Budgeting for a downturn

Economic growth, Financial Events, Oil markets

The ‘consensus forecast’ for 2008 is very optimistic, as I commented in my post-EPCA note. It says oil will remain at $70/bbl, that debt market problems will be contained, and that petchem margins will remain at 2007 levels. This is unusual, as the consensus is normally a base case scenario, with upside and downside variants.

And since EPCA, oil has already increased to around $90/bbl. Back in early July, when it was still ‘only’ $70/bbl, I noted that it had the potential to approach $100/bbl, and this still seems a real possibility. In these circumstances, it is perhaps no surprise that we are seeing an apparent ‘boom’ in demand, as downstream consumers rush to cover themselves before product prices move higher.

I first saw this effect happen in 1979, when the industry had a record year. It was only in 1980 that we discovered that the apparent ease with which the economy had weathered a rise in the oil price to $30/bbl (around $95/bbl in today’s money), was a mirage. Could the same be happening today? I think it is worth considering very carefully as a possibility.

After all, whilst history never repeats itself, the underlying position in financial markets is clearly deteriorating. Bank of America (the 2nd largest US bank), came out with truly shocking Q3 results on Thursday, whilst on Friday Caterpillar’s CEO Jim Owens said the US was already ‘near to, or even in, a recession’. And new housing starts and US house prices were already very weak, even before the recent credit crunch.

There must surely be a real possibility that this latest upward rush by the oil price will be the catalyst that finally causes the US consumer to cut back on non-essential spending. Equally, the continuing problems in the banking sector may well turn off the tap of consumer, and maybe even corporate, lending.

If I was drawing up budgets for 2008, I would be putting in place contingency plans for just such an outcome, even whilst crossing my fingers that I would not have to use them.

PREVIOUS POST

Buffett sells PetroChina

20/10/2007

I mentioned PetroChina in the very first blog entry, when the stock was trading ...

Learn more
NEXT POST

Private Equity and the credit crunch

24/10/2007

I recently had the opportunity to attend a workshop organised by Pilko & As...

Learn more
More posts
Auto industry provides a model for the transition to Net Zero
25/07/2021

Flooding in China and Europe, record temperatures in the USA, wild fires – all these are signs...

Read
Europe’s Green Deal will transform its economy, as floods confirm urgency of tackling climate change
18/07/2021

The floods raging in Germany and Benelux highlight the scale of the Climate Change challenge ahead....

Read
Oil markets enter the endgame as car companies rush to electrify
11/07/2021

Almost every day now sees a car company rushing to announce its plans to boost Electric Vehicle (EV)...

Read
Governments continue to fail the Covid challenge
04/07/2021

Governments have failed to properly protect their populations from the pandemic. Some have actively ...

Read
The blog’s 14th birthday – and the New Normal world it predicted has arrived
27/06/2021

The blog has now been running for 14 years since the first post was written from Thailand at the end...

Read
“When all the experts and forecasts agree — something else is going to happen”, Bob Farrell
20/06/2021

In January, “everyone knew” that inflation was about to take off, and that the US$ was g...

Read
Friends of the Earth v Royal Dutch Shell – what did the Dutch Court rule, and what does it mean for Shell’s business?
06/06/2021

My Dutch colleague, Daniël de Blocq van Scheltinga, is a graduate of Leiden University in the Nethe...

Read
ACS Chemistry & the Economy webinar on Thursday
02/06/2021

Please join me for the next ACS Chemicals & Economy webinar on Thursday, at 2pm Eastern Standard...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more