Wednesday, October 29, 2008

Financial Crisis : Petroleum Price Update

Financial Crisis : Petroleum Price Update
Andre Willers
29 Oct 2008

See “Petroleum Price” , “Optimal Markup” and others .

In “Petroleum Price” on 3 July 2008 , when the oil price was $145 a barrel and heading upward , I predicted that the oil-price would fall sharply from about $160 to $50 , then recover to about $80 . The $80 was calculated from basic principles , the $160(=2x80) from “Optimal Markup” and $50 from an estimate of overshoot on the downswing to about the 1/3 Reserve of the maximum price .

There was a strong resistance level at 1/3 of the maximum price . This was the perceived reserve value of oil .
See “Infinite Probes” et al .
Or , to put it another way , about a 2/3 added value was all the system could tolerate .

The actual figures at present time (29 Oct 2008) are $147 tops , falling to about $53 , now slowly rising past the $63 level .

A reasonable fit .

Why did everything else fall ?
Answer : because energy is the basis of our society . And oil is the basis of our energy. I doubt if any than a AI(3.1) can disentangle all the causative loops .

The best we can say is that there is a complicated causative relationship between food , oil , money , commodities , in that order .

The food-price rises in 2007 destabilized the oil-price , which destabilized the money and commodities markets .

The Stock Markets
The markets are in correspondence with the oil price .
It is simplistic to say which started to fall first .

When the fall started , the system had a problem (a huge number of inflated dollars) .
The owners of these dollars had a problem : to keep their money .
The emerging markets were used as the entropy sink (as discussed before) .

All those numbers of dollars , rubles , etc could not go away . We do not have a formal mechanism for the destruction of money (see previous posts) . But we have exchange rates .
See “Financial Crisis 2008 : Exchange Rates” et al .

During the bubble run-up , huge numbers of dollars were created by the credit mechanisms . These were invested in high-yield emerging markets at a good rate of exchange (say R6 to dollar) . When the panic hit , assets were sold and converted back into dollars at say (R12 to the dollar) . That difference in the exchange rate has vanished from the monetary system . Pouf ! The magic of exchange rates .
Note that foreign currencies’ decreases against the dollar was about 50% .

The original dollar investors still make a profit , but on a much more modest scale . In other words , the obscene excesses of the derivitives market vanished down the same financial hole as made by the same people that used them .
The biter bit .

The emerging marketer then sits with a lack of capital and some production machinery .
A few fat-cat banks had to be bailed out for the common good , but nothing serious .

Suddenly , the international number of dollars has decreased by about a half .A much healthier situation . Dollar inflation is suddenly not a problem and interest rates can be decreased .

Is this a train-crash for the emerging markets ?
It would be , if not for the speed of the crash and rebound .

Working capital for emerging markets can be supplied from local and international loans as long as the downturn is limited to a period of months .

The stock markets hit their lowest point when oil was at about $53 . This was when the market indices was about 50% of maximum . This is to be expected , since the market would have been pricing in a near-future oil-price of $80 . (Most big investors did not panic , but were buying .)

The rebound
The number of dollars available for global investment have halved . So , we can expect growth rates to be initially rapid as they re-invest (2-4 months) , then slow to half previous rates , then slowly increase as wealth creation picks up .

But these would be for value , cherry-picked shares in countries with stable currencies and stable political systems .

South African Investments.
The Exchange-rate picture remains bleak .
Political uncertainty until the next elections(with wild talk of nationalizations , tax increases to pay for the dole , interest rate decreases to “stimulate” job creation) as well as a big balance-of-payment deficit does not bode well for attracting a share of the dollar rush in the next 4 months .
Commodity prices will recover slowly .But there will be severe competition from countries like Australia .
Tourism will be under severe pressure from competition from countries like Iceland , Hungary , Ukraine , Zimbabwe , etc , whose currencies tanked .
Until there is better international regulation , currency speculators will target the Rand(like they did in 2000) and drive it down .

Rand-denominated foreign investments seems the best of poor choices .

Japanese and Chinese Foreign currency Reserves
These were in large part in US Treasuries . Their decision not to sell and crash the US dollar led to the situation above . It amounts to deliberate decision to support a global economic system . A very enlightened long-term view . They would lose more in the long term by a depression than they could gain . Also , they made an enormous amount of money , not to mention favours owed .

This is where everybody got it wrong . In a free-market capitalism , they would have sold. But they are Social-Capitalists . Long-term gain matters more .
Can you see why the planetary economic systems will favour Social-Capitalism ?

Still , there would have had to be an enormous amount of trust between China , Japan and the US .

For Conspiracy Theorists .
This controlled crash is a typical AI(3.1) maneuver .
The overview might seem simple , but to actually do it requires data-handling capability of AI(3.1) order .

If this is true , I have to take my hat off to Bush .It is a phenomenal end-run .

There is no way this could have been done without Presidential approval .
The Chinese and Japanese simply would not have co-operated without the US CEO .
They thought that he was stupid and predictable , therefore trustworthy .
They would never have trusted Clinton or Nixon on something like this .

I never thought I would say this , but it seems like Bush was one of those rare US presidents that grew in office.

The US gains a lot from this crisis .
1.It can disengage from the Middle East without loss of face (sorry , no money)
2. The Oil Cartels have been crippled . (sorry , no money)
3.China is saddled with the problem of Pakistan and Afghanistan . (sorry , no money)
4.Inflation has been dealt a serious blow .
5. National production can be stimulated by some judicious subsidies .
6. They can get back to what they are good at , namely making money .
7.An opportunity to draw back from imperial overstretch
8. Concentrate on some serious long-term capital investment (like the space program)

A controlled crash at the end of a US presidential term is much preferable to an uncontrolled crash . And he could sign all those billions of debt bills without huge political problems . (Well , it helps that he knew that that was the best investment the US Government made in the last 40 years ). Still , he signed them , and signed them quickly .

It’s only money .


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