Suddenly energy has replaced credit as the shortage that is threatening the economies of the west.
On 31 December 1999, the Dow Jones closed at 11,497. Last night it closed at 11,453. That’s eight and a half years of zero capital growth by the greatest corporations in the Earth’s capitalist headquarters.
During that period three bubbles have burst – internet, housing, and credit – and the United States began a war on terrorism that has drained both its treasury and its confidence.
But the immediate cause of last night’s 3% fall on the Dow was that the oil price went above $US140 a barrel for the first time, just a few days after Saudi Arabia came to the rescue of consumers by announcing a production increase of 200,000 barrels a day.
So that went well.
And the reason the oil price went above $US140 last night is firstly because Chakib Khelil, the president of OPEC, said it would, so it did, and secondly because Shokri Ghanem, Libya’s most senior oil official, said his country might as well cut production now because the world is so well supplied by Saudi Arabia.
Then again maybe it was because some shorts were covering their positions in the last 45 minutes of futures trading, since that’s when all the action in the price took place (don’t believe it).
As I drove to the airport this morning for a flight to Sydney for a few hours, I heard Michael Lardelli, senior lecturer in genetics at the University of Adelaide, talking on Radio National’s Perspective segment. Obviously he’s a genetics expert, not an oil expert, but he plucked at my airport-bound conscience.
“If you are listening to me now, then you were born in the “age of oil”. A wondrous time when abundant energy has enabled humanity to work technological miracles. With enough energy we can solve any problem. Need to get to the other side of the world by tomorrow? Just fly! Need to sow and harvest millions of hectares of grain, or move a mountain, or build an island? Our mighty machines will do it for us. Need to drive five kilometres to the shop, or 50km to work? Now where did I put those car keys?”
Oh yes, it’s true. The world’s oil consumption is 85 million barrels a day, or 13.6 billion litres, and rising (entirely because of developing world demand – OECD demand is falling). Production is a bit less, and declining.
The price might fall again soon – it has been volatile this year after all – but the proposition that it is all due to speculation is the refuge of the blind optimist.
As HFA’s Jonathan Pain wrote in Wednesday’s Eureka Report, the net long position of speculators, according to the Commodities Futures Trading Commission, is just 12,712 contracts, equivalent to just 15% of daily global consumption.
Pain, like Lardelli, says the era of cheap energy is over, and one way or another it is hard to disagree. Even if the price of fossil fuel energy falls a bit, it will have to be raised again to save the planet from greenhouse warming.
It is the bursting of the fourth bubble in a decade – the cheap oil bubble.
In 2000 the crude price was about $US30 a barrel and the world spent 2% of global GDP on oil. Now it’s $US140 a barrel and 7% of world GDP.
Suddenly energy has replaced credit as the shortage that is threatening the economies of the west.
The difference is that when credit dried up last year, we found we could do without it. Some firms went bust, and are still going bust, because they are on a credit drip and they starve to death when it is turned off.
We are all on an oil drip.
Now, I’d better go and board that plane.
This first appeared in Business Spectator
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