Finally, and far too late, policy makers are waking up to the damage that today’s high oil prices are doing to the global economy. Q1’s oil price averaged $119/bbl, just 7% below Q2 2008’s record $127/bbl ($2012).
Thus Saudi Oil Minister, Ali Naimi, last week told the Financial Times:
“High international oil prices are bad news. Bad for Europe, bad for the US, bad for emerging economies and bad for the world’s poorest nations. A period of prolonged high prices is bad for all oil producing nations, including Saudi Arabia, and they are bad news for the energy industry.
“The bottom line is that Saudi Arabia would like to see a lower price…There is no lack of supply. There is no demand which cannot be met. Total commercial stocks for OECD nations are within target, and enough to handle almost any eventuality”.The chart shows that recession (pink column) has followed every time oil prices in $2012 (red line) have moved above $50/bbl (green dash):
• Today’s oil price is now 5.5% of global GDP
• It was usually 1% – 3% during the 1982-2007 supercycle
• Consumers cannot avoid higher gasoline/diesel and heating bills
• So they have less money to spend on more discretionary items
Recession has been delayed this time by money-printing from the major central banks – the USA has lent $1.6tn via QE1, QE2 and ‘Operation Twist’: China has added $1.6tn in bank lending: and the European Central Bank recently added €1tn ($1.4tn) via its LTRO.
Policymakers also tried to postpone a downturn in the 2000s with the subprime credit boom. Previously in the 1970s they had allowed inflation to reach >10%. But both times, reality intervened and recession followed.
The blog would like to believe that ‘this time will be different’. But as the great Spanish philosopher George Santayana wisely noted in 1905, ‘those who cannot remember the past are condemned to repeat it“.
ICIS pricing comments and price changes since the IeC Downturn Monitor launch on 29 April are below:
PTA China (red), down 13%. “Players are unsure of the downstream demand outlook in April”
Benzene NWE (green), down 11%. “Prices largely followed upstream crude movements this week amid a lack of any real activity.”
HDPE USA export (purple), down 7%. “Traders continued to purchase very little material, saying US prices are too high to work in other regions”
Naphtha Europe (brown dash), down 4%. “Demand picking up from the gasoline sector as blending margins become more favourable”
Brent crude oil (blue dash), down 1%
S&P 500 Index (pink dot), up 3%