Sunday, January 29, 2006

Oil’s affect on the world economy

Recent evidence suggests that the high cost of oil, post Katrina, helped to slow the U.S. economy in the 4th quarter of 2005. The increased cost of fuel took money out of the already strapped American consumer’s wallet, which hurt Big-3 SUV/auto sales, slowed discretionary spending, impacted housing and acted as a drag on the U.S. Economy. See this NY Times article: U.S. Economy Slowed Sharply at End of 2005: Snippets below:

Consumer spending slowed abruptly as purchases of motor vehicles collapsed after automakers phased out the generous incentive programs that had lifted sales through the summer. As consumers cut back on spending, business investment also slowed as companies curtailed spending on cars and trucks.

The abrupt slowdown fed into a bubbling debate over the nation's economic prospects as the housing market weakens and removes a core pillar supporting consumers' hearty spending.

Many economic analysts have been warning for months that the housing bubble will burst and lead to retrenchment as rising interest rates and the stalling of home sales put a dent in consumer spending.

Moreover, the surge in the price of oil led to a big jump in the nation's energy bill, contributing to a sharp rise in imports that put a drag on domestic output.

With the above information digested, what does the future hold for oil and how will it impact our lives, our housing market and our economy?

I’ve previously discussed several oil sector problems (in Time To Worry?), and I don’t think the outlook is very promising. With that said, I’m no analyst and I’m probably not smart enough to understand all the details, but I do keep my ear to the ground and listen to what others are saying:

Word just came out that Kuwait, long regarded as home to some of the world's largest reserves of petroleum, may possess only half the amount of oil reserves that it officially has been stating for many years. Kuwait’s Reserves have been downgraded from 99 Billion Barrels to ~ 50 Billion Barrels.

See to what Sir Richard Branson, the billionaire entrepreneur has to say about the current oil situation: “… any conflict with Iran could push oil prices over $100 a barrel and trigger "the biggest recession we have ever seen".

Ryan McGreal, from Raise the Hammer feels the same way: If Iran cuts off all, or even some, of its 2.5 million barrels a day, the rest of the world will not be able to make up the shortfall and oil importing countries have already dipped heavily into their strategic reserves. Most analysts agree that oil will spike over $100 a barrel, shocking the global economy. When a recession lasts for 20 years, it's called a depression. That's what we're in for once oil production goes into decline.

The Gulf Times paints a pretty bleak picture also: Kidnappings in Nigeria, sabotage in Iraq, and Iran’s controversial nuclear program have combined with huge demand from emerging countries to spark fears of an oil supply crisis, analysts say. “World producers need to bring another one and a half million barrels per day on line every year to meet rising demand,” said Bruce Evers, an analyst with Investec in London. “So even a minor supply disruption is going to have a disproportionate impact on oil prices.” The vigor of China’s demand for oil since 2004 has coincided with rising consumption in the US and India and has shaken up the supply side of the industry. OPEC has increased production, but this has left it with little spare production in reserve, leaving it vulnerable to a supply shock in a member country.

Next, lets see what folks have to say about the possibility of an Iran Oil Bourse: The Bush administration will never allow the Iranian government to open an oil exchange (bourse) that trades petroleum in euros. If that were to happen, hundreds of billions of dollars would come flooding back to the United States crushing the greenback and destroying the economy.
Such a crash would result in soaring interest rates, hyperinflation, skyrocketing energy costs, massive unemployment and, perhaps, depression. This is the troubling scenario if an Iran bourse gets established and knocks the dollar from its lofty perch.

If you consider all of these issues together: the troublesome situation in Nigeria; the recently released news from Kuwait; the extremely narrow margins between oil supply and demand; and the current IRAN nuclear situation/IRAN Bourse; just how high do you think future oil prices will go, and how do you think it will impact our housing sector (which is cooling) and our economy (also slowing)?

Please feel free to provide your thoughts on the matter...


Out at the peak said...

Life After the Oil Crash has a preparation area for Peak Oil.

41cadillac said...

Yes! to all of your post on oil.

The foolish purchases of homes at prices far above the ability of individuals salaries to really meet those monthly payment will haunt the USA economy.

Today I was at the "Grove" in Los Angeles, the popular farmers market next to CBS, and suggested to a clerk in the "Apple Computer Store" that since May 2005 people in the USA have spent more than they earn.

She said: she believed my statement and she was one of them. And did not seem to be concerned.

So now the SUV's purchased with monies taken out of home ATM is costing more to run to the Grove to spend more money THIS MONTH than is earned.

I suggest that the Los Angeles Times will at some point print: "LOS ANGESLES BIGGEST REAL ESTATE BUBBLE BURST IN THE USA".


contrarian2day said...

Thanks for the comments guys.

PEAK--Yes, I've seen that web-site before. Lot's of good information, but most folks would blow it off as unrealistic and it"Could Never Happen". I personally feel we are near.

Cadillac: You hit the nail on the head and it's only going to get worse. How badly will $4 or $5 gas hurt the consumer? Will they even be able to afford to drive to the grove?