Chancellor Says Oil Price Could Dampen Recovery Hopes

[cashinmattress]

Chancellor says oil price could dampen recovery hopes

The Chancellor today sought to damp down hopes of an early end to the recession, arguing that high oil prices could hold back recovery.

An opinion poll for The Times today suggested that more people were detecting green shoots, with 32 per cent of those questioned predicting that the country’s finances would fare “well†over the next year, up from a low point of 18 per cent in January.

A leading think-tank had also claimed this week that the UK economy may have bottomed out after returning to growth in April and May.

But in an interview with the Financial Times, Alistair Darling said: “I think it is important that people should not become complacent.â€

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He said that he was sticking to his Budget forecast and expecting the recession to finish towards the end of this year.

The Chancellor said the volatile oil price — which last night reached an eight-month high above $73 a barrel — had “the potential to be a huge problem as far as the recovery is concernedâ€.

“We’ve got to convince everyone, including some of the Gulf states, who really have been badly affected by this downturn in their broader economies, it is in no one’s interest that we allow a high oil price to impede recovery.

He also warned that getting banks lending again remained a problem, and that lenders were still struggling to build confidence.

“If you don’t fix the banking problem, you’ll never fix the wider economy,†Mr Darling said.

Sterling rallied against both the euro and the dollar yesterday after the upbeat economic forecast from National Institute of Economic and Social Research (NIESR), which estimated GDP rose by 0.2 per cent in April and 0.1 per cent in May.

The pound, which almost reached parity with the single currency at the end of 2008, climbed to €1.174 and was also up against the dollar, to $1.648.

Mr Darling also commented on the circumstances surrounding his retention of his job in last week’s Cabinet reshuffle.

It was widely expected that he would be replaced by Ed Balls, his Cabinet colleague, one of Gordon Brown’s most trusted lieutenants.

He said: “I was always very clear there was a job of work to be done. I wanted to see through the work we started when I came here in 2007.â€

So what about this supposed recovereh? Who put it to the MSM to front page the 'end of recession' meme this week?

[SMAC67]

Don't worry, CELLS say's that even at USD500 oil is cheap and that we have no energy related problems. Another Chimera slain......

[UndercoverElephant]

Reality begins to dawn....

The price of oil over the coming years is THE elephant in the room. Every time there is a whiff of global recovery, up will go the price of oil. This will remain the case for the rest of our lifetimes. Welcome to the post-peak-oil world.

Edited June 12, 2009 by UndercoverElephant

[SMAC67]

But but but but, abiotic oil, the Bakken formation, endless cheap oil, you lie, stop lying, I can't hear you, lalalalalalalala..................

[interestrateripoff]

http://www.fromthewilderness.com/free/ww3/...d_stories.shtml

April 15th, 2005

Over the next five years, crude prices will almost double, averaging close to $77/bbl and reaching as much as $100/bbl by 2010. That's over twice the previous 6-year high (1980-1985) following the second OPEC oil shock, when crude, in today's dollars, averaged the equivalent of $65/bbl. Tomorrow's price hikes won't be triggered by sudden supply disruptions like the Arab oil boycott of 1973 or the Iranian Revolution in 1979. Instead, they will follow from the inevitable collision between surging global crude demand and accelerating depletion of conventional crude supply. By 2010, prices will have to take out nearly 9 million barrels a day from world oil consumption-no mean feat for a world that has never been more thirsty for oil.

As in the 1970s and early 1980s, energy will once again come to dominate both the economy and financial markets. But there are likely to be some fundamental differences. On the economic front, the impact of surging crude prices is likely to be far more deflationary than inflationary. During the 1970s, surging fuel costs were the catalyst for a huge outbreak of wage-price inflation, as workers futilely tried to protect the purchasing power of their incomes through ever-escalating wage demands. But that was in a world where most workers in G-7 economies were protected by huge trade barriers against competition from cheap offshore labour. In today's world, where production and jobs can easily be shifted to low-wage economies, North American wages will have to eat energy price increases, and in the process, stomach the loss of purchasing power that comes along with it.

Hence the implications for monetary policy couldn't be more different than the ones posed by the OPEC shocks. Instead of draining the system of liquidity to starve out wage-price inflation, the primary concern of monetary policy in oil-importing economies like the US will be to support economic growth. Offsetting the massive terms of trade effect, and its taxing implications for both American consumers and American businesses, will require a much more accommodative posture than today's Federal Reserve Board has so far acknowledged.

On the financial market front, energy stocks will become almost as dominant in equity markets as tech stocks were in the last decade. As oil prices continue to rise, energy stock valuations, already characterized by some as a bubble, should follow a similar trajectory to the one they charted in the 1970s. Between 1973 and 1979, the oil and gas index of the TSX more than doubled. While long-term oil price expectations embedded in the oil strip curve have moved up sharply over the last three months, longdated contract prices for 2010 still show oil prices at only $50/bbl, half of what they are likely to be trading at by the end of the decade (see pages 2-6).

The first two oil shocks were transitory, as political events encouraged oil producers to seize full sovereignty over their resources and temporarily restrict supply. This time around, with suppliers already running full tilt, there's no tap that can suddenly be turned back on.

Crude Prices Will Almost Double Over Next Five Years

by Jeff Rubin and Peter Buchanan

Many oil "experts" were sure 2004's high oil prices and hot demand growth was just an aberration. While the flattening of the futures curve suggests markets are now boosting their expectations for longer-term prices, they may still have a long way to go. Accelerating global demand concurrent with accelerating global depletion points to much higher energy prices over the next five years. In fact, the trajectory of future price hikes may even challenge the very nature of backwardation in the oil strip curve (Chart 1).

On the demand front, the International Energy Agency (IEA) has just upped its forecast for global crude demand this year by almost half a percentage point to 2.2%. This marks the third time the energy watchdog has changed its views of late. And last month's revision is by far the single largest so far (Chart 2).

See link for more articles like this.

Edited June 12, 2009 by interestrateripoff

[interestrateripoff]

http://www.naturalhub.com/slweb/fading_of_...sion_timing.htm

When might a deep recession start?

First, the credit bubble has to collapse. Next, oil has to become structurally expensive. A reasoned guess post-credit-collapse would be when oil both reaches and maintains a price of close to $US80 a barrel. Temporary spikes to around $US100 a barrel don't indicate depressionary conditions. At the point of oil settling at or over $80 for a year or longer there is likely to be structural (oil component of goods price adjustment) inflation of 10% - 20%. At this point, if price movements in 2005 are a guide, petrol may reach close to $US4 a gallon at the pump. This will make petrol effectively unaffordable for many low income people who have no other transport options (chiefly a USA condition).

New refinery capacity for heavy oil has kept pace with increased reliance on heavy oil as light oil supplies diminish. Mildly recessionary conditions in late 2006 caused demand to fall and reduced prices. A pumping capacity bottleneck, mainly from Saudi and Mexican megafields has already been masked by reduced demand (mainly in Asia) following oil spiking to $US77 a barrel in July 2006.

Business nervousness, changing consumer behaviour, and seasonal slacking of oil demand will likely make any spike temporary, should it occur. Increased bilateral trading in oil (direct from producer to consumer) outside the betting floor of the futures traders has increased, meaning price is more stable. Whether it stabilises at a higher or a lower level depends on the USA economy and on whether Mexico, Venezuela, and Saudi Arabia are able to forego production in the interests of holding prices up. Their domestic situations may force them to sell at a lower price than they would like.

A credit bubble collapse will likely be triggered by rises in USA treasury interest rates. Higher interest rates will likely combine with oil price inflation to remove a larger percentage of tax-paid disposable income from circulation in the economy. Considering the vast USA government debt, the on-going dollar cost of seizing and guarding Iraqi oil ($US5 billion a month by december 2005), and the beginning of a move away from the essentially valueless USA dollar as a currency of international settlement, then the USA Federal reserve will probably need to move within the next few years to make it's bonds more attractive.

The mechanism is to increase interest rates payable on the bonds. (The US could of course back the dollar with oil by seizing all Iraqi oil revenue as 'spoils of invasion'.) Oil prices might reach or exceed the historic oil price high reached in 1980 by mid 2008, driven mainly by decline in mega fields, but tempered by price driven demand reduction. Winter fuel oil shortages 2007/2008 and large hike in natural gas prices - and therefore electricity prices - in USA will add to economic slowdown.

Recession beginning by the end of 2008 is somewhat likely, and USA treasury bonds lose their attractiveness as a consequence. Yet the USA will need to finance an even larger government deficit as structural inflation raises all governance costs, and as unemployment costs rise. US interest rates must then be raised by the end of 2009, no matter how unwilling the government may be to do so. The only alternative is massive government spending cuts, on a scale never before seen. These cuts are extremely unlikely.

The 'structural' pumping capacity bottleneck will likely occur in december 2008 or 2009, cause a spike to $US90 a barrel (unless new Saudi 'sweet oil' fields do come on stream as promised). It is uncertain whether or not oil might remain at or around the $80 per barrel level thereafter. It depends on the price-driven change in consumer behaviour in how much petrol and diesel consumers choose to burn, against how much they are forced to burn in the essentials of living. It depends on what degrees of freedom consumers have to buy smaller cars or motorbikes, to live closer to work, to substitute public transport. It depends on whether consumers believe oil shortage is a temporary blip, or a long term trend. The conditions should be clearer in 2008/9. Recessionary conditions will be apparent by then anyway.

Recession in itself reduces demand. Oil consumption drops. Reduced demand weakens oil prices. However, at some point, the year on year reducing production from large high-volume oilfields (that have passed their peak of production) reduces global supply until it matches the reduced global annual demand. From then on, as pumpable supply drops below even new reduced global demand levels, prices once more increase. The best guess for this point is around 2015.

Deep recession may start before 2015. It may be triggered 'early' if any of the major Saudi or Mexican fields collapse, or if climate causes electrical energy supply shortfall, water shortage, significant crop failure, and if resultant socially hysterical hyper-reaction causes a precipitous collapse in business confidence and employment.

[funinhounslow]

According to the chief executive of BP, Tony Hayward, demand for oil in emerging nations now exceeds that in developed countries for the first time.

http://www.telegraph.co.uk/finance/finance...first-time.html

Governments and companies both have to find ways to make sure that investment in new energy – in all its viable forms – continues through this downturn.

So this is the chief executive of BP effectively saying that oil alone will soon be unable to meet our energy needs. He's not banging on about deepwater Brazilian fields or Canadian tar sands…

[interestrateripoff]

http://business.timesonline.co.uk/tol/busi...ticle720308.ece

January 26, 2006

Sir Richard Branson, the billionaire airlines-to-mobile phones tycoon, today warned that any conflict between the West and Iran could push oil prices over $100 a barrel and trigger "the biggest recession we have ever seen".

The remarks recall those from analysts at Goldman Sachs, the Wall Street bank, who suggested last year the oil market was entering a "super-spike" period that could see 1970's-style price surges as high as $105 a barrel.

Sir Richard suggested military intervention in Iran by the United States could tip the markets into such a bull run. International concerns over Iran's nuclear programme, championed by the country's hard-line President Mahmoud Ahmadinejad, have already risen sharply in the past month.

But Sir Richard told Times Online that any military action against the world’s fourth-largest oil producer would prove "disastrous" for the world economy.

"It is the one possibility on the horizon which really worries me. The economic fall-out from an attack on Iran would be crippling, not to speak of the human costs of any conflict," he told Times Online from the World Economic Forum in Davos.

Washington and Whitehall have so far sought to talk down the possibility of a military strike on the Middle Eastern state. But oil prices have continued to test record highs in recent months, largely on the fraught geopolitical situation in the region.

Oil prices, which started 2005 at around $42 a barrel, reached $70 in September as a series of hurricanes hit the Gulf of Mexico and disrupted supplies. The average price through 2003 was just $29.

Spikes in the market mean Sir Richard’s Virgin Group is spending around $600 million to $700 million a year more on fuel costs than it did in 2003, a factor he admitted had "focused the mind somewhat" as he called on delegates at Davos, one of the world’s leading gatherings of business an political figures, to renew efforts to develop alternative energy sources.

"We have to hope that what Sheikh Yamani [the former head of Opec] feared 20 years ago is true: that high oil prices will force users to look for alternatives" he said.

"We all have a responsibility. Companies need to look at investing in cleaner energy sources. Individuals need to think about double-glazing."

[cashinmattress]

Good articles there IRRO, thanks.

Well, it seems we Westerners are all facing a difficult future in regards to energy security.

At what point do we wage war on a massive scale to put a choke hold on the remaining reserves?

Finally, in the micro view, Britain is going to face the steepest energy prices and taxation in its history in the very near future. Are you ready?

[UndercoverElephant]

At what point do we wage war on a massive scale to put a choke hold on the remaining reserves?

We already tried that. That's why we ended up invading Iraq. This strategy won't work. It is no use gaining control of the well-heads if the area you are occupying is too politically unstable to allow you to get the oil out of that area.

So, no, we will have to compete in a free market to buy oil just like everybody-else.

Finally, in the micro view, Britain is going to face the steepest energy prices and taxation in its history in the very near future. Are you ready?

Yep. That's why I don't have children.

[funinhounslow]

At what point do we wage war on a massive scale to put a choke hold on the remaining reserves?

We've been doing it for years - in particular the 'liberation' of Kuwait, and invasion of Iraq.

[sikejsudjek]

No infinite growth = no economic solution to the debt money system collapsing.

Its just when not if.

[Bloo Loo]

this is very odd.

last time petrol rose above a pound then kept climbing, there was clamour in the MSM about rising costs, the tax take and the damage.

this time its doing the same, yet its the CHANCELLOR who makes the first comment.

wierd!

[Flash Gordon]

Chancellor says oil price could dampen recovery hopes

So what about this supposed recovereh? Who put it to the MSM to front page the 'end of recession' meme this week?

Recession is an economic term for when the economy is in contraction for at least two quarters, if the economy stops contracting and starts growing even at a very low rate the recession has ended by definition.

If the National Institute of Economic and Social Research are correct then the economy started growing in April, if this is confirmed in the GDP figures for Quarter 2 then the recession has ended.

Unfortunately so many economic illiterates band the word about without actually having the slightest idea of what Recession actually means!

Edited June 12, 2009 by Flash Gordon

[Kurt Barlow]

Don't worry, CELLS say's that even at USD500 oil is cheap and that we have no energy related problems. Another Chimera slain......

Don't forget Gameover and his fusion just round the corner prediction.

[interestrateripoff]

this is very odd.

last time petrol rose above a pound then kept climbing, there was clamour in the MSM about rising costs, the tax take and the damage.

this time its doing the same, yet its the CHANCELLOR who makes the first comment.

wierd!

Perhaps his wife is on MSM and is now pulling the strings seeing as Darling appears to have developed some balls.

[Jadoube]

Re "of course it will stupid"

Never underestimate the requirement to 'state the obvious'. And repeatedly restate it.

In my job I'm often in the position of saying/presenting something that I think is obvious (or general knowledge). Its depressing the number of times this results in the audience feeling that I said something subtle or new. I savour the days when the audience doesn't need to be told the simplistic stuff.

[cashinmattress]

Re "of course it will stupid"

Never underestimate the requirement to 'state the obvious'. And repeatedly restate it.

In my job I'm often in the position of saying/presenting something that I think is obvious (or general knowledge). Its depressing the number of times this results in the audience feeling that I said something subtle or new. I savour the days when the audience doesn't need to be told the simplistic stuff.

Our British 5 minute attention span needs that repetition.

The danger is of course is the choice of whom is saying it, and what is said. We realists don't get much say and our government has a huge budget for churning out its own sanitized information. That's a pretty big obstacle to overcome. Naomi Klein has written extensively about it.

Is it white or black propaganda? Do people want the truth?

Edited June 12, 2009 by cashinmattress

[The McGlashan]

Recession is an economic term for when the economy is in contraction for at least two quarters, if the economy stops contracting and starts growing even at a very low rate the recession has ended by definition.

If the National Institute of Economic and Social Research are correct then the economy started growing in April, if this is confirmed in the GDP figures for Quarter 2 then the recession has ended.

Unfortunately so many economic illiterates band the word about without actually having the slightest idea of what Recession actually means!

Were you to have actually read the NIESR press release, you might just pick out the facts of what they are projecting.

http://www.niesr.ac.uk/press/gdp0609.pdf

The projected figures published by NIESR show an estimated GDP increase of 0.2% for April and 0.1% for May. The projected month-on-month uptick is made up almost entirely from growth in Public Services during these 2 months (and a very small growth in Agriculture in April).

They also say:

"Our track record in producing early estimates of GDP suggests that our projection for the

most recent three-month period has a standard error of 0.1-0.2% point when compared to

the first estimate produced by the Office for National Statistics."

The report also points out that the quarterly annualised figures remain negative at -6% for April and -3.6% for May.