“Its the oil price, stupid!”

Brent €.pngFamously, when Bill Clinton ran his successful presidential campaign in 1992, his advisers would remind him of the key message with just one phrase “Its the economy, stupid!”. Today’s policymakers would do well to maintain a similar focus on the oil price, if they want to understand today’s lack of demand.

Somehow, everyone seems to have forgotten that oil prices over $50/bbl have always led to recession in the past. Similarly, they are now 5% of global GDP, compared to a normal level of half this. So it is hardly surprising that hard-pressed consumers cannot afford much discretionary spend. They have no spare cash after paying to heat their homes, and fuel their cars.

This would be bad enough on its own. But prices in two major markets – Europe and China – are actually at all-time record highs. So it is hardly surprising that domestic demand in both areas is particularly slow. As the charts show (Europe left, China right):

• Brent oil prices are now €87/bbl in Europe, due to the weakness of the euro. This is above the peak level of 2008 (€86/bbl), when oil hit a record $144/bbl
China’s prices are also at records. The government capped them in 2008, to avoid social unrest during the Olympics. Today, gasoline is at Rmb 9630/t and diesel at Rmb 8810/t, compared to June 2008′s peaks of Rmb 6980/t and RMB 6520/t

China’s gasoline price for 90 RON is thus $4.60/US gal ($1.20/litre), compared to current US prices of $3.75/gal. European prices are even higher at $8.00-$9.00/US gal.

Wages have not gone up to reflect today’s record prices. And unemployment is considerably higher in most countries than back in 2008. So it is hardly surprising that ordinary people are cutting back on everything but real essentials.

Every policymaker should have a version of Bill Clinton’s slogan hung in their office, to remind them of the crushing burden this imposes on the economy. “Its the oil price, stupid!”.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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