Does another Great Depression mean oil will go to $500?
The world has gotten so strange that even as GDP growth tumbles around the world, OPEC is saying that oil prices could rise another 50% or so. In this tortured logic, we might then see $500 oil if we were to experience another Great Depression.
On the one hand the FT says that growth is going to be terrible in the US and Europe, and that governments have little flexibility in adding fiscal stimulus to stem the decline:
Europe’s outlook for economic growth and inflation deteriorated sharply on Monday as official forecasts showed the US downturn and the turmoil in world financial markets damping prospects. In its latest six-monthly forecast, the European Commission said economic growth in the 27-nation European Union would slow to 1.8 per cent in 2009…“The financial turmoil is proving deeper, wider and longer-lasting while the downturn in the US looks set to be more pronounced and protracted than assumed in the autumn forecast,” the Commission said…
The Commission’s forecasts suggest the slowdown is taking its toll on the budget balances of certain countries, notably France and the UK. France is forecast to have a budget deficit of 2.9 per cent of gross domestic product this year and 3 per cent in 2009 while the UK deficit is projected to be 3.3 per cent in both years.
Of course a recession correlates historically with a decline in oil demand and often a decline in oil prices. But not today. Today the laws of supply and demand are irrelevant, according to OPEC, as quoted in the same FT:
Opec’s president on Monday warned oil prices could hit $200 a barrel and there would be little the cartel could do to help. The comments made by Chakib Khelil, Algeria’s energy minister, came as oil prices hit a historic peak close to $120…
He told El Moudjahid, Algeria’s government newspaper: “I don’t think that an increase in production would help lower prices, because there is a balance between supply and demand and the stocks of gasoline in the United States have recorded a surplus and are at their highest level for five years.” He added: “The prices are high due to the recession in the United States and the economic crisis, which has touched several countries”…
This situation has entered cloud cuckoo land, as we and some industry veterans continue to say. Observing a mania from outside the bubble, this tulip bulb foolishness and NASDAQ 5000 moment on steroids, is perhaps good for the psyche, but it still hurts the pocketbook. This foolishness is likely to end very badly for the worthies who are betting on $10 a gallon gas — but when?
April 29th, 2008 at 8:19 pm
AP headline:
April 29th, 2008 at 8:25 pm
Sorry about the HTML error in the previously submitted comment. (A preview capability at Dinocrat would be appreciated.) Hopefully the following is correct:
AP headline:
That’s encouraging, but there’s a long way to go.
The IEA speaks:
Sole responsibility? ANWR? Offshore California and Florida? Shale, tar, coal? Nonfood biofuels? Hellooo…?
Sounds like the powers that be are treating this as business as usual. (Btw, apparently Ramsay has never held a private-sector job.)
I hope they know what needs to be done when it isn’t business as usual, and I hope they’ll do it.
April 30th, 2008 at 9:56 pm
During the “Great Depression”, no one gave away free money as quickly as the banks cared to “lend” it to deadbeats.
April 30th, 2008 at 11:52 pm
Back at the great oil crisis of 74-75 oil quintupled in a 12mth period. All talk was on recession/depression as OPEC had their way in a very destabilized uncertain world. Saigon collapsing, Yom Kippur war in Mid east and Soviets ready to pick up the Arab ball as they played footsie for better deals on arms and technology trade offs. Mass starvation in third world countries was around the corner. Saudi Arabia and others used their new found oil wealth to recreate the glory of Islam. The cycle is has come full circle. Or, what comes around goes around.