09 June 2008

Global Inflation from Oil Hikes: No Nations Immune

Optimistic analysts had been hoping that economic booms in the BRIC nations--Brazil, Russia, India, China--would supply needed global economic growth that the US and Europe have failed to supply. But price pressures from inflated oil prices are putting the BRICs under a lot of inflationary strain. The emerging economies simply do not have the firepower to substitute for slow US economic growth.
"They (BRIC economies) are running very large combined trade surpluses in the order of 500 billion dollars... so if there's weakness in the advanced economies, you are going to see weakness in the emerging markets," McCormack said.

"The trade flows are going the other way, so the conclusion that we reached is that strong growth in the emerging markets is not really going to help offset weakness in the advanced economies."

Both India and China still account for a relatively small portion of global imports which means their economies' influence on international growth is limited, the US ratings agency said.

India only accounts for two percent of the world's gross domestic product, said McCormack.

"So in some sense, it doesn't matter how fast India grows and it's not a very open economy," he added.

"It's not really going to contribute to stronger growth in other markets. It doesn't import that much. It's just too small." __AFP
Obvious, no? But financial analysts and journalists can easily overlook the obvious in their enthusiasm for emerging markets. It gets worse.

As oil prices rise, Russia's inflation rate is approaching the high teens. China and India have been subsidising fuel prices for consumers, driving demand and putting an ever greater strain on the government infrastructure as oil prices mount. Inflation from higher oil prices is the greatest threat to world economies.

The Shanghai stock exchange has lost almost 35% of its value this year, representing a huge loss to Chinese savings. Far from providing a life vest to a struggling global economy, China itself--and much of Asia--is flirting with significant regional slowdowns. China's remarkable boom--like India's--has been built upon outside investment and exports. As the more developed economies slow down with higher fuel costs, China's economic engine itself is being strained for fuel.

Oil prices are in the driver's seat for now. Until the US Congress wakes out of its deep coma, and takes the handcuffs off of energy providers in the US, oil prices will be driving the global economy in an increasingly erratic manner.

The BRIC economies are too small and too closed, to substitute for slowdowns in the US and Europe. And they are not immune to high oil prices--far from it.

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Blogger Bruce Hall said...

1980... again.


Monday, 09 June, 2008  
Blogger al fin said...

Back then we had triple digit inflation, triple digit unemployment, and triple digit interest rates (some over 20%). We are not nearly so bad off now. Still, things can certainly get a lot worse.

After Reagan was elected in late 1980, the US orchestrated a slow but steady pull-out from the Carter instigated nosedive. Oil prices slumped and the US and world economies took off together.

We have another presidential election coming up this year. Who is your pick for the new Reagan? Or will we elect another Carter instead? The baby senator from Illinois looks a lot like Carter to me.

Monday, 09 June, 2008  
Blogger Barba Rija said...

LOL al fin

What "handcuffs" are you mumbling about, al fin? You had me there until your penultimate paragraph. But do you seriously think that US reserves in the no-zone will put oil back in the 30s again? Get serious man, we are facing peak oil lite at best, and the eighties were a kind of a test.

The only big mistake that Carter made in those times was considering that peak oil was just in the eighties, when it should have been clear that it was not. North Sea to the rescue. But since the dawn of the new millenium, NS is at steep decline, and so the barrel went up. The real mistake is now to think that the "market will solve everything" meme, which is obviously true, but in a hard way.

That means full blown high prices and recession so that demand falls down in accordance to the falling oil exports.

There's nothing that congress can make to alter these events. Even if they un.cuffed your pals, you'd see that from prospecting to drilling, we would already be facing 200-250$ per barrel of oil, and such drilling would cut what? 30$? Doesn't cut it. We desperately need an energy revolution. And there is no Obama nor McCain who's gonna "make" it. That's up to everyone. So that jab to Obama is a strawman. As if the POTUS can alter these events!

Monday, 09 June, 2008  
Blogger al fin said...

Bruce, here is an interesting look at the contribution from the Fed to current price inflation of commodities.

My reference to "triple-digit" inflation, unemployment, and interest rates would have to include the first digit after the decimal to be truly triple digit. When you compare interest rates of 19% from Carter, with rates of 8% now, inflation rates of 12% then, compared to 4 % now, or unemployment rates of over 10% then, with 6% now--you can see that the Carter reign of economic terror was far worse than anything Greenspan or Bush have achieved.

If elected, the baby senator could do much worse, of course.

Tuesday, 10 June, 2008  
Blogger Barba Rija said...

Sell your fear, al fin. Sell your fear. That's all you've got left.

Tuesday, 10 June, 2008  
Blogger al fin said...

This article is a fascinating glimpse into the cyclical nature of the cost of finding oil.

Everyone understands that oil exploration and production costs are particularly high at this time. What few understand is that such high production costs constitute "price bubbles" of their own, and are subject to cyclical popping and re-expansion.

The price of oil currently controls much of the rest of the global economy. But the price of oil does not exist in a vacuum.

Friday, 13 June, 2008  

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