Tuesday, February 09, 2010

A Look at Oil Prices by Dian Chu

Among the many determinants of risk bonds, the price of oil is a key factor as it plays a significant role in economic growth, inflation, production costs, trade balances and currency. Nine of the ten economic recessions in the United States since the end of World War II were preceded by a dramatic increase in the price of oil. _DianChu
Oil prices are extremely volatile, as Chu points out. Swings in oil prices have consequences for oil producers and oil consumers. Nations that are both oil consumers and producers -- such as the US, Canada, Brazil, and China -- can benefit from swings in either direction. Unfortunately for Venezuela, Iran, Russia, and the other oil tyrannies, they lose a great deal with each downward swing.
In addition to the United States, GDP growth in Brazil, China and India could get a boost from the softening and stabilizing of oil prices and should increase their competitiveness. Brazil and Chindia are all oil producers with aggressive state-sponsored exploration and production efforts and strong economic growth prospects. Brazil, with a new and improved investment grade credit rating, is now largely self-sufficient and has insulated its economy from oil price shock on net basis.

The economic impact of oil prices on oil-importing, developing countries such as China and India could be more pronounced primarily because Chindia are more energy-intensive due to its strong growth rate, and less energy efficient. From that perspective, Chindia, though good prospects, could be more of a roller-coaster ride for investors.

Among the emerging economies, lower crude oil prices will be a big dampener for the Russian economy. Russia's two oil wealth funds declined by a total $1.54 billion over the last month, as more funds were transferred to aid federal budget shortfalls. The Reserve Fund, one of Russia’s two oil wealth funds, is expected to run out by the end of 2010. _DianChu
Russia is hoping for big upward swings in oil prices -- that may be the only thing that can save the corrupt kleptocracy [redundancy alert!]. All of the oil dictatorships are desperate for higher oil prices -- by any means necessary. Well, almost. Iran wouldn't approve its own destruction, even though that would certainly drive oil prices higher.

It is vital for observors to distinguish between peak oil and upward swings in oil prices. Peak oil is about an irreversible doom from energy starvation. Upward swings in oil prices are inevitable and within the cyclic nature of quasi-capitalist economies.

Peak demand for oil will get here soon enough. We merely need to ride the waves of an untidy geopolitical picture and a wild and ill kept economy until then.

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