there are graphs in this article, i could not include for obvious
reasons. for the less intellectually curious, you need to visit the
site to view the graphs.
http://www.suddendebt.blogspot.com/
MONDAY, MAY 12, 2008
Glaringly Wrong, Or ..?
The post's title refers to an article in the January/February 2000
issue of Foreign Affairs about the price of oil.
But before delving into that, a current Reuters news story about GE
Money ceasing to finance motor homes and recreational boats. Sales of
such pricey toys have collapsed: year-to-date motorhome ****pments are
down 24% and sales at the nation's largest boat retailer are down 28%
in the first quarter. Along with Starbucks overpriced lattes, these
are additional signs that the US consumer is hitting the brakes hard.
And while peripheral, highly discretionary items are feeling the
impact hardest, overall spending is down significantly, too. According
to SpendingPulse, retail sales excluding gasoline and autos were down
0.7% in April versus March.
OK, back to the Foreign Affairs article from 2000. You can read a 500
page preview here (or the entire article if you are a subscriber).
This is a part of the first paragraph:
But contrary to much received wisdom, the energy problem looming in
the early 21st century is neither skyrocketing prices nor shortages
that herald the beginning of the end of the oil age. Instead, the
danger is precisely the opposite; long-term trends point to a
prolonged oil surplus and low oil prices over the next two decades
[emphasis added].
The writers predicted oil would remain in the $12-20 range for another
20 years.
Instead, we got this:
The purpose of this post is not to scoff at a glaringly wrong
prognosis by two experts - anyone can make a mistake. Indeed, it is
sometimes far easier for "experts" to make mistakes than rank novices
(ever heard of beginners' luck?). Instead, this post is about a
different interpretation of the what, why and when of the article, one
that may also shed some light at current oil prices.
First, some background: by 1998-2000 oil prices were scraping the
teens and low twenties for over a decade. The national economies of
crucial Arab allies like Saudi Arabia, plus Russia (a.k.a. "Upper
Volta with nukes") were essentially bankrupt. Populations in Arab oil
producing nations exploded upwards while oil income collapsed,
threatening the socio-political stability of the authoritarian
regimes. Massive subsidies for everything from food, fuel and higher
education, medical care and even wedding dowries were no longer
possible. Agitation by young, restless populations was on the rise...
I remember reading the article when it first came out. My first
reaction was surprise at the truly parlous state of finances in the
Gulf region. In Saudi Arabia alone, real GDP per capita had slumped
from $11,450 in 1984 to $6,750 in 1994. The country's budget had swung
from $140 billion in surplus revenue in 1982 to consecutive deficits
that eventually ran up a national debt of $130 billion. Other oil
producers - most obviously Russia - were in even worse shape.
My second thought, then, was that "they" wanted oil prices to go
higher in order to prevent major geopolitical upheaval ("they" being
the loose term employed when referring to the US establishment, for
which Foreign Affairs is the recognized house organ). The article's
purpose, therefore, was not to predict low oil prices but to warn that
low prices were dangerous and no longer desirable. Indeed, after a
brief pause due to the shallow recession following the dotcom bubble,
prices climbed inexorably higher.
Well, things have now come full circle. The latest issue of Foreign
Affairs carries an article ("Blood Barrels") that is in the exact
opposite direction of the one that appeared eight years and $100 ago.
The summary reads:
Oil wealth often wreaks havoc on a country's economy and politics,
helps fund insurgents, and aggravates ethnic grievances.
From cursing very low oil prices in 2000, "they" have now gone to
"..the so-called oil curse", "Dutch disease" and armed conflict by
internal insurgencies. In the 3,000 word article "conflict" appears 17
times, "war" 11 times, insurgent/insurgency 7 times and violent/-ence
4 times. Get the message?
Now, all of the above is not meant as my prediction that oil prices
will move lower - I am just pointing out the ebb and flow of the
establishment's views on the subject. In any case, readers know that I
prefer pricing energy on a like-for-like basis (EROEI), instead of
artificial dollar terms that can expand or contract with monetary
policy.
One final observation.
President Bush is to visit Israel, Saudi Arabia and Egypt between
Wednesday, May 14 and Sunday, May 18. This is the schedule:
Wednesday - Israel
Thursday - Israel
Friday (until abt. noon) - Israel
Rest of Friday - Saudi Arabia
Saturday - Egypt
Sunday - Egypt
If you are familiar with diplomatic protocol you can immediately "read
between the lines". A visit to Saudi Arabia lasting just a few hours
scrunched between Israel and Egypt is the equivalent of expressing
severe displeasure, i.e. the White House is flipping Saudis the finger
(or is it the other way around?). The cause for such displeasure is
easy to guess: despite repeated US entreaties to raise oil production
and lower prices, the Saudis are staying put. They blame record prices
on the lower dollar, speculative frenzy in futures markets and high
demand from Asia, but the US administration is clearly not satisfied.
There are more aspects to this story, most prominently the possibility
that Saudi oil production has peaked (see Simmon's Twilight In The
Desert). But "they" are very far from acknowledging any such
possibility, at least publicly, choosing instead to view high oil
prices as a deliberate choice by Arabs bent on maximizing current gain
and "buying up the world" through sovereign wealth funds.
My view is that we will find out very, very soon what is really going
on.
|
