Oil prices were up a bit today on news about some storm somewhere, but the fundamentals appear to have changed, at least for now. Marketwatch:

Oil prices also saw pressure after Friday’s news that OPEC production was running well above official quotas set for the cartel’s members, according to Meir. Petrologistics said OPEC will produce 32.95 million barrels a day in August, up 450,000 barrels from a revised 32.5 million barrels a day in July, according to a Reuters report.

“We could see further weakness gnaw at the markets over the next few weeks, as weaker demand aggravates the excess supply problem,” Meir told clients. He thinks it’s unlikely that OPEC will take action to roll back any of the excess supplies.

“OPEC production was running well above official quotas set for the cartel’s members.” That’s very interesting. We expect to see more cheating in the future, but we’ll just have to see if that happens.

With the Olympics a soon to be distant memory, all of a sudden we are seeing articles questioning China’s future. WSJ:

The precedents for China aren’t encouraging. Many developing countries in Latin America and the Middle East stagnated after periods of rapid growth. Economists sometimes call this the “middle-income trap” because so many countries have failed to achieve the consistent growth that would deliver higher prosperity.

China is at the crucial boundary, no longer poor but still far from rich. It ranks 100th in the world in terms of income per person, edging out Namibia but lagging behind Colombia. President Hu Jintao frequently calls this a “crucial period” for overhauls.

In the next few years, China will cross the threshold to a majority-urban society. Since urban workers earn more than three times as much as rural ones, the annual migration of more than 10 million farmers into cities has steadily boosted the economy. But the urban-rural balance will eventually stabilize. Then people will have to find other ways to raise their incomes, such as learning new skills.

In addition, a smaller number of workers will have to support an increasing number of elderly. The United Nations projects that China’s working-age population will account for a decreasing share of the total after 2010, and will start shrinking in absolute terms after 2015 — the long-delayed effect of the strict family-planning policies that came in the 1970s. The “demographic dividend” from a young and growing work force may have been responsible for a quarter of China’s growth to date…

Though some possess a fantasy vision of China, we think there is a significant probability over the next year that the real, but glossed over, problems of China’s economy begin to become obvious.

Francis Fukuyama said this in 1992: “What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” Now he says this, via WaPo:

Nazi Germany, the Soviet Union and Mao’s China were particularly dangerous because they were built on powerful ideas with potentially universal appeal, which is why we found Soviet arms and advisers showing up in places such as Nicaragua and Angola. But this sort of ideological tyrant no longer bestrides the world stage. Despite recent authoritarian advances, liberal democracy remains the strongest, most broadly appealing idea out there. Most autocrats, including Putin and Chávez, still feel that they have to conform to the outward rituals of democracy even as they gut its substance. Even China’s Hu Jintao felt compelled to talk about democracy in the run-up to Beijing’s Olympic Games. And Musharraf proved enough of a democrat to let himself be driven from office by the threat of impeachment.

If today’s autocrats are willing to bow to democracy, they are eager to grovel to capitalism. It’s hard to see how we can be entering a new cold war when China and Russia have both happily accepted the capitalist half of the partnership between capitalism and democracy. (Mao and Stalin, by contrast, pursued self-defeating, autarkic economic policies.) The Chinese Communist Party’s leadership recognizes that its legitimacy depends on continued breakneck growth. In Russia, the economic motivation for embracing capitalism is much more personal: Putin and much of the Russian elite have benefited enormously from their control of natural resources and other assets.

Democracy’s only real competitor in the realm of ideas today is radical Islamism. Indeed, one of the world’s most dangerous nation-states today is Iran, run by extremist Shiite mullahs. But as Peter Bergen pointed out in these pages last week, Sunni radicalism has been remarkably ineffective in actually taking control of a nation-state, due to its propensity to devour its own potential supporters. Some disenfranchised Muslims thrill to the rantings of Osama bin Laden or Iranian President Mahmoud Ahmadinejad, but the appeal of this kind of medieval Islamism is strictly limited.

In lieu of big ideas, Russia and China are driven by nationalism, which takes quite different forms in each country. Russia, unfortunately, has settled on a version of national identity that is incompatible with the freedom of the countries on its borders; I’m afraid that Georgia will not be the last former Soviet republic to suffer from Moscow’s sense of wounded pride. But today’s Russia is still very different from the former Soviet Union. Putin has been called a modern-day czar, which is far closer to the mark than misguided comparisons to Stalin or Hitler.

Question: what happens if, as is quite possible, China’s economy enters some sort of recession or Russia’s fortunes fade as oil prices tumble in the overdue correction to the world economy? What happens if capitalism loses its allure to these two regimes? What kind of “ideological” resurgence might emerge?

The Democratic Presidential candidate speaks about China:

Everybody’s watching what’s going on in Beijing right now with the Olympics. Think about the amount of money that China has spent on infrastructure. Their ports, their train systems, their airports are vastly the superior to us now…

“Their ports, their train systems, their airports are vastly the superior to us now” — huh? China’s infrastructure in many areas is primitive, not superior. Let’s take just one example: the US has 20,000 airports, with 5,000 for commercial use; China has 150 or so airports for civilian use. 150 civilian airports in a country of 1.3 billion people — that’s “vastly the superior”?

One measure of the state of a country’s infrastructure is environmental pollution. In this, China flunks some basic tests. China has serious deficiencies of safe drinking water, dangerously polluted rivers, and often poor quality control in its exports and industrial processes. We are great admirers of the strides that China has made in lifting its population out of the hardscrabble life that the Chinese people have endured, but that country has a long way to go. Hundreds of millions of rural Chinese still appear to live on less than $1000 a year.

It is interesting to note the left turn of mind that has Senator Obama praising China’s government spending in such grand terms. The logic of Senator Obama’s thinking would appear to be that China is now vastly superior to the US in infrastructure because it has embraced its version of the New Deal. This recalls to us Senator Clinton’s attributing American prosperity to the progressive movement. These are fantasies of the left that come from university life and never leave — particularly in those people who have never worked in the private sector in their lives. Senator Obama’s ignorant fantasy about the wonders of government spending in China not only provides an insight into how he might govern, but also suggests that he possibly has no clue about how the United States became the most prosperous nation on earth.

The NYT reports on actions taken, or not taken, by Russia (the AP had a similar story):

Although Russia claimed it had begun withdrawing its troops from Georgia on Monday, Russian soldiers were digging in positions along the highway approaching Tbilisi and showed no signs of pulling back from the severest confrontation between Russia and the West since the collapse of the Soviet Union. Instead, along one major road, four Russian tanks rattled a few miles closer to the capital, and then plowed through parked police cars blocking a road as Georgian police officers stood by in dismay. Elsewhere on the ground in Georgia, no significant troop movement was evident.

Meanwhile, the Secretary of State talked tough about Russia’s invasion and occupation of Georgia and its resumption of deploying nuclear bombers along the coast of Alaska. AP:

Russia is playing a “very dangerous game”…This “is a very dangerous game and perhaps one the Russians want to reconsider,” Rice said of the flights that began again with frequency about six months ago. “This is not something that is just cost-free. Nobody needs Russian strategic aviation along America’s coast.”…the French would be seeking “an explanation from the Russians for why the Russian president either won’t or can’t keep his word…”It didn’t take that long for the Russian forces to get in and it really shouldn’t take that long for them to get out…

“We have to deny Russian strategic objectives, which are clearly to undermine Georgia’s democracy, to use its military capability to damage and in some cases destroy Georgian infrastructure and to try and weaken the Georgian state,” she said. “We are determined to deny them their strategic objective”

If the “strategic objective” of Russia was merely to try to control oil supplies, and perhaps influence oil prices, its actions would be understandable, if not wise. Normally we would be inclined to think that Russia’s actions trump the mere talk of the West.

However, by the grossness of its actions, Putin’s Russia has revealed itself to be a hulking bully, coarse, undisciplined and untrustworthy — and it has done so in such a way that there can be no doubt about its nature. (Indeed, its propaganda is as crude as its actions.) China has benefited by the strategic ambiguity of its intentions; Russia no longer will get the benefit of any such doubts.

In his dealings with Russian leader Mikhail Gorbachev, Ronald Reagan often said “trust but verify.” That phrase seems today quaint and inapplicable to today’s Russia. It remains to be seen if Russia’s actions will work towards its benefit, or result in a meaningful and lasting backlash that will harm its long term interests. As has been pointed out, Russia’s degree of connectedness with the West is far greater today than it was in the time of the USSR. Having said that, Russia’s continuing bluster bodes ill for a happy outcome to current events.

The Times of London reports on another Russian invasion, this one of the Riviera instead of the Republic of Georgia. This house purchase for $750 million cost roughly 7x the previous record set a few years ago:

A mysterious Russian billionaire has trumped his big-spending rivals and broken a world record by splashing out €500 million (£392 million) on one of the most sumptuous villas on the French Riviera. The price of the Villa Leopolda, a Belle Époque mansion on the heights of Villefrance, has amazed estate agents but fuelled local worries that the invasion of Russian money on the Côte d’Azur is getting out of hand.

Since the early 1990s, Russian oligarchs, drawn by memories of the Riviera-mad old Russian aristocracy, have been piling into seaside properties at Cap Ferrat, Cap d’Antibes, Saint-Tropez and the other great playgrounds.

None, however, has come near the price with which the unnamed Russian clinched the Leopolda deal with Lily Safra, the widow of Edmond Safra, a Lebanese banker who was killed by an arsonist’s fire in Switzerland in 2003…The previous record for a house was said to be the £57 million that Lakshmi Mittal, the steel tycoon, paid for a property in Kensington Palace Gardens in 2004.

No doubt there are serious and diverse geopolitical reasons behind Russia’s invasion of Georgia, but this kind of outrageous market top in real estate prices paid by Russian kleptocrats and Putin allies suggests that money and oil alone could potentially be a sufficient explanation for Russia’s recent outrageous actions.

It was just a few months ago that we posted the chart above and similar ones on the parabolic increases in the price of oil. We had the feeling back then that things had gotten crazy and that prices were nearing a peak, but we were early. As one oil analyst noted, “Even if you are the only sane person in the asylum, there’s nothing you can do about” oil prices. But eventually things do change. Here’s that chart as of today, with the even steeper decline in natural gas prices in red.

If the free fall in natural gas prices is an indicator, oil prices should go much lower. We wonder what role, if any, control of oil or the oil price decline played in Russia’s timing of its Georgia invasion, since Gerogia’s strategic Baku-Tbilisi-Ceyhan pipeline is the sole “effective alternative to Russia’s pipeline network” and monopoly over supplies to certain parts of Europe.

And then there’s Iran’s OPEC governor trying as well to talk up the price of oil. We observe that there is a reasonable rationale for oil producers to be disciplined about restraining production when prices are going up every day; but when the prices start coming down, producers are incentivized to cheat and to produce more than they say they will, to squeeze out every bit of marginal revenue. We’ll just have to see if that happens this time.

Iran’s OPEC governor Mohammad Ali Khatibi says that the oil market is oversupplied. Apparently he favors cutting production at OPEC’s next meeting in Vienna on September 9. WSJ:

“The market is oversupplied by at least 1 million barrels a day. If OPEC would like to remove this additional oil out of the market, then OPEC has to cut some production,” Khatibi said.

Questions: (a) how did we go from a permanent shortage of oil to a surplus in such a short time? (b) how is it possible for Congress and some Americans to want to be held hostage by the likes of Khatibi and his friends rather than using domestic resources that exist in abundance?

The WSJ sees China’s growth continuing…

Fixed-asset investment in urban areas between January and July rose 27.3% from a year earlier, the National Bureau of Statistics said Friday. The pace exceeded the first half’s 26.8% rise and the median 26.5% rise forecast…robust growth in investment and retail sales suggests economic growth will be resilient

…while the developed world sputters:

the European Union’s statistics agency said gross domestic product in the euro zone contracted 0.2% in the second quarter, the equivalent of a 0.8% annual rate of decline. It marked the first time since the early 1990s that GDP has fallen overall in the 15 countries that use the euro…The global weakness marks a sharp reversal of expectations for many corporations and investors, who at the year’s outset had predicted that major economies would remain largely insulated from America’s woes…

in a sign the world is dialing back its shopping spree of the past few years, the Baltic Dry Index, a measure of demand for shipping services, has fallen 37% since hitting a record on May 20, including a stretch of 23-straight down days…”The global economy is sputtering amidst a widening in the slowdown from the United States to Western Europe and Japan,” J.P. Morgan economist David Hensley said in a note to clients Wednesday. That slowdown, he said, “is feeding through to the emerging economies.”

If China’s growth is still 70% dependent on exports, as it was a couple of years ago, we wonder how it can continue to grow swiftly, as is currently predicted. Indeed, we are very skeptical, and find the “fixed-asset investment” explanation unpersuasive. “Fixed-asset expansion” quickly can become “overcapacity” in a time of reduced demand — the US was in the process of massive “fixed-asset expansion” in 1929, after all. In any event, we likely will be learning the answer soon.

The CFTC is catching on to the notion that there’s been some speculation in the oil market. WSJ:

Last month, the main U.S. regulator of commodities trading, the Commodity Futures Trading Commission, reclassified a large unidentified oil trader as a “noncommercial” speculator. As a result, the number of futures and options contracts held by traders counted as speculators…rose to 49% of all crude-oil bets outstanding on the New York Mercantile Exchange, up from 38%.

The scale of the recent revision and questions about the reliability and transparency of data in this market are feeding into efforts by Congress to impose restrictions on energy trading. Four Democratic senators on Thursday called for an internal CFTC inspector-general investigation into the timing of a July 22 release of a report led by the agency. That report concluded speculators weren’t “systematically” driving oil prices. Oil prices soared until mid-July…

Talk about shutting the barn door after the horse is long gone. The spike started almost precisely a year ago when the hedge funds saw going long oil was a good way to short the dollar in the risk-free environment created by the Fed, and things got really crazy earlier this year as others piled on. Months ago oil traders and hedge fund managers detailed their findings about speculators in the market. It’s nice that the apparently blinkered CFTC appears to be catching up on the news.

The fellow who called drilling for our own oil “junk economics” and those who are proponents of such policies “stupid” seems to have a different view when it comes to other nations. NYT:

the war in Georgia isn’t that big a deal economically. But it does mark the end of the Pax Americana — the era in which the United States more or less maintained a monopoly on the use of military force. And that raises some real questions about the future of globalization.

Most obviously, Europe’s dependence on Russian energy, especially natural gas, now looks very dangerous — more dangerous, arguably, than its dependence on Middle Eastern oil. After all, Russia has already used gas as a weapon: in 2006, it cut off supplies to Ukraine amid a dispute over prices.

And if Russia is willing and able to use force to assert control over its self-declared sphere of influence, won’t others do the same?

Isn’t is vastly “more dangerous,” to quote Mr. Krugman’s piece above, for the nation enforcing what remains of the Pax Americana to be 70% dependent on its rivals and adversaries for its most important strategic resource? Ah, what’s the use…

We didn’t cover Shanghai 3000, but we did note Shanghai 4000, Shanghai 5000, and Shanghai 6000. Now it’s Shanghai 2605, and the amazing thing is that all the previous records were made, and erased, in little more than a year and a half. WSJ

Chinese stocks slumped Friday to their lowest point in well over a year, finding little support ahead of the Beijing Olympics opening ceremony, as concerns about a slowing economy weighed down property developers and airlines.

The benchmark Shanghai Composite index, which tracks both the yuan-denominated Class A shares as well as Class B shares priced in foreign currency, slumped 4.5% to 2605.72, its lowest close since Dec. 26, 2006. It is down 57% from its record close in October. The All Share index in Shenzhen tumbled 5.6% to 747.34, its lowest close since March 6, 2007. Friday’s drop came on worries that the Chinese economy could slow further after the Olympics.

Markets forecast the future, and the market’s predictions for the Chinese economy have gotten worse and worse in the last year. So many bubbles have now burst, housing, mortgages, and many commodities now including oil. If this is the correction that the IMF predicted was long overdue, it could be a doozy.

Reuters reports that oil’s crash continues:

U.S. light crude settled down $4.82 to $115.20 a barrel, before falling to $114.90 in post-settlement trade, the lowest level since early May. Prices have slid since hitting a record high over $147 a barrel on July 11. London Brent crude settled at $113.33, down $4.53.

Apparently that fellow who said that oil’s chart reminded him of 1987 wasn’t too far off the mark. Meanwhile, remember what Cramer said a few months ago:

these moves speak to something so fundamental as to be outrageously obvious: Oil is not going back to $70, where ag plantings might be unclear and nat gas might be just a bit better than oil. It is not going back to $80, where it made good economic sense to get more fertilizer or drill for more natural gas. It may not even go back to $90, where food for oil is outrageously profitable and natural gas is a shoo-in. A retreat to $100 seems hard now. As someone who has been saying that oil is headed to $125 — been my thought now for two years — I have to say that these prices for these ag and nat gas companies are NOT TOO HIGH to pay.

Here’s what he says now:

Someone asked me how long oil can go down earlier today. I said that I didn’t think it could stop until it went down as much as natural gas did. That means it could go to $90.

It was only a year ago, when oil was $70 a barrel, that people wondered whether it could ever get to $80. It was only a few weeks ago that people speculated that oil would never go down from $145 a barrel. People generally (and particularly the so-called experts?) often predict that tomorrow will be just like today. The trend is your friend — until suddenly it isn’t. Man’s track record in predicting major discontinuities is pretty bad.

Paul Krugman in the NYT has an opinion about many of his fellow Americans:

the G.O.P. has found its issue for the 2008 election. For the next three months the party plans to keep chanting: “Drill here! Drill now! Drill here! Drill now! Four legs good, two legs bad!” O.K., I added that last part. And the debate on energy policy has helped me find the words for something I’ve been thinking about for a while. Republicans, once hailed as the “party of ideas,” have become the party of stupid…

Sad to say, the current drill-and-burn campaign is getting some political traction. According to one recent poll, 69 percent of Americans now favor expanded offshore drilling — and 51 percent of them believe that removing restrictions on drilling would reduce gas prices within a year…one of America’s two great parties believes that when it comes to politics, stupidity is the best policy.

Compare and contrast: Mr. Krugman and his colleague Mr. Herbert.

The Telegraph says the oil bubble has burst. The market is ignoring the disruption in supply through the Baku-Tblisi-Ceyhan pipeline as well as the battles in South Ossetia. AP says this:

Oil prices resumed their descent Friday, dropping below $117 a barrel (and then to $116) as a strengthening dollar and expectations of slowing demand offset supply concerns over a sabotaged pipeline in Turkey.

Light, sweet crude for September delivery slumped $3.43 to $116.58 a barrel in morning trading on the New York Mercantile Exchange, after dipping as low as $116.10.

Analysts have pointed to the $117 a barrel mark as technically significant — a move below this level shows, they say, that oil’s recent slide might be more than a brief pullback. Crude peaked at $147.27 on July 11.

Question: doesn’t the $30 per barrel decline in the price of oil seem quieter than the run-up in its price? Wasn’t it only a couple of weeks ago that we saw that story saying “This time it’s different”?

The Democratic presidential candidate on August 4:

“We should sell 70 million barrels of oil from our Strategic Petroleum Reserve for less expensive crude, which in the past has lowered gas prices within two weeks”…

And on July 7:

“I do not believe that we should use the strategic oil reserves at this point. I have said and, in fact, supported a congressional resolution that said that we should suspend putting more oil into the strategic oil reserve, but the strategic oil reserve, I think, has to be reserved for a genuine emergency. You have a situation, let’s say, where there was a major oil facility in Saudi Arabia that was destroyed as a consequence of terrorist acts, and you suddenly had huge amounts of oil taken out of the world market, we wouldn’t just be seeing $4-a-gallon oil. We could see a situation where entire sectors of the country had no oil to function at all. And that’s what the strategic oil reserve has to be for.”

Senator Obama was right in July. Indeed, the SPR should be increased, not tapped. Jim Geraghty asked the real question behind Senator Obama’s newest flip-flop: “Does a Poll Drop Count As an Emergency?”

The Democratic presidential candidate moves toward supporting offshore drilling, no doubt because his party’s position on the issue has hurt him in the polls. Note the evident lack of enthusiasm in Senator Obama’s revised position. AP:

“My interest is in making sure we’ve got the kind of comprehensive energy policy that can bring down gas prices…If, in order to get that passed, we have to compromise in terms of a careful, well thought-out drilling strategy that was carefully circumscribed to avoid significant environmental damage — I don’t want to be so rigid that we can’t get something done.”

Question: Does this mean the messiah has lost his power and this was not “the moment when the rise of the oceans began to slow and our planet began to heal.”

San Francisco Chronicle:

Pelosi, who has opposed offshore drilling throughout her two decades in Congress, insists opening new areas to drilling won’t lower gas prices in the short term. She believes a vote would only help the GOP blame Democrats for high gas prices. “I will not…give the administration an excuse for its failure,” Pelosi said at an end-of-session roundtable interview Thursday…

What-ever. The piece also noted, towards the bottom, that a “CNN/Opinion Research poll released this week found that 69 percent of Americans favor more offshore drilling, while 30 percent oppose it.” Apaarently that doesn’t matter much.

But it’s all okay, since the the Messiah is on the case:

Sen. Barack Obama…announced an “Emergency Economic Plan” that would give families a stimulus check of $1,000 each, funded in part by what his presidential campaign calls “windfall profits from Big Oil.”

So then it would be a good thing if oil went to $200, right? So that there would be more windfall profits to redistribute like manna from heaven.

Jesus’ first miracle was said to be at the marriage at Cana, where he changed water into wine. The new Messiah promises to go Jesus one better, to turn proper tire inflation and auto maintenance into the equivalent of 1-2 million bpd in additional oil output. Senator Obama via YouTube:

There are things you can do individually though to save energy. Making sure your tires are properly inflated. Simple things. But we could save all the oil that they’re talking about getting off drilling if everybody’s just inflating their tires and getting regular tune-ups. You could actually save just as much.

This is ridiculous. Inflating your tires properly can boost mpg by 3% or so at best, and maybe most Americans are doing this already. We used to use 140 billion gallons of gas a year, though this is going down, and there are about 20 gallons of gas in a barrel of oil (as well as a slightly greater amount of other refined product).

So at most the recommendation by the Illinois Senator would be good for a saving of maybe 250,000 barrels a day, and that seems implausible to the point of silliness. By contrast, even the most pessimistic assessments of incremental production at ANWR and offshore by opponents of the idea are 1-2 million barrels a day.

This fellow is getting tiresome. The most interesting question: just how dumb is his audience.

We were wrong for a long time about oil, when it kept spiking to $147, but this is beginning to look like a trend. Reuters:

Oil fell to its lowest level in nearly three months on Tuesday… OPEC President Chakib Khelil said Tuesday oil could fall further to $70 to $80 a barrel in the long term but added he did not think the producer group should consider cutting output at this point. U.S. crude dropped $3.11 to $121.62 a barrel by 1:00 p.m. EDT after dipping as low as $120.42…

Limiting oil’s drop, Shell declared force majeure on Tuesday on its Nigerian Bonny Light oil exports for July to September following Monday’s attack by militants on an oil pipeline in the Niger Delta. Tension over Iran’s nuclear program also provided support.

It would be awfully nice if the asylum is actually emptying out at last. That tired narrative about Iran and Nigeria isn’t working as well as it did just a few weeks ago. Of course, everything could turn around again tomorrow….