Growth is slowing in all regions of the world, and inflation is rising, but the International Monetary Fund's No. 2 person in charge says a repeat of the 1970s stagflation period isn't likely.
IMF First Deputy Managing Director John Lipsky said the "inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability," Bloomberg News reported Thursday. However, Lipsky added that a return to 1970s-style stagflation isn't likely, but it cannot be totally ruled out.
Oil, commodity-rooted inflation
Further, Lipsky underscored that the current inflation rise is being driven by a fundamental increase in demand for commodities, primarily oil, and to a lesser extent by supply constraints around the world, Thomson Financial reported Thursday via Forbes.com. Hence, the recent price increases are likely to prove finite, Lipsky added, unless these items keep rising more rapidly than other items.
Economist David H. Wang told BloggingStocks Thursday he agreed with Lipsky's categorization of the most-recent rise in inflation but added that government subsidies may prevent a pullback in commodity prices, especially oil. Classic economic theory holds that as the price of a good rises, people will use less of it. However, governments in China, Venezuela and the Middle East, among other nations, subsidize gasoline/fuel, lowering its cost, which discourages conservation, Wang said. The United States does not subsidize motor fuel at the federal level, but individual states do subsidize heating oil/natural gas for low-income citizens.
AP reports that Goldman Sachs Group (NYSE: GS) predicts that the price of a barrel of oil could climb from its current $120 to as high as $200. That's not too much of a stretch because since January 2001, that price has risen 400% from $24. A rise to $200 would be a mere 67% increase from the current price. Meanwhile gasoline is likely to hit $4 a gallon this summer -- and if oil hit $200 a barrel, that could drive the price to $6.67 a gallon -- up 319% from the $1.59 it cost back in January 2001.
Why is the price of oil going up so much? Experts don't seem to know and I'm not an expert. But it looks like simple supply and demand does not explain such a rapid price rise. Some cite rising energy demand -- from China and India -- combined with a reduction in supply -- e.g., production declines in Mexico, an unstable oil industry in Venezuela and possible shrinking production capacity in the Middle East -- as a partial explanation.
But then there are the other factors that seem hard to measure -- the potential decline in the dollar, political instability (such as the U.S. firing warning shots at two Iranian boats in the Persian Gulf this week), and so-called speculators. Of all these factors, the speculators explanation is the most interesting. These could be hedge funds and commodities traders who borrow huge amounts of money to bid up oil prices.
Venezuela has started collecting its new foreign oil companies windfall profits tax, as part of President Hugo Chavez' plan to gain a larger share of oil company profits, The Associated Press reported.
The tax is based on the monthly average price of benchmark Brent crude oil. The tax kicks in when the price of benchmark Brent crude sits above $70 per barrel, The Wall Street Journal(subscription required) reported. If oil prices remain above that threshold for one month, the state will take 50% of the difference between this average and the final sale price of every barrel. When Brent crude exceeds the $100-a-barrel average, the rate will rises to 60%.
'21st-century socialism'
President Chavez, a Socialist, has said the tax is necessary to fund key social programs as part of his effort to implement an economic and social system he calls "21st-century socialism." Critics say the tax will slow investment and development in the oil sector, and also discourage other foreign direct investment in Venezuela.
Oil spiked up to $107 on news that an Iraq pipeline had been blown up, potentially disrupting supply. Oil-consuming nations had watched crude drop to $100 on hopes that a slowing global economy would cut demand.
In all probability, the hunger for oil in areas such as China and India will keep the need for oil high. There is also evidence that older fields in the Middle East and the Arctic are not yielding as much crude as they once did. The supply and demand dynamics may keep oil prices high for a very long time.
Oil disasters like Iraq and Katrina almost always cause a rapid rise in oil prices because of concerns that, at least temporarily, crude will be more scarce.
But, there may be a "two disaster" rule that could spike up oil prices 15% to 20%, at least for a time. Under this set of circumstances oil might be interrupted in Nigeria -- where the government is unstable, and Iraq -- where there may be more attacks on the infrastructure. Or, the head of Venezuela could cut off oil because he hates the US. If this is combined with a pipeline problem in northern Alaska, crude could take a big run.
The "two disaster" rule has not been fully tested, but the chances that it will be in the next year are increasing. The world's political scene is too volatile and the pipe and refineries that supply oil are, in many cases, too old.
Crude is going to $120. It is just a question of when and for how long.
Douglas A. McIntyre is an editor at 247wallst.com.
Lawyers for the Venezuela state-owned oil company PDVSA are back in court in London. They are trying to convince a judge there that the $12 billion that Exxon (NYSE: XOM) has seized through the courts in exchange for its assets that have been nationalized is excessive.
According to Reuters, "PDVSA lawyer Gordon Pollock said the amount frozen was excessive. He said a claim that PDVSA would try to hide its assets was not credible and the English court which awarded the freeze had exceeded its jurisdiction." PDVSA's argument is based partially on a theory that the calculation Exxon has used for reparations sets the face value of its property too high.
The legal challenge from Hugo Chavez's government has one significant flaw. His country has no right to take the Exxon assets in the first place. There would be no court hearing at all if Venezuela had not violated international law.
Several courts have agreed that the $12 billion in PDVSA overseas assets that Exxon has been able to seize is based on rational calculations. If the Venezuelan government does not want to pay fair value, then it should give the property back or reap the financial whirlwind.
Douglas A. McIntyre is an editor at 247wallst.com.
The rise in oil prices now seems relentless. The price has now crossed $103. MarketWatch reports, "Ecuador's state-run oil company, Petroecuador, suspended operations at a key export pipeline after a landslide damaged infrastructure." While the news may be moderately important, it is hardly a reason to send the global price of crude up. It is a sign that the oil market will react to even the most mundane information.
The psychology of oil trading seems to have changed in the last month. Consumption from emerging countries including China and India has remained high. Concerns about whether older oil fields can produce at current rates have been reported on repeatedly. OPEC has indicated that it may cut production slightly. The unpleasant political problems in Venezuela and Nigeria have been in the papers and on TV since last year.
It may be that the facts of life are dawning on the big oil consuming countries. There is no reason for producers to bring down prices. They are making hundreds of billions of dollars a year. The impact of alternative fuels is decades off. America, Europe, and Asia have not curtailed oil use because of high prices.
Greed has hit the market square between the eyes, and there is no sign that the oil market will see any relief when the money to be made comes so easily and without consequences
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Venezuela wants a bit of revenge against oil company Exxon Mobil Corp. (NYSE:XOM). The most profitable US corporation has gone to court to freeze $12 billion in assets from the Latin American country. Venezuela nationalized certain Exxon property and the firm wants compensation.
One expert toldReuters "It is to Venezuela's interest to keep oil prices high and its response to the Exxon Mobil asset freeze orders has done just that."
It is not clear whether Exxon or Venezuela will be hurt more by the move. Exxon needs crude to keep its refineries running at full capacity. It can probably get oil from other sources but whether it can keep that up for several months, if necessary, is not clear.
Venezuela may be able to keep crude prices high, but it still needs to ship all of the oil it can drill to get the full cash benefit of its production. If some of its oil goes unsold, even for a short time, it may hurt the flow of capital to the government.
OPEC may be the eventual beneficiary of the move. Its members are certainly happy if prices are high and supply is low. They can put a few more dollars into their sovereign funds.
Douglas A. McIntyre is an editor at 247wallst.com.
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I've been patiently waiting for something to be done regarding the seizure of Venezuelan oil infrastructure by communist dictator Hugo Chavez. It appears that time has come, with the help of Exxon Mobil Corp. (NYSE: XOM). As reported by Reuters, approximately $12 billion in Venezuelan assets have been frozen. It's just too bad that John F. Kennedy isn't still around. He'd have already parked an armada of gunboats a mile off the sunny shores of Venezuela. There's a limit to the amount of guff we should take from an out-of-control communist dictator.
According to Reuters, "Exxon -- which last week posted the largest ever year's profit by a U.S. company -- said on Thursday it has received court orders in Britain, the Netherlands and the Netherlands Antilles each freezing up to $12 billion in assets of Venezuela state oil firm PDVSA."
While oil companies rarely get public sympathy, the move is more than fair to Exxon. The government of unstable Venezuelan president Hugo Chavez had taken the assets from Exxon as part of a nationalization process. The move could complicate operations of Venezuela's local oil company, which co-owns some of the properties.
As more oil continues to come from unstable regions like Nigeria and Venezuela, the court decisions may give U.S. companies some leverage in keeping overseas assets. With the price of oil so high, local governments are going to find it more and more attractive to take a piece of Big Oil's pie.
Douglas A. McIntyre is an editor at 247wallst.com.
Existing oil field output is declining about 4.5% annually, but new fields are making up for that production decline, a study by Cambridge Energy Research Associates concludes, The Wall Street Journal reported Thursday. (Subscription required.)
The annual decline from existing fields is about 4 million barrels per day -- about the amount oil No. 4 oil producer Iran produces per day -- with new fields offsetting the loses. The study is based on data from 811 fields, The Journal reported.
Depletion rates are one measure that oil sector analysts use to gauge current productivity, proven reserves that can be extracted, and probable future production output.
The measure also provides evidence for the ongoing debate in oil circles regarding the ultimate size of oil supplies -- with exploration bulls arguing that oil is decades away from a production top, and others, peak oil theorists, arguing that global oil production is likely to peak in the decade ahead, if not sooner. The debate is complicated by the fact that reliable production data on field-by-field production is not available from several key oil-producing nations, including Saudi Arabia, Iran, Russia, and Venezuela.
Oil Friday closed down $1.21 to $92.50 as concern that a U.S. recession would dampen both oil and gasoline demand again weighed on the markets.
The other major energy commodities also retreated. Heating oil fell about 2 cents to $2.53, unleaded gasoline declined about 4 cents to $2.32, and natural gas fell about 7 cents to $8.20 per million BTUs.
As oil trades near $100 per barrel, one of the questions economists and analysts are asking is why hasn't global energy demand moderated?
With only isolated exceptions, both oil use in emerging markets and gasoline use here in the United States continue to increase. Emerging markets, particularly China, continue to register sizable increases in oil use. There has been some slackening of the increase in gasoline consumption in the U.S. as gasoline rose again above $3 per gallon this year, but not enough to cause a substantial drop in prices at the pump.
Is +$90 oil a price that's too costly for nations? Economist David H. Wang says perhaps not, particularly if a nation is not, in effect, paying the spot price, and he argues that a little-publicized fact regarding the oil market may be stoking demand. Namely: oil pacts among oil producing and consuming nations below the spot price for oil.
Financial Timescolumnist Martin Wolf, an economist, poses the question, "Will CO2 emissions limits lead to a zero-sum global economy?" – an economy characterized by stagnant (or declining) incomes, and armed conflict among nations?
Wolf argues that increased energy consumption per capita, primarily oil from fossil fuel, has been a key causal factor in creating the plus-sum economic world we live in, which he calls the positive-sum economy. Or in other words, rising energy consumption has helped produce rising productivity / real incomes / wealth, and the expanding global economy that we know today.
In addition, Wolf further argues that rising energy consumption transformed politics -- assisting both the birth of democratic politics at home and more-consensual foreign relations among states -- by increasing the size of the economic pie. Elites in a country, Wolf argues, became more willing to tolerate the enfranchisement of the masses because it was in the elites' economic interest to do so: i.e. that energy consumption created a more-productive (and more-valuable) citizenry with higher incomes.
Internationally, a nation's gains from the increased trade that characterizes the high-energy consumption era far exceed its gains from making war with another nation: the plus-sum global economy that trade produces supports today's norm of trade as opposed to the limited-sum world's norm of conflict and war.
Oil spiked up to $107 
The rise in oil prices now seems relentless. The price has now crossed $103. MarketWatch 
Venezuela wants a bit of revenge against oil company 
You may file this under: It's about time.
Existing oil field output is declining about 4.5% annually, but new fields are making up for that production decline, a study by Cambridge Energy Research Associates concludes, The Wall Street Journal reported Thursday. (
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