Tuesday, May 31, 2005

Fifty Problems

The real problems with $50 oil By Henry C K Liu

Small scheme (read above article first):

- Is better to use the expression business spiral to business cycle. As example: the economy with oil barrel above $50 gives a total diferent view
- Cash flow increases with higher oil prices.
- Working longer hours does not translate into productivity increases, but it does increase income.
- Those who get paid by fixed commission on transaction volume are the winners.
- As cash flow increases for the same amount of material activities, the GDP rises while the economy stagnates.
- People eat less beef and put the meat money into the gas tanks of their cars to pollute the air, shifting cancer risks from their colons to their lungs.
- Since the monetary value of assets tends to rise in tandem over time, the net effect is a de facto depreciation of money, misidentified as growth.
- High oil prices threaten the economic viability of some commercial sectors, such as airlines and motor vehicles.
- Ironically, from a central bank's perspective, a commodity-price-pushed asset appreciation, which central banks do not define as inflation, is the best cure for a debt bubble that the central banks themselves created.
- America's wars will carry a higher price, which will either lead to a higher federal budget deficit, or lower social spending, or both. This translates into rising dollar interest rates, which is structurally recessionary for the globalized economy.
- Gasoline prices also will not come down, not because there is a shortage of crude oil, but because there is a shortage of refinery capacity.
- Refineries need to be located where the demand for gasoline is, but families that own three cars do not want to live near a refinery.
- According to the US Geological Survey, the Middle East has only half to one-third of known world oil reserves. There is a large supply of oil elsewhere in the world that would be available at higher but still economically viable prices. The idea that only the Middle East has the key to the world's energy future is flawed and is geopolitically hazardous.
- If the Mideast and the Persian Gulf implode geopolitically and oil from this region stops flowing, the US will be the main beneficiary of $50 oil, or even $100 oil, as would Britain with its North Sea oil and countries such as Norway and Indonesia. But the big winner will be Russia.
- Neo-classical economics views higher prices of consumables as inflation, but asset appreciation is viewed as growth, not inflation.
- Sustainable economic expansions are based on real production, not on speculative debt.
- The fact of the matter is that the term "market" is a misnomer for oil and currency transactions. These commodities change hands not in a market, but in an allotment schema arranged from a central control point in a neo-feudal regime.
- Current oil-price levels are a reflection of a fleeting inventory problem rather than a long-term pricing issue.
- At any rate, oil is no longer a critical factor for the US economy, which is increasingly less dependent on oil for growth. GE announced in February 2000 a new turbine that would be 60% more efficient than current models in generating electricity for the same energy input. The news did not help GE stock prices.
- There was solid evidence that the 1970s recycling of petrodollars, which mostly ended up in the dollar assets in the United States anyway, contributed to US inflation as much as the higher retail price of gasoline.
- The drop in oil prices after 1997 was mostly a cyclical effect of the drastic reduction of demand from the Asian financial crisis, which impacted the whole world.
- In oil, no one has told the truth for more than 80 years, or since its discovery.
- If Iraqi oil re-enters the world market, other OPEC members will reduce the production quota, so the real impact on prices will be minimum.
- In recent years of cheap oil, advances in conservation have all been abandoned. Until this year, US consumers were buying eight-cylinder SUVs that deliver only eight miles per gallon (29 liters per 100 kilometers), as well as air-conditioned convertibles.
- Member nations had experienced a decline in the real value of their oil since the foundation of OPEC.
- Oil prices at $35 per barrel would reduce South Korea's economic growth by 2%. Japan's former minister of international trade and industry, Takeo Hiranuma, said oil prices should drop to between $22 and $25 to benefit both consumers and exporters.
- The euro's continuing fall until 2002 when it bottomed at 1.1 to the dollar from its launching rate of 0.846 in 1999 dampened US multinational profits denominated in euros, which in turn hurt US equity markets. The lesson from this is that the trade deficit is not without benefits if it can be sustained. When the Japanese yen dropped to 147 per dollar in August 1998, it did not affect US export earnings much because of the large deficit in US-Japan trade. With the euro, it was a different story because US-European Union trade was relatively balanced. Also, it had been widely expected that the euro would be supported by the European Central Bank (ECB), so most US firms did not bother to hedge their euro earnings. In this case, derivatives would have saved the day. Thus structured finance is not always destructive. The high 2004 rate of 0.84 euro to a dollar did not reduce the US trade deficit.
- The only trouble is that $50 oil takes money from the pocket of consumers and delivers it to the oil producers (not just Arabs), who then reinvest it in Wall Street. The net result is a transfer of wealth from the "working families" of the world to the capitalists the world over.
- The current structure of the overcapacity economy is such that more debt can only go to support consumption and speculative, not productive, investment, causing the debt bubble to be unsustainable.
- .. But governments tend to resist fuel-tax reduction because of the flawed ideology that fuel taxes encourage conservation. Capital-gain tax measures are resisted on the doctrine that what hurts capital hurts the poor also, if not more.
- All central banks, except the US Federal Reserve, have a finite supply of US dollars. The Fed, under its own rules, cannot dump dollars into the market without raising interest rates, not to mention contradicting the US Treasury's policy of a strong dollar. When the ECB intervenes in the currency market, it buys euros with dollars to keep the former from falling in exchange value, in essence shrinking the euro-denominated economy, causing the euro to fall further in value. The bought euros held by the ECB must be unloaded to either the Fed or the Bank of Japan or the People's Bank of China, which then must invest or spend them in Euroland to counter the shrinkage of the euro-economy. But if investment opportunities in Euroland do not improve, then these euros must be held in reserves to collect interest, making it difficult for the ECB to raise euro interest rates, a move that is needed to strengthen the euro fundamentally.
- While $50 oil is not a problem in the long run, it could give Greenspan a super-size headache if it serves merely to fuel more debt.