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  • Oil Prices: Revisiting a Prediction

    Posted by Jonathan on June 16th, 2005 (All posts by )

    Whoops.

    (In case it’s unclear, I made that call about $20 ago. Latest prices here.)

     

    17 Responses to “Oil Prices: Revisiting a Prediction”

    1. Sandy P Says:

      That’s OK, our economy’s adjusting, check this out via Bros. Judd:

      Government Hits One-Day Tax Revenue High

      After totaling it all up, the Treasury Department announced Thursday that it had collected $61 billion on Wednesday. That surpassed the old one-day record of $56 billion set on Dec. 15, 2000.

      The bulk of the revenue — $49 billion — came from corporate tax payments, also a one-day record for such receipts. The old mark was $46 billion set last Dec. 15. Wednesday’s date, June 15, and Dec. 15 are both deadlines for corporations to make quarterly tax payments.

      The government’s coffers have been swelling this year as tax receipts from both individuals and corporations have been on the rise, reflecting an improving economy. Because of those increases, this year’s federal deficit is expected to fall to around $350 billion, down from the $413 billion record in dollar terms set in 2004.

      And Jacques had to admit defeat. The 1st 1/2 of June on the whole has been very, very good to the US.

    2. Mark Says:

      Henry C K Liu made me look at oil prices in a different light. He says:

      Oil-related transactions involving the same material quantity involve greater cash flow, with each barrel of oil generating $50 instead of $25. … higher energy prices do not take money out of the economy, they merely shift profit allocation from one business sector to another.

      Since energy is a basic commodity and oil is the predominant energy source, high energy cost translates into a high cost of living, which can also result in a higher standard of living if income can keep up.

      As cash flow increases for the same amount of material activities, the GDP rises

      With asset value ballooning from the impact of a sharp rise in energy prices, which in turn leads the entire commodity price chain in an upward spiral, the economy can carry more debt without increasing its debt-to-equity ratio

      War-making is a gluttonous oil consumer. With high oil prices, America’s wars will carry a higher price, which will either lead to a higher federal budget deficit, or lower social spending, or both. This translates into rising dollar interest rates, which is structurally recessionary for the globalized economy. But while war is relentlessly inflationary, war spending is an economic stimulant, at least as long as collateral damage from war occurs only on foreign soil. War profits are always good for business, and the need for soldiers reduces unemployment.

      The economics of petroleum are as important as geology in coming up with reserve estimates since a proven reserve is one that can be developed economically. If the Mideast and the Persian Gulf implode geopolitically and oil from this region stops flowing, the US will be the main beneficiary of $50 oil, or even $100 oil, as would Britain with its North Sea oil and countries such as Norway and Indonesia. But the big winner will be Russia. For China, it would be a wash, because China imports energy not for domestic consumption, but to fuel its growing export machine, and can pass on the added cost to foreign buyers. In fact, the likelihood of the US bartering below-market Texas crude for low-cost Chinese manufactured goods is very real possibility in the future. Similar bilateral arrangements between China-Russia, China-Venezuela and China-Indonesia are also good prospects.

      Fifty-dollar oil will buy the US debt bubble a little more time, albeit bubbles never last forever. But in a democracy, the White House is under pressure from a misinformed public to bring the oil price back down to $25, not realizing that the price for cheap oil can be the bursting of the debt bubble. Despite all the grandstand warnings about the need to reduce the US trade deficit, a case can be made that the United States cannot drastically reduce its trade deficit without paying the price of a sharp recession that could trigger a global depression.

    3. Ralf Goergens Says:

      Sandy,

      I don’t think that tax revenue is that good a yrad stick. German tax revenue also sharply increased last month, even though we aren’t doing all that well.

      Besides, American companies are taxed not just on domestic profits, but also on profits they make abroad. It may be that tax revenue from American holdings abroad, with currencies that serve as a kind of hedge against high oil prices (as the Euro did so far) increased strongly.

      Besides, while the performance of the Amercan economy is impressive it can hardly be denied that Americans are better off with low oil prices than with high ones.

    4. David Foster Says:

      “higher energy prices do not take money out of the economy, they merely shift profit allocation from one business sector to another”…I don’t understand this argument, unless by “the economy” you mean the entire *world* economy. When the price of crude goes up, most of those businesses are making increasing profits are non-American businesses, and I doubt if there is sufficient US equity ownership in them to make higher oil a net positive.

    5. Shannon Love Says:

      Mark,

      I think you are falling into the Keynsian fallacy wherein the movement of money is what actually constitutes the economy.

      It doesn’t, the making and moving of stuff is what the economy actually is. Money is just a tool for doing so.

      High commodity prices indicate a shortage of that commodity. That means there will be less physical work done that depends on that commodity. Since less work is done the system as whole grows poorer. Likewise, wars don’t help the economy because they don’t produce anything but merely destroy. Physical resources diverted to the military are resources that can’t be used for creative purposes.

      In economics, it is better to think about the physical work that gets done first and money second if at all.

    6. Sulaiman Says:

      It would be interesting to find out how much of the rise in price is attributed to upstream and how much to downstream (refining capacity) side of the business.

      If it is the former, we have a good excuse to invade Saudi Arabia and make smaller countries out of their oilfields. The resulting competition will be good for world economy and we will have taken a huge step forward in solving the terror problem. And by increasing the number of Oil Sheikhdoms, we won’t hopefully have to see George Bush in his jeans photographed at Crawford Ranch with such dignitaries as Prince Bandar (the man lies from all the holes from his head).

    7. Sandy P Says:

      –This translates into rising dollar interest rates, which is structurally recessionary for the globalized economy. —

      It’s always America’s fault. I remember the 80s. $ too high, $ too low.

      Ralf, the drug firms are repatriating over $200 billion, they’re getting an “amnesty,” only have to pay 5%, IIRC.

      Besides, Americans aren’t entitled to low oil prices. We are finally starting to pay our “fair share.” The “experts” told us that we would be paying $2 in the early 90s. We need this kick in the pants.

      Physical resources diverted to the military are resources that can’t be used for creative purposes.

      Like advancing the socialist state????? Because it works so well????

    8. Ralf Goergens Says:

      Ralf, the drug firms are repatriating over $200 billion, they’re getting an “amnesty,” only have to pay 5%, IIRC.

      Ah, a tax amnesty! That explains it.

      Besides, Americans aren’t entitled to low oil prices. We are finally starting to pay our “fair share.” The “experts” told us that we would be paying $2 in the early 90s. We need this kick in the pants.

      Well, if Europe had the same climate as the US, we’d consume almost as much energy per capita as Americans do, because we’d need air conditioning. And sometimes we can use it even with the climate we have now – think of all the dead senior citizens in France and Italy two years ago.

      If the high oil prices serve as an incentive to build more nuclear power plants, it’s fine with me, though. :)

    9. incognito Says:

      $2.70 a gallon for the good stuff in Northern California. How much is it in Germany Ralf?

    10. Ralf Goergens Says:

      If you mean with good stuff the high oktane gas it’s 1,23 Euro per liter, that’s $4,65 a gallon.

      Since the still strong Euro still serves as a hedge against the high oil price, it should be less than in California, but over 80% of our price is in taxes. :(

    11. incognito Says:

      Ouch… whenever I think we have it bad, gas prices wise, I think of Germany. But hey, iirc it was $5 a gallon a few years ago in Germany, so net net you’re doing ok growth wise. We use to pay $1.30 a gallon here just a few years ago, so it more or less doubled. I remember we howled when it went to $1.65 a gallon. $1.65 is lookin’ pretty good now.

    12. Sandy P Says:

      Ralf, is any of that tax targeted to your National health care like Britain is?

      75% goes to the NHS, IIRC.

    13. Sandy P Says:

      I paid $2.23 for primo a couple of weeks ago.

    14. Ralf Goergens Says:

      incognito,

      it actually wasn’t any higher than it is now. You get the least mileage per Dollar in the world in Germany, that’s quite bad enough, thank you very much. :(

      You know, the idea is to motivate people to take the train, but because a lot of the locomotives run on Diesel, and the railroad company needs a lot of trucks for logistics, tickets have gone up by almost the same rate.

      Sandy,

      part goes to social security.

    15. Sandy P Says:

      Drill, baby, drill in Utah and Colorado! With our shale, we could have more oil than the ME?

      And Mexico might be running dry, too….

      Hmmm……..

    16. jaimito Says:

      Mark is right, asset value is ballooning from the impact of a sharp rise in energy prices, which in turn leads the entire commodity price chain in an upward spiral.

      We call that ballooning – inflation. It is the same thing, that is, pure air. Last Friday I went to the sook after the mosque and lo! the price of young female camels has doubled. Nowadays, only sheikhs can afford camels and airy tents, we run-and-mill beduins have to drive SUVs and live in air-conditioned palaces.

      A well ballooned economy can carry more debt without increasing its debt-to-equity ratio. Al-ha-keefak! I was clever and like the infidels, I bought much things on credit. Now I shall pay off my debt with less crude. Too bad for Chinese coolies, from now on they will have to slave much hardly and make do with sticky rice and no pork chops.

    17. Mark Says:

      For what it’s worth:

      Morgan Stanley economist sees oil crash
      Thu Jun 16, 2005 12:54 AM ET
      SINGAPORE (Reuters) – The oil market may be quickly headed for a massive crash as global economic growth slackens, alternative energy gains ground and financial traders sense a price peak, an economist with Morgan Stanley said on Thursday.
      His projection for a multi-year bear cycle stands in sharp contrast to the super-spike scenario envisioned three months ago by Goldman Sachs, Morgan Stanley’s arch-rival in the world of oil derivatives trading, where they are the two biggest players.

      “As evidence of weakening demand and ample supply accumulates, the market may panic,” Andy Xie, Greater China economist in Hong Kong, said in a report. “I believe it could correct in the most speculative fashion — it could collapse.”

      Oil prices have extended their two-year boom into the first half of 2005, gaining 28 percent since January to top $55 a barrel amid fears that already maxed-out refiners will struggle to supply enough fuel in the second half of the year.