US Energy Shock - war for oil (price)
GWI | 28.02.2003 07:55
Politicians are right when they say the war is not about oil... it's about the PRICE OF OIL and the currency it's paid for in. France and Germany want to shift oil payments from Dollars to Euros - Iraq was the first country to do this. Whilst the US economy is dependent on maintaining the Dollar as the only oil trading currency and world reserve currency.
Will U.S. Suffer Energy Shock?
Summary
Nymex crude prices have reached 13-year highs as product stocks have hit 28-year lows. The United States is moving into dangerous territory regarding energy markets; the Venezuelan situation has stripped away much of the insulation that protects the American economy from energy shocks. Without a rapid return to lower prices, the United States risks joining the rest of the world in a recession induced by high energy prices.
Analysis
Nymex crude rose as high as $38.66 on Feb. 27, continuing a
steady climb in crude prices over the last year and ringing them to a level not seen since October 1990 in the aftermath of the Iraqi invasion of Kuwait.
The rise in prices has a number of causes. First, and most obvious, is the war premium related to pending Iraqi hostilities.
The Bush administration began beating its anti-Iraq drum
approximately one year ago. With the rhetoric -- and matching military buildup -- now reaching a crescendo, the premium is nearly at its ceiling.
That premium is being magnified by the second factor: low inventories. The Department of Energy reports its crude inventories dipped to a 28-year low last week, while an unusually cold winter has reduced natural gas stocks 47 percent from their level a year ago. Supplies of heating oil and diesel also dipped below the benchmark 100 million-barrel level. None of these statistics alone is dangerous, but they all feed into higher energy prices and, taken together, they raise the specter of an energy-induced recession.
Finally, there is Venezuela, with a recent strike by Petroleos de Venezuela employees that cut Venezuelan crude from the market in a crisis that contributed to both shy American inventories and higher prices globally.
The key of the Venezuelan crisis, however, is that it hit the U.S. market disproportionally, since the majority of Venezuelan crude ships to the United States. That has raised the price of U.S. trading oil more quickly than the price of crudes that trade abroad. For example, Nymex crude on Feb. 26 closed in New York $4.63 above Brent in London. That's triple the average spread over the past year.
In short, because of Venezuela, the U.S. economy is suffering more from the higher energy prices than it has in the past.
Spiking energy prices certainly can take some of the economic wind out of American sails, particularly in the transportation sector. Higher energy prices raise production costs across the board, making less cash available for business investment. Low business investment was the leading cause of the 2001 recession, and it has yet to return to comfortable levels. Higher heating and gasoline bills also deplete the disposable income of consumers, preventing their spending from stimulating economic growth. In effect, higher energy prices act as a direct tax on both producers and consumers.
But while high energy prices certainly are uncomfortable and do cause worry of recession, a 1973-74-style energy shock is not in the making.
The United States registered 2.7 percent growth for 2002. While the public mood might be that the recession is still present, by any sane definition it ended 15 months ago. So while the price spread between American crude prices and their international equivalents has eroded much of the United States' natural advantage, stronger growth gives the United States more resistance to high energy prices than the stagnant economies of Europe or Japan.
There is also the issue of scope. The 1973 oil embargo jacked up prices in inflation-indexed dollars from an average of $12.38 a barrel in 1973 to $39.27 in 1974. Even with this week's jumps, oil prices are not yet double their level from a year ago. Considering that the U.S. economy is roughly twice as energy-efficient now as it was in 1973, prices would need to push to $80 a barrel before having 1973-style effects.
This is not to say there isn't a danger. The Arab oil embargo of 1973-74 squeezed the life out of the U.S. economy, despite the fact that the United States was the world's largest energy producer at the time.
There are only two means of removing the threat. First, the
United States can learn to use less energy. After the 1973
embargo, U.S. crude demand dropped by nearly 6 percent. This was partly due to the introduction of new technologies and partly to conservation measures, but mostly it was from economic contraction. Energy-intensive industries simply shut down.
Second, prices can fall on their own. Normally this occurs
because of an increase in supply. It was ultimately Venezuela ramping up its production -- despite the anger of Islamic producers -- that broke the embargo.
A quick U.S. victory in the coming Iraq war would end the war premium and herald the return of Iraq to the ranks of the world's largest oil producers. The removal of political uncertainties and the flooding of the market with Iraqi crude could send prices even down into the teens.
Since Americans, with their car-and-vacation culture, are not about to sacrifice their gasoline-guzzling SUVs, the second of the two possibilities is the most likely outcome. But should the war turn sour, the United States -- and the world -- will need to add a protracted removal of most of Iraq's oil exports from the global supply picture as well.
see also: When Will We Buy Oil in Euros
http://www.observer.co.uk/business/story/0,6903,900867,00.html
Summary
Nymex crude prices have reached 13-year highs as product stocks have hit 28-year lows. The United States is moving into dangerous territory regarding energy markets; the Venezuelan situation has stripped away much of the insulation that protects the American economy from energy shocks. Without a rapid return to lower prices, the United States risks joining the rest of the world in a recession induced by high energy prices.
Analysis
Nymex crude rose as high as $38.66 on Feb. 27, continuing a
steady climb in crude prices over the last year and ringing them to a level not seen since October 1990 in the aftermath of the Iraqi invasion of Kuwait.
The rise in prices has a number of causes. First, and most obvious, is the war premium related to pending Iraqi hostilities.
The Bush administration began beating its anti-Iraq drum
approximately one year ago. With the rhetoric -- and matching military buildup -- now reaching a crescendo, the premium is nearly at its ceiling.
That premium is being magnified by the second factor: low inventories. The Department of Energy reports its crude inventories dipped to a 28-year low last week, while an unusually cold winter has reduced natural gas stocks 47 percent from their level a year ago. Supplies of heating oil and diesel also dipped below the benchmark 100 million-barrel level. None of these statistics alone is dangerous, but they all feed into higher energy prices and, taken together, they raise the specter of an energy-induced recession.
Finally, there is Venezuela, with a recent strike by Petroleos de Venezuela employees that cut Venezuelan crude from the market in a crisis that contributed to both shy American inventories and higher prices globally.
The key of the Venezuelan crisis, however, is that it hit the U.S. market disproportionally, since the majority of Venezuelan crude ships to the United States. That has raised the price of U.S. trading oil more quickly than the price of crudes that trade abroad. For example, Nymex crude on Feb. 26 closed in New York $4.63 above Brent in London. That's triple the average spread over the past year.
In short, because of Venezuela, the U.S. economy is suffering more from the higher energy prices than it has in the past.
Spiking energy prices certainly can take some of the economic wind out of American sails, particularly in the transportation sector. Higher energy prices raise production costs across the board, making less cash available for business investment. Low business investment was the leading cause of the 2001 recession, and it has yet to return to comfortable levels. Higher heating and gasoline bills also deplete the disposable income of consumers, preventing their spending from stimulating economic growth. In effect, higher energy prices act as a direct tax on both producers and consumers.
But while high energy prices certainly are uncomfortable and do cause worry of recession, a 1973-74-style energy shock is not in the making.
The United States registered 2.7 percent growth for 2002. While the public mood might be that the recession is still present, by any sane definition it ended 15 months ago. So while the price spread between American crude prices and their international equivalents has eroded much of the United States' natural advantage, stronger growth gives the United States more resistance to high energy prices than the stagnant economies of Europe or Japan.
There is also the issue of scope. The 1973 oil embargo jacked up prices in inflation-indexed dollars from an average of $12.38 a barrel in 1973 to $39.27 in 1974. Even with this week's jumps, oil prices are not yet double their level from a year ago. Considering that the U.S. economy is roughly twice as energy-efficient now as it was in 1973, prices would need to push to $80 a barrel before having 1973-style effects.
This is not to say there isn't a danger. The Arab oil embargo of 1973-74 squeezed the life out of the U.S. economy, despite the fact that the United States was the world's largest energy producer at the time.
There are only two means of removing the threat. First, the
United States can learn to use less energy. After the 1973
embargo, U.S. crude demand dropped by nearly 6 percent. This was partly due to the introduction of new technologies and partly to conservation measures, but mostly it was from economic contraction. Energy-intensive industries simply shut down.
Second, prices can fall on their own. Normally this occurs
because of an increase in supply. It was ultimately Venezuela ramping up its production -- despite the anger of Islamic producers -- that broke the embargo.
A quick U.S. victory in the coming Iraq war would end the war premium and herald the return of Iraq to the ranks of the world's largest oil producers. The removal of political uncertainties and the flooding of the market with Iraqi crude could send prices even down into the teens.
Since Americans, with their car-and-vacation culture, are not about to sacrifice their gasoline-guzzling SUVs, the second of the two possibilities is the most likely outcome. But should the war turn sour, the United States -- and the world -- will need to add a protracted removal of most of Iraq's oil exports from the global supply picture as well.
see also: When Will We Buy Oil in Euros
http://www.observer.co.uk/business/story/0,6903,900867,00.html
GWI
