Monday, August 31, 2015

Cheap oil always boosts economic growth - UK economist


If you remember back when it was going up, everybody thought it would cause a collapse, now with it going down, everybody thinks it will cause a collapse.




17 comments:

Dan Lynch said...

Depends on whether you are an oil consumer or an oil producer. And no, Saudi control is not broken.

US is both producer and consumer so maybe mixed results here. Good for car sales, tourism, bad for oil patch.

Dan Lynch said...

US steel industry is laying off, citing weak demand for drill rod as one reason.

Philippe said...

most unintentionally funny thing ever:

http://www.zerohedge.com/news/2015-08-30/austrian-economics-equivalent-terrorism-thanks-latest-islamic-state-gold-standard-pr

Tom Hickey said...

There's a difference between economics, which deals with allocation of real sources, and finance, which deals with debt.

A look at historical data shows that energy availability and price is correlated with economic growth.

However, shifts in price in major factors like petroleum can have financial consequences that have knock-on effects that also influence economics in a shorter term.

Falling commodities prices has a generally stimulative affect in the longer terms, but not necessarily in a shorter term, where it can be a bearish signal and also a bearish factor due to financial consequences. This can become an economic factor through declining demand owing to declining incomes or increasing liquidity preference expressed as saving that constitutes demand leakage.

Matthew Franko said...

Saw that Philippe....

If we were smart we could really exploit this...

Trouble is probably most of the people in US "intelligence" are sympathetic with the ISIS people in this regard....

Dan Lynch said...

A Wilder steel mill in Kentucky that serves the energy industry is set to lay off nearly 150 workers

Low gas prices are partially blamed for the up to 614 layoffs occurring at U.S. Steel’s Lorain Tubular Operations in Ohio

Republic steel to lay off hundreds. The lower prices have made fracking and conventional drilling less profitable, and much of the steel Republic produced was for fracking equipment and oil rigs.

Mass layoffs at northwest Indiana steel mills. Shale oil production, using the process of hydraulic fracturing, or fracking, relies on a large quantity of steel pipe to pump fluids and sand into a well and pump oil out. With the collapse of shale production, steelmakers are pulling back on so-called oil country tubular goods, which had been a large growth segment of their production.

That's just one industry. When you are a petro state, low oil prices are not a good thing.

Ignacio said...

The cyclical nature and the volatility in oil price has been theorized long time ago as the natural way in which the peak (plateau) of production would unravel.

The question remains if a decoupling from oil (and carbon) is possible (yet) or not. If this decoupling does not happen, and "fast", the frequency of the cycle will become higher as well as the amplitude, becoming more virulent and creating shocks in the economy which will create, at the same time, further geopolitical tensions as conflict for resources becomes a (even more) real thing.

The extended breath of lower commodity prices can be attributed to several factors probably, but SA IS contributing to it actively, destabilizing two very ancient regional enemies (Iraq and Iran), is not "broken".

Matthew Franko said...

Dan those linear segments might be half the price of what they were a year ago... just judging by "steel" prices....

The article refers back to the 80s when ores and metals were bullish while oil price was weak...

Today they are both going down together.... with today's lower steel prices in USD terms it may lower the incremental cost of US production...... cost models might be adjusted going forward

rsp,

Ignacio said...

No worries Dan, the increase in Suggar Babies (aka legalized prostitution), waitress and Uber drivers sure will offset any unemployment.

The GDP is growing, all is good, nothing to see, move along, DOW 50000! HAS USA also started to add in drugs into the GDP like in Europe? The only good thing about the current descent into feudalism (becoming more complete each day) is that drugs may become legal. At this rate they will start adding up crime into the GDP (why not, the police state-prison-justice complex already is counted and adds A LOT to the GDP), growth feels good!

Dan Lynch said...

Add drugs to GDP? That's a great idea, Ignacio. That might get us back to 5% growth rates. ;-)

From Warren today Dallas Fed Mfg Survey: "shockingly negative"

"I don’t see any signs of any other sector stepping up and replacing the GDP supported by the now lost oil capital expenditures."

Not sure that I agree with Warren there because housing seems to be re-bubbling, health care is still adding to GDP, car sales were still decent thanks to subprime auto loans, and student loans continue to pump money into the economy. So the economy could keep muddling along for a while. It just seems like a house of cards to me.

Random said...

Warren has been banging on that (heh!) for forever.

Random said...

Drum. I meant drum. Nevermind the joke is ruined :(

Dan Lynch said...

@Random, yes Warren has been pessimistic for a long time and so far the economy continues to muddle along. I share his pessimism, but no one can predict when bubbles will pop.

Add the corporate stock buy-back scheme to the list of bubbles keeping the economy muddling along.

The next recession may be driven by corporate debt rather than household debt. Households have deleveraged while corporations have borrowed.

Matthew Franko said...

Dan the stock buybacks are asset swaps they dont add anything to GDP except via the Confidence Fairy.... it like saying the QE is somehow stimulative...

Dan Lynch said...

Matthew, doesn't it depend on how the buybacks are financed?

If the corporation uses its cash on hand to buyback its stocks, that's an asset swap.

If the corporation finances the buyback by selling a junk bond to an investor who buys the bond with cash on hand, then that moves existing money from point "A" to point "B". No new money is created.

But if the buyback is financed with a loan, or if the investor buys junk bonds on margin, doesn't that create money out of thin air like any other private debt?

Ignacio said...

Corporations have been borrowing from banks because the zero rates and strong balance sheets (initially) for a while, as they were awash in cash which was used to leverage.

Or indirectly through bonds, which have been bought by wealthy creditors who have access to credit lines at low cost. Pumping a lot of credit into the economy, substituting households as Dan says. A lot of the buybacks have been financed thought those schemes, tune in the usual suspects: hedge funds, private equity and ivnestment banks and all the shadow banking system as financiers.

Is like a Ponzi scheme really, but goes in hand with all the growth in the last decade. Unfortunately we don't know the magnitude of those credit bubbles until they blow back and the government has to throw in good money (reserves) after collapsing shadow money (leveraged credit) as it happened in 2008.

Ignacio said...

Looking at the Dallas Fed report, it looks like the 'recovery' in production was led, at least an important part, by fracking. As it started to slow down (in general cooldown as credit is reaching it's limits again) probably the lower oil has somehow helped 'muddle through' but it has surpassed the point where it helps the economy and with the global slowdown it's getting worse.

This is all speculation, but it all comes back to if the pvte sector has reached again its leverage limits (relative to govt spending and exports). If there is a shutdown of the govt is gonna blow up; but one thing is certain and that is that any rates hikes will be delayed.