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May 8, 2008 Rising Oil Prices: Crunch time may be here. Reflections on the possible impact on the economy, US Dollar and Gold.
The non-stop rise of Oil prices to over $124 has been disconcerting to most observers. To the extent that it may fundamentally reflect the worsening of a long-feared progressive imbalance between supply and demand, it is nothing less than alarming for it promises to go much higher and may prove devastating in its impact on every aspect of the economy and therefore to the general standard of living in our society. We are neither economists nor experts in the Oil situation with its many aspects of global production, consumption, reserves, and geopolitical factors. We only wish to highlight one aspect of rising Oil prices: the amount and possible consequences of that part of the annual Oil bill that is being incurred and paid to foreign Oil producers. To put the issue in perspective, this amount is related to the annual $ amount produced by GDP growth. In 2007, a year of slowing economic growth, the 5% of nominal growth of GDP resulted in $476 billions above the GDP of 2006. In the past four years, the increased amount of GDP averaged $666 billions annually. In the table below are listed the amounts of the annual Oil bill that would be paid to foreign oil producers at different Oil prices, if the latter persisted for a full year: Oil Price ($/barrel) Annual Cost of Oil imports (billions) _______________________________________________________________________________ $100 $474 $124.3 (today Price) $589 $130 $617 $150 $712 $200 $949 _______________________________________________________________________________ From the above estimates, it is evident the annual Oil bill due to foreign producers is fast approaching the entire increase in wealth resulting from GDP growth. This is the amount that normally would be used to improve standards of living and invest in the future of our children. We find such an impact of rising Oil prices very alarming. One question can be asked: can the value of the US Dollar be maintained under such circumstances?. There is good reason to doubt, even when to the above figures one does not add the cost of War and other costs. If so, the prospects for future significant waves of rising Gold prices will be much enhanced. In this site, we have been very early, in fact premature, in warning of an impending bottom of the USD based of the likelihood of a due correction in the exchange rates of major currencies and the prospects of moderate increases in interest rates. See: The GYN Trio: Gold, Yen, and T-2 years Note Outlook for Gold: Headwinds from Interest Rates and Carry Trade. Therefore, we have had no difficulty sharing the recent consensus view of a bottom and rally of the USD. At the same time, we have recognized the headwinds that these developments represented against further appreciation of Gold prices. Thus in view of other factors still very bullish for Gold, we expressed the opinion that, on balance, Gold prices would most likely move sideway. The surprising and relentless recent rise of Oil prices and the consequent massive transfer of wealth to foreign Oil producers that it implies, both at current prices and at potentially higher prices in the near future, forces us to at least begin to reconsider the view that that the USD has reached a firm bottom. As a corollary, we propose to carefully monitor developments in the energy sector with a view to change our outlook for Gold prices from neutral to a more bullish one. Enter content here Enter content here Enter content here Enter content here |
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