naked capitalism

Anonymous says:

my 1 cent opinion…

even with sub-$100 oil and lower food prices, US demand will not flip back on. I think that non-US downward wage pressures, US consumer debt and tighter credit has structurally reduced discretionary income for the next couple of years.

No mathematical models to support my assertion….it just “feels” that way. Hell when people are cutting back at the Olive Garden, people are seriously cutting corners to make ends meet.

Anonymous says:

Someone needs to tell McCain that drilling for oil in Alaska is off the table, along with drilling on the outer shelf and all the other places his oil lobby wants to tap into ASAP!

I also agree with the previous post, which I think implies food costs and inflation will not follow oil down, and thus sustained consumer inflation will continue to undercut any growth that may surface.

I highly doubt there will be wheat, rice and corn wars which will find us going to the store and stocking up on super cheap food, and then waiting a few weeks to see if prices will keep dropping on groceries.

Stuart says:

And how much more are the OPEC countries consuming versus last year.

Europe
BRIC
NA (N. America)
Emerging

Need to look at the demand and supply figures in aggregate of these regions. This is the problem with so much analysis of this issue these days. US centric thinking/data is no longer sufficient and leads to false conclusions.

Juan says:

Stuart,

Let’s consider that, through globalization of production, distribution, finance, national economies have become very interpenetrated, i.e. no longer national but a fusion of national and transnational. This does not mean all are the same, only that – in uneven fashion – processes in one or more affect all others. There are economic and institutional reasons why the now more globally integrated BRIC and other EMs cannot be immune to recession in the U.S. Slowing in E. and SE Asia has already become evident just as it has in Europe — a globally synchronizing recession is underway; ‘decoupling’ never had any real basis.

So how did world consumption of crude oil play out during the early 1980s’ double slump:

Table 11.10 World Petroleum Consumption, 1960-2006 (Million Barrels per Day)

1979,,,65.22
1980,,,63.11
1981,,,60.94
1982,,,59.54
1983,,,58.78
1984,,,59.82

The 1979 level of consumption was not surpassed until 1989.
(http://www.eia.doe.gov/emeu/aer/txt/ptb1110.html)

Will this repeat? No. I expect it to be somewhat more severe or, depending upon perspective, beneficial.

Juan says:

anon,

true enough, the petrodollar recycle and its part in perpetuating what Michael Hudson call ‘the Treasury-bill standard’ is often overlooked these days.

Heck of a contradiction when very high priced oil may be required to support to one part of the system even though the same high price weakens others.

By the end of 2007, GCC Sovereign Wealth Funds (SWFs) will manage over $1 trillion.
GCC central banks – counting the non-reserve foreign assets of the Saudi Arabian Monetary Agency (SAMA) — will manage another $460 billion. Their combined portfolio will thus approach China’s $1.7-1.8 trillion portfolio in size. Adding McKinsey’s estimate for the “private assets” of major Gulf investors, including those of the ruling families, total Gulf investment abroad would far exceed $2 trillion. (Setser, December 2007)

Of course total for all oil exporters is higher, and substantial portion has recycled into Treasury paper, Agencies, et cetera.

Matt Dubuque says:

This is consistent with my scenario of a WORLDWIDE collapse in consumer demand, not just the USA and Europe….

That consumer demand in the USA will collapse should not be in serious debate in my view. The cost of credit is soaring, its availability is diminishing as the Feds recent comprehensive nationwide survey of top lending officers showed…

And the hit to the wealth effect from the housing price collapse amplifies more deeply than other wealth effects; Mishkin’s recent paper made that pretty clear to this reader at least.

And it’s a pretty basic fact that stock markets are a leading indicator….not a coincident one and not a lagging one.

And the bourses in China and India BOTH are down more than 50%…. plunges in their consumer demand will surely follow. Anecdotally we know that non-industrial gold purchases are down over 40% in India (think of Indian women spending discretionary income on gold…)

These are but a few of the key indicators pointing to the implosion.

The problem is that the Fed is OVERLY restrictive, they are fighting the last war.

We are running a rapidly growing tail risk of HYPERDEFLATION. Flight to Treasuries is but another example of this scenario, in hyperdeflation, the smart money goes to the highest quality bonds.

I know this is a minority view, but I’m sticking to it.

Matt Dubuque

Anonymous says:

anon 9:58 PM,

Appears that the U.S. has been exporting increasing quantities of crude and distillates, which may effect commercial inventories?:

Chart-
http://tonto.eia.doe.gov/dnav/pet/hist_chart/MTTEXUS1m.jpg

Anonymous says:

Demand destruction is here to stay. As others upthread observed, when people stop going to the Olive Garden, you know times are tough.

Everyone I know has slowed spending. Even the ones with stable jobs and a good income. “Frugal is the new Cool” is real, and it’s here to stay. Dave Ramsey is becoming popular with people outside the churches, who simply want to be free of the debt yoke we’ve all been hauling around for two decades.

It’ll be a couple of years of consumer retrenching, for sure. It’s going to be harder going for foreign countries who have depended upon selling tons of crap here to drive their economies because people are, and will continue, to buy less of that crap.

wintermute says:

Oil demand is not some amorphous quantity which can just scale back in linear fashion. There is “froth” (elastic) demand which can be destructed easily. SUV usage, unnecessary journeys. There is also a base-load of inelastic demand – heating oil in northern states, aircraft etc.
Demand desatruction will look amazing when it first happens – but then it wil lhit a wall and each percentage of reduced oil usage wil lbe painful to the public and the economy. Oil prices could still be near $100 when demand is mostly inelastic.

Anonymous says:

My hooptie rollin’, tailpipe draggin’
Heat don’t work an’ my girl keeps naggin’
Six-nine Buick, deuce keeps rollin’
One hubcap ’cause three got stolen
Bumper shook loose, chrome keeps scrapin’
Mis-matched tires, and my white walls flakin’
Hit mickey-d’s, Maharaji starts to bug
He ate a quarter-pounder, threw the pickles on my rug
Runnin’, movin’ tabs expired
Girlies tryin’ to dis ‘n say my car looks tired
Hit my brakes, out slid skittles
Tinted back window with a bubble in the middle
Who’s car is it? Posse won’t say
We all play it off when you look our way
Rollin’ four deep, tires smoke up the block
Gotta roll this bucket, ’cause my Benz is in the shop

Anonymous says:

wintermute,

what interfuel substitutions are you allowing for over what periods. other variables might be relations between primary, wholesale, retail, then as well, efficiency changes in cap goods — sure elasticities are not linear but neither are they particularly predictive and if we’re talking prices of oils, we’re talking prices which are only indirectly related to physical supply/demand.

anon 4:42,

latest monthly at tod indicates that production has been, if not ’surging’, definitely rising. saudi production rates are not exactly known but if i had been in their shoes i’d not have increased earlier and would be cutting by now. looks like the same old lags between production/consumption which have given us gluts before.