Much has been made of the continuing strength of US exports and the decline in the so-called "non-oil" trade deficit, but Brad Setser, as usual, hits the nail squarely:
"The same forces propelling Chinese export growth – the weak dollar and still-strong global economy – are also propelling US export growth. Those same forces are also a key reason why oil is high. Take away strong global growth and both US export growth and the price of oil would be lower."
Incidentally, OPEC is puzzling over the effect that financial turmoil will have on the demand for oil, but the oil funds themselves play an important role in propping up the markets. Not that anyone knows the real numbers, of course.
So, Peter, does this mean we could be heading towards a crash of the price of oil? Over on maxspeak I had several postings about production problems in Saudi Arabia, especially in the al Ghawar monster oil pool. But some sources say that the Saudis still have the capacity to increase output by three or four millions barrels per day. Furthermore, the UAE is upping production, and new deals in Iraqi Kurdistan look to see output rising there, possibly by as much as 2 mbpd over the next five years (will post on that one soon).
ReplyDeleteAnd then, of course, we do seem to be having a slowdown of growth around the world, even if the US has managed so far to avoid slipping into a recession. But, if we do, could oil prices exhibit a sudden and sharp decline? It has happened before, including in 1930 and 1986, with the latter triggering the fall of the Soviet Union, according to a recent book by Yegor Gaidar.
Barkley, I think you are the guy to model this. It's a positive feedback loop (potentially) between oil revenues and asset prices, but only within a bound. I could be wrong on this, but if maintaining asset values in a highly leveraged environment is what matters (in the short run anyway), high oil prices may be keeping us afloat (along with CBs that ignore currency risks). So the risk would be a mutually reinforcing drop in financial markets, oil earnings, and real economies. It could be very destabilizing politically, too.
ReplyDeleteWhat do you think? Is an article on the way?
I have already written on interlinked financial collapses, but a blog posting could be on the way. A collapse of oil prices would catch a lot of people on the wrong wing of a black swan (or at least a dark grey one), and a sudden global recession combining with production increases could easily do it, given all the leverage and speculation.
ReplyDelete