Thursday, June 7, 2012

Global recession being predicted by falling oil prices?

The global economy is based on transportation networks that are propped up by cheap energy. Because of this we can be relatively certain that when demand for energy begins to fall that the economy is slowing. And when energy prices fall sharply we can be relatively certain that the economy is not just slowing but entering into a recession.
Jeff Rubin, the former Chief Economist for CIBC World Markets has showed convincingly how global recessions are linked to high oil prices. Rubin had this to sayback in May 2011:
"There will be many dress rehearsals in commodity markets before the next global recession. An example is last week’s dramatic and broad-based selloff that took oil prices for over a $10/barrel tumble. And there is no doubt that despite the scarcity of the resource, the price of oil will crash the next time the global economy sewers."
Read it at Southern Limits
Brace Yourself For The Next Global Recession: It’s Already Begun
by Andrew McKay

The other factor is superabundant supply. Since oil became an asset classes, already pumped crude has been stored in expectation of rising prices owing to increasing demand in a recovery. That is not happening and storage costs are biting. Holding oil is becoming an alligator.


AndyCFC said...

Chris Cook wrote this back in february

He didnt put a date on it here (apart from 2nd quarter) but on FTAV he posted a comment predicting may to mid june. This would have happened anyway.

Tom Hickey said...

Thanks, Andy, I remember reading that back then.

Dan Lynch said...

Cook's theory makes a lot of sense, and is consistent with Wray's theory that we have experienced a tremendous commodity bubble.

But Mosler claims the Sauds, as monopoly swing producers, have the power to set prices -- though like any monopoly, the Sauds still have to contend with a demand curve.

Further, the Sauds have a history of lowering prices just in time for US presidential elections.

Perhaps a combination of all three factors ?

Southern Limits said...

Hi everyone,

Thanks Andy for the link, there are a number of people who have been predicting this for a while. I wrote this because I believe we are actually seeing the signs of it happening right now.

Tom, over supply is definitely a factor but as a symptom of a failing economy rather than a healthy oil industry creating more oil than a healthy economy can consume.

Dan, as for the impact of the Sauds and OPEC in a larger sense, Gregor McDonald wrote an interesting piece on how OPEC has lost the power to set the price of oil: The main reason put forward is that OPEC's market share has stagnated since 2005. It is debatable whether OPEC has the capacity to dramatically increase production when it feels like it. That may have been the case once but it is looking increasingly likely that OPEC is being constrained by an upper production limit. Of course this is highly contestable due to OPEC keeping a tight hold on production figures and the figures that are released are dubious at best.

AndyCFC said...

Hi Southern
Liked your article btw.

Reason I reminded people of Chris Cooks article is of who he is and his timing has been spot on.

Southern Limits said...

Thanks AndyCFC. It was a very interesting article and shows an intimate understanding of the subject.