Estimates, 1980-2006
“…“Carbon will be the world’s biggest commodity market, and it could become the world’s biggest market over all”… “…with volumes comparable to credit derivatives inside of a decade,” …The emergence of carbon finance in London — not only trading carbon allowances but investments in projects that help generate additional credits — is largely the result of…” http://www.nytimes.com/2007/07/06/business/worldbusiness/06carbon.html?ref=business
re: “The US capital structure – think of a dispersed housing far from mass transit/ many workplaces and an automobile fleet that is biased toward bigger, heavier and less fuel-efficient vehicles – makes it a bit harder for the US to adjust to an energy shock.”
much more dispersed in many other countries and – for those who can afford to escape low income urban life – will become more so as urban real estate prices sky-rocket and working wages don’t keep up. Much of the choice to live outside the city is driven by necessity. The cost of providing that mass transit translates through to tax base and higher cost of the dwelling – no? Whether more flexible, knowledge based industries, e-workers and home-based entrepreneurs (who probably aren’t reflected in the data all that well – and many of those big homes and cars have dual commercial/ personal use of some sort) are better able to adjust to commodity price and other shocks in the U.S. – as long as some competition remains in the supplier base. Whether or not the majority of those less-fuel efficient vehicles are leased, if energy prices go through the roof, watch how quickly, and how many are replaced by more energy-efficient models and more virtual networking.
On the other hand, China’s growing resource dependency will draw it further into international wars (whether or not accurate reports on the numbers of executions and consequences of riots in China might reveal a civil war of sorts, at least in some regions)…
“… Chinese companies have also been attacked in Sudan. Their response has sometimes been to send in their own armed men to reinforce protection by the host regime. A foreign expert on Sino-African relations said it was likely they would react similarly to yesterday’s massacre in Ethiopia. “The Chinese are like the west was 100 years ago. They come in, make deals with the local bosses and then bring the guns…” http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=59997&nav02=57273&nav01=57272
…and prisoner’s dilemmas – no? Presume energy costs and FX also have to be a factor in the following if anyone is qualified to comment: “…Chinese smelters are losing about 5,000 yuan for every ton processed, according to Liu Guohua, an official in charge of concentrate imports at Yunnan Copper Group Co… The profitability of smelting in China has fallen because concentrate is in short supply and competition for the raw material has increased… “Chinese producers often don’t keep promises of cuts as they don’t believe their rivals will cut production…” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0HWMlxp_evs
Macro Man — Thanks a lot! I thought the dollar-oil anticorrelation was present at least in the past few years. But the link you give clearly shows that it is not the case.
According to Texas Oil man, T Boone Pickens, who has previously been very accurate with his predictions, the spot price of oil will reach $80 per barrel within 6 months. Chinese oil consumption is increasing at a 12 pecent annual rate along with a booming economy. In order to compensate for the weak US dollar, the OPEC oil producers led by Saudi Arabia are keeping a tight rein on high energy prices by restricting supply. Japan and other Asian import nations received a 1 million barrel per day cut in quota recently by Saudi Arabia.
On a separate note, from a fairly reliable source, Kuwait Royal family is getting fed up with the ongoing fiasco across the border in Iraq, and is informally telling the U.S. that they won’t support a military attack on Iran. The Kuwait government now wants US troops out of their country. Despite decades of close cooperation with the US, what the Gulf Arab states increasingly want is political stability, in order for them to build their financial and economic empires around the world. US foreign policy around the world is very much behind the times.
if anyone is qualified to comment
Can you tell me the value of dollar if nations around the
world traded their oil not for dollars.
or agricultural commodities
“…the rising cost of oil, which affects everyone, including farmers and food companies, shops and supermarkets. A second is increasing demand for western foodstuffs from developing countries like China… George Munns farms 200 hectares… In two weeks time he’ll start harvesting his winter wheat… He’s already sold it for £112 a tonne, a huge increase on the £70 a tonne he got last year. For the first time in several years he’ll be making a profit on the crop, because it costs him around £72 a tonne to produce… China needs to import more cereals to feed its mushrooming population of pigs and poultry. The third reason is biofuels… British Sugar, are currently building an extension to turn surplus sugar beet into 70 million litres a year of ethanol… but biofuels are already big business in the [U.S.]… as a greener and more sustainable alternative to traditional petrol… The [IMF] say there’s no question that demand for biofuels is driving up food prices… But the NFU… says farm-gate prices have lagged behind rising production costs and the cost of living for far too long…” http://news.bbc.co.uk/2/hi/uk_news/6909469.stm
1. I don’t know what “US economy sort of aborbs various shocks” means, but 2 to 2.5% GDP growth forecast by the fed for the next 18 months sure sounds weak. The retail sales for June haven’t looked bright either.
2. The stock market has decoupled from US growth story. If you look at earnings for companies that reported last week, all had strong sales and proft growth outside of US. So it’s conceivable that Dow will hit >14000 and oil price will continue to rise.
3. With oil at $75 and climbing, I think the rest of the world has already factored in a messy Iraq and a quick US withdrawal. It makes all that debate in Washington pointless and moot. It’s time to move on.
Thanks for the plug Brad …
Indeed, there are sometimes nice hidden memes in the ECB monthly bulletins stuck in between all those data points.
It is of course interesting to have some raw data which shows how at least some of the petrodollar recycling is used to fuel European exports. It seems then that the petroexporters are doing something (if only a small bit) to keep the global boat flowing.
As for the weak Dollar I think that there are two main drivers. Firstly, there MIGHT be some underlying structural diversification process going on c.f. Stephen Jen’s recent notes about how US money managers are investing more on in foreign assets on the margin as well as BWII might be loosening up. However, at this point it is also driven a lot by interest differentials I think which is to say that the tide may very well turn at some point. Clearly, if the Fed went out and actually eased it would be very interesting to see how markets reacted.
Thanks LC for this comment and your last one in brad’s previous post.
Brad made an excellent post, as usual, beginning with oil and going quickly to economic analysis and, as always, to his obsession (we all have more than one, but one always wins over the others!) of dollar reserves and flows and so on.
As the readers are almost silent and I’m very interested in this subject, I want to invite everybody to read some links on the web related tightly or loosely with this post.
But as we are in the weekend, let’s suggest some readings.
The first one is a bit old, from last year, but quite provoking. A conference given by Dmitri Orlov titled “Closing the ‘Collapse Gap’: the USSR was better prepared for peak oil than the US”. I think is was given in a Boston theater. It explains ‘structural differences that could help to the structural reform brad’s talking about.
It’s a very funny, with dark humor, and very interesting to read. Here it is:
The second one (quite short but clearly written) goes to a Turkish energy analyst’s blogger, called Sohbet Karbuz, who works in Paris, explaining the last months oil and gas developments in central Asia, between Putin or Russia, USA/EU team, China, Turkey and Iran, among others. It goes about pipelines, energy security and politics. Quite useful info to know about contracts being made between nations and their play on the game.
The third is the full text of the press conference given by Putin in the G8 summit, answering to all journalist of western media, question after question, that was censored in the 99% of western media. It’s a long transcription, but worth reading. Most people will realize about the “comparative advantage” of Putin over Bush junior, as a leader of a country and politician, something unknown in USA. But also about the media play in western democratic countries and censorship. The only media publishing the whole thing in north america was The Globe and mail from Canada (there is a big gap between media in Canada and US), but they published it like question and answer (without explaining who was the answer, strange isn’t it?). So I give three links: the canadian newspaper, a very critical newspaper and the official Kremlin page (you know, compare and buy!).
I think that the above info is enough reading for a weekend screen session, but if some is still in the mood of reading hot energy geopolitics, a last link to an article that I don’t support in some areas, but gives quite a lot of info about the whole business around Middle East, War, Oil, Geopoiitics and Globalization, but its 143 footnotes are not mainstream, though useful. Just an example of a different media for free in this new era of globalization and internet:
Good weekend to you all,
PS: I’ve enjoyed a lot in Boston, Gloucester, NYC and San Francisco, even in Reno (where I have friends). I think that US is as diverse as EU, but speaking the same language with a different accent. Airport controls apart (after September 11th), I think that US people is very kind in general. Let’s correct what is wrong. Sorry this digression, Brad, it was a saturday night fever after working all day long in a hard project and a gin-tonic.
Energy intensity is pretty much a function of population density. Whether we are talking about public transportation or heat and electricity co-generation, consumption of services versus consumption of goods, almost everything energy efficent thrives in a city and is impractical in suburbia, and vice versa at least as far as cars are conserned. In most parts of Europe, a city centre is a desirable place to live, in most parts of USA it is not.
I read the “Collapse Gap”. I think the author missed the fact that much of the rest of the world depends on the US remaining somewhat solvent. I exepct to see some kind of international support and/or buying spree for US assets as our economy continues to falter. At the time of the Soviet Union’s collapse, I don’t remember there being much international interest in its assets. We didn’t have the same ‘world economy’ we have today. The Soviet Union was far more isolated from the rest of the world than the US is today. Although, our present administration is working very hard to isolate the US from the rest of the world.
re: “US money managers are investing more on in foreign assets”
might you mean in foreign assets which may be priced in currencies that remain undervalued relative to USD, the U.S. having already invested quite heavily in everything else…
“…[a] very large fraction of the Canadian economy… is controlled by American interests… Of note is that Canada’s largest companies by value, and largest employers, tend to be foreign owned in a way that is more typical of a developing nation than a G-8 member…” http://en.wikipedia.org/wiki/Foreign_ownership_of_companies_of_Canada
along with sizeable stakes in ‘Canadian’ firms, like Talisman and Potash Saskatchewan
“Potash is a crucial mineral-based fertilizer used around the world and in particular in Brazil… Sugar cane… demands about four times as much potash per hectare as wheat or soybeans… And with… ethanol leading the initial charge to reduce the amount of crude oil in gasoline, Potash Corp. is a direct beneficiary… bigger than better-known firms such as… Talisman Energy, the international oil and gas explorer. Potash’s gain in the past year, about 170 per cent, ranks second only to…” http://www.globeinvestor.com/servlet/story/GAM.20070721.RPOTASH21/GIStory/
and other critical customer/ supplier relationships.
“ConocoPhillips Co. is prepared to spend billions of dollars on pipelines and refinery upgrades to allow it to process oil sands crude throughout its refinery network stretching to the U.S. Gulf Coast… extension of the pipeline network into the Gulf Coast would open a vast new market for Canadian oil sands producers and help ensure that oil sands projects that have already been proposed could go ahead…” http://www.huliq.com/27824/conoco-to-invest-in-pipelines-and-refinery-upgrade
Don’t seem to be doing all that badly at home either, depending on what, exactly, the 2.5% (although even that still doesn’t sound like a ‘meltdown’ or a ‘shock’ to me) is measuring.
“…Indeed, the total loss of investor money in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund, and the loss of 91 per cent in its less-geared sister fund, have been good news for rival hedge funds, such as New York’s Paulson & Co, which bet against subprime…” http://www.ft.com/cms/s/882a911a-36f1-11dc-9f6d-0000779fd2ac.html
“…Ford is the most popular foreign brand at the Russian automobile market…” http://www.russia-ic.com/news/show/4322/
DETROIT, July 19 /PRNewswire-USNewswire/ — “At a luncheon in Detroit hosted by the Detroit Regional Partnership and sponsored by the Ford Motor Company, USRBC President Eugene Lawson called upon U.S. companies to begin considering Russia a “true commercial partner,” given the enormous opportunities the Russian market offers. Lawson and Russian Senator Mikhail Margelov, Chairman of the Federation Council’s International Affairs Committee, were in Detroit as part of a five-day tour across the United States to increase economic and political awareness about Russia… Michigan companies such as Ford, GM and DaimlerChrysler continue to increase market share in Russia… Michigan’s exports to Russia have seen striking increases in the past several years — from chemicals to manufacturing to processed foods. Overall, from 2001-2006, Michigan exports to Russia grew more than 1,000 percent, compared to growth of only 24 percent for its exports to the rest of the world.” http://www.earthtimes.org/articles/show/news_press_release,142762.shtml
April 04, 2007 – “American investment in Russia increased by nearly fifty percent last year…” http://moscow.usembassy.gov/bilateral/statement.php?record_id=91
“…Beijing’s ‘war on terror’ hides brutal crackdown on Muslims… Semed was 37, a Muslim and a political activist. He was not guilty of murder nor any act of violence… Three Chinese judges sentenced him to death for “attempting to split the motherland” and possession of firearms and explosives. He said he was tortured into a confession. Two men whose evidence was used against him were already dead, having been executed in 1999… ” http://www.timesonline.co.uk/tol/news/world/asia/china/article2116123.ece
“Since Oct. 9, 2002, when U.S. stocks bottomed after the technology bubble burst, [S&P's] 500 Index rallied 95% through May 9. Over the same period, the [MSCI] Europe Australasia Far East Index climbed 110% in local-currency terms. MSCI’s Germany Index rose 160%, its Spain Index 167%, its Sweden Index 239% and its Austria Index 321%. The MSCI Australia Index was up 118%… Yet to U.S.-based investors who measure their wins and losses in dollars… The EAFE Index posted a 163% rise, while Germany rallied 257%, Spain 267%, and Sweden 364%. MSCI’s Austria Index soared 478%, measured in dollars, and MSCI Australia climbed 229%. In 2006, U.S. open-end mutual funds that invest in U.S. equities pulled in a net $15 billion, while non-domestic funds reported net inflows of $142.9 billion…” http://www.bloomberg.com/apps/news?pid=20601039&sid=anOdcPj8i4kQ&refer=home
re: “At the time of the Soviet Union’s collapse, I don’t remember there being much international interest in its assets.”
read any part of cdi, or: http://www.cdi.org/russia/johnson/2006-62-24.cfm or the results of any other simple google search of the topic
Why does Norway export energy.I would suggest that longterm keeping it in the ground (storage) is a better and safer return.
I fail to see the significance of your citation. You might want to go back to google to find something more substantive.
The reason big oil is not increasing production is that they have been burned before when they spent billions into new facilities and lost huge amounts of money when the price of oil collapses.
Also big oil companies haven’t controlled prices since the 1970′s. Since 1970′s, the price of oil has been controlled mostly by Saudi Arabia.
China’s economy is going to be overwhelming coal based for the next century.
Hi black swan,
I think that an US collapse caused by lack of energy supplies, would be followed quickly by a global collapse and preceded by lots of poor countries starving, and we already have quite a lot of them.
Orlov’s article is to learn what happens, what helps and what hurts in a collapse situation.
The sad thing is that, instead of investing in renewable and green energy sources and preparing to lower our energy demand, we are still increasing the demand. And this time developing countries are increasing a lot their demand.
World population is growing, everybody wants to consume more, and resources are depleting, and eventually, we’ll reach the top of what planet earth wants to give us.
About a year ago, J. Stiglitz estimated the cost of Iraq war in about $2 trillions. This money should have been invested wisely. A missed opportunity…
Ethanol, this creature of high oil prices, the sinister idea of converting food into fuel, is another example of bad investment. But governments are giving subsidies from ordinary tax payers to corn producers, to make the gas cheaper, making the food more expensive. “Bread for today, starvation for tomorrow”. It’s another example of privatization of earnings and socialization of costs. You know who the decision makers are…
Economists are obsessed with economic growth (the first time I heard “negative growth”, I smiled), but more sooner than later we’ll brake hard or we’ll hit a wall.
Soviet Union collapsed because Saudi Arabia lowered the barrel of oil to $5. Let’s see what happens with the opposite move.
07-22 11:24:07 – if you choose to be blind, neither google or blogs can help you
koteli, ADM, big pharma, big oil and the military industrial complex rule America. For more on ethanol and bio-fuels, this is worth a listen: http://media.globalpublicmedia.com/RM/2007/06/FridleyBradford.060407.mp3
It’s interesting how little thought is given to Canada’s role in the US oil and USD questions. Canadian exports of oil are in the same league as Venezuela, for example, and while Venezuela’s production seems likely to fall in the medium term, Canadian oil sands production will increase substantially. Unlike other sources of oil, US trade with Canada is relatively balanced (Canada is still the #1 market for US exports). Also unlike many other oil sources, CAD trades freely against the USD, and has run from ~0.65/USD to ~0.95/USD in the past few years.
The run in CAD vs USD is beginning to cause internal imbalances within Canada, as the east finds US export markets increasingly unprofitable while otherwise appropriate monetary policy is constrained by price pressures induced in large part by oil related development in the west.
Another issue not on many American radars is the environmental impact of oil sands development, especially water.
Neither of these issues are likely to hit Fox news anytime soon, but both have significant potential for medium term influences on US energy markets.
Estragon — interesting point about how the Canadian dollar’s strength impacts different parts of the Canadian currency union differently. Having oil may mean not having autos, so to speak … it is hard for me to see a lot of new investment in car production in Canada at current exchange rates.
“…A massive shift to renewables in the coming decades could, he estimates, be achieved for say £250bn, roughly equivalent to what the US has spent on the Iraq war…” http://business.guardian.co.uk/story/0,,2132527,00.html
“…the Canadian dollar… has been pushed higher by speculation that both interest rates and oil prices will continue to move higher. Assuming the anticipated synchronized global moderation emerges in the second half of the year, and oil prices ease toward the $60 level, then the dollar could trade down toward the mid-80s…” http://www.edc.ca/english/docs/ereports/commentary/publications_13387.htm
“…The longer term outlook for the automotive industry is more positive as a number of significant investment announcements have been made. GM is moving ahead with its $3 billion Beacon project… Chrysler is spending $768 million… Ford has committed $1 billion….Toyota is spending nearly $1 billion… Honda will spend $154 million…” http://www.edc.ca/english/docs/Provoutlook_e.pdf
“Treasuries are getting an unexpected boost from pension funds controlling more than $14 trillion. Fund managers for companies including General Motors Corp… are shifting away from stocks to prepare for accounting changes… Bonds are gaining favor as funds seek to avoid wider swings in prices that may accompany equities as the new rules take effect… The surge in equities this month to record highs has wiped out the pension deficits of the companies… Now the funds can afford to match future obligations to employees with fixed- income securities…” http://www.bloomberg.com/apps/news?pid=20601109&sid=aCoF9B9h8rxs&refer=home
Federal Reserve Agenda to exploit US Dollar Hegemony to its maximum limits
Is the infernal pact the US made to borrow against the future about to wreck its currency?
Doomsday for the dollar may in fact not have arrived. But arrive it will as time runs out on the pact that the US made with the devil – enjoy yourself as much as you can, have your every wish granted for, the punishment will be in the future.
Midnight is at hand for the $800 billion a year US current account deficit which has been financing not just the US consumption binge and the Iraq war but the global asset price bubble which is affecting, to varying degrees, assets around the world and of every variety.
The US consumer is beginning to tire, particularly as the house price decline looks set to continue. But inflation in the US is probably more deeply entrenched than the Fed admits. The Fed will be between a rock and a hard place, reluctant to lower rates ever as the economy weakens. However, ultimately it will opt for inflation over unemployment. It will even encourage it by fostering a weak dollar.
“Everyone from Nobel Prize laureates to the world’s biggest bond investor says the Bush administration has reason to cheer the dollar’s slide to historic lows. The currency has lost 13.2 percent since January 2001… based on a Federal Reserve index that tracks the dollar against the currencies of 38 U.S. trading partners, including Germany, Japan and Canada. A weaker dollar is helping the economy and may bolster voters’ confidence in the Republican party as the U.S. heads into a presidential election year. Rather than causing foreigners to flee U.S. securities, the depreciating currency is making American goods less expensive abroad and helping offset the worst housing recession in 16 years. Exports reached an all-time high of $132 billion in May, the government said this month…” http://www.bloomberg.com/apps/news?pid=20601109&sid=ajoaH2NckNKQ&refer=home
“Natural Resources Minister Gary Lunn says he’ll press his American counterpart… to ensure speedy regulatory review of the major pipeline projects needed to carry growing volumes of oil sands crude to U.S. markets. Mr. Lunn will host U.S. Energy Secretary Samuel Bodman and Mexican Energy Secretary Georgina Kessel Martinez… this morning… the trilateral session will focus on measures to improve the working of the continental energy market… joint efforts to co-ordinate regulatory oversight, develop cleaner energy supplies and improve efficiency…” http://www.globeinvestor.com/servlet/story/RTGAM.20070723.r-lunn23/GIStory/
“When Bear Stearns Cos. [CEO] James E. “Jimmy” Cayne told the New York Times the failure of the firm’s hedge funds was a “body blow of massive proportion,” he may have been using a tactic honed in three decades of championship bridge. To win the card game, a player sometimes will misstate the number of tricks he can win to dupe opponents into underestimating his hand…” http://www.bloomberg.com/apps/news?pid=20601103&sid=aLfvGsmPqM.A&refer=news
Brad, regarding Canada’s troubles anyone living in a small (in the sense of being a price taker) open economy becomes acutely aware of how fluctuations in the price of commodities creates large internal imbalances. Here in Australia our manufacturing sector is currently dying due to our booming commodity exports to China driving up the value of our currency. OTOH our farmers and miners were really suffering a decade ago.
If you’re running an economy like that you need to pay lots of attention to smoothing consumption over the commodity cycle and to shifting capital and labour internally in a hurry.