News
Financial trouble in the pipeline
You cannot turn your back on these markets for one minute. Having just returned from an idyllically peaceful vacation in south west France – a welcome break from the tyranny of e-mail and mobile phones – I find that war has broken out in one of the most economically sensitive regions of the world, the oil price has slumped, and (seemingly perversely) Western stock markets are soaring ahead. And, as if to prove that "decoupling" is alive and well, the Dubai stock market has just sustained its biggest one-day slump in six months. How to make sense of all this activity, much of it apparently contradictory?
To begin, the Russian confrontation with Georgia in the Caucuses has all the makings of a nasty, brutish little war that could grumble on for years and further destabilise one of the world's critical energy regions. Even setting aside the geopolitical considerations – though the repercussions of a resurgent Russian military nationalism are momentous – there are plenty of reasons to be worried about the chaos and disruption that could ensue from a conflagration in the Caucuses.
I am not one of those energy determinists who see the big nations' quest for security of oil supply as the sole reason for their actions. It was not true in Iraq that the United States acted in 2003 purely to "steal" Iraqi oil, and it is not true now that the Russians are primarily seeking to block Western supplies in the Caucuses. Some in the West called the Russian action the beginning of "the pipeline wars", but this is nonsense. There are far more complex and convincing reasons for the actions of great powers.
However, the threat to European oil supplies is real enough if the Russians gain a stranglehold in Georgia. The Baku-Tblisi-Ceyhan pipeline is one of the few supply lines that lie outside Russian control, and if they were to invade Georgia proper it would further tighten their grip on Europe's energy market.
We are a long way from that. The BTC line does not run through South Ossettia, which looks likely to be occupied by the Russians, and so far supplies have not been affected by the fighting. But the real danger lies in a prolonged state of armed tension between Russian and Georgia, perhaps with guerrilla attacks on strategic Georgian installations, like the BTC line.
The oil price blipped up a few cents on the world's markets in response to the Caucuses crisis, but it was barely a flicker compared with the huge one-day surges of early June. Then crude oil touched $149 a barrel, but, while I was enjoying la vie francaise, it plunged back to below $120, and now stands around $114. There are two apparent reasons.
First, the oil price has finally woken up to the fact that world economies from the US to China are not going to grow as fast as they have done in recent years.
The economic recession, sparked by the year-old financial credit crisis, is finally beginning to bite, and industrial output will need far less energy that previously predicted. Hence, with falling demand, the price of oil is set for a long-term bear phase, with some even suggesting it might drop to $70 per barrel in the near future.
The second apparent reason for oil's decline is that Western consumers have finally had enough of soaring energy prices, and are drastically reducing their energy consumption.
In the argot of the economists, inelasticity of demand has reached the point where marginal consumption has been permanently affected. In plain English, at nearly $150 per barrel, the West cannot afford to pay any more and is beginning do do without.
Both are pretty persuasive arguments, but not enough to convince the long-term oil bulls, led by US investment bank Goldman Sachs, that the current weakness in energy prices is anything more than a temporary aberration on the inevitable track to $150 by the year end, and the infamous $200 soon after. Goldman's track record is so impressive in this sector – they were the first to predict $100 a barrel, remember – that I feel obliged to stick with them for the time being. I believe oil will resume its rise in the near future, so the West should enjoy low prices while it can – they will not last long.
As for the world's stock markets, the share price surges of recent days are welcome in a financial world that has often this in 2008 shown signs of being on the brink of collapse, of Great Crash proportions.
Markets have taken heart from the oil decline, and the recent strength of the US dollar, and have been encouraged by the effects of US regulatory action to halt the financial crisis.
Once again, I believe it is too early to say we are out of the crisis. There is a curious contradiction at the heart of the recent upsurge in equity markets, which I feel should make us suspicious about its longevity. If oil is falling because we are on the grip of a real industrial recession in the big economies, how can they financial markets regard that as a positive indicator? Surely they are not so divorced from reality as to believe that anything, including an imminent world recession, is preferable to high energy costs? That sounds to me as though the cure is worse than the disease.
To begin, the Russian confrontation with Georgia in the Caucuses has all the makings of a nasty, brutish little war that could grumble on for years and further destabilise one of the world's critical energy regions. Even setting aside the geopolitical considerations – though the repercussions of a resurgent Russian military nationalism are momentous – there are plenty of reasons to be worried about the chaos and disruption that could ensue from a conflagration in the Caucuses.
I am not one of those energy determinists who see the big nations' quest for security of oil supply as the sole reason for their actions. It was not true in Iraq that the United States acted in 2003 purely to "steal" Iraqi oil, and it is not true now that the Russians are primarily seeking to block Western supplies in the Caucuses. Some in the West called the Russian action the beginning of "the pipeline wars", but this is nonsense. There are far more complex and convincing reasons for the actions of great powers.
However, the threat to European oil supplies is real enough if the Russians gain a stranglehold in Georgia. The Baku-Tblisi-Ceyhan pipeline is one of the few supply lines that lie outside Russian control, and if they were to invade Georgia proper it would further tighten their grip on Europe's energy market.
We are a long way from that. The BTC line does not run through South Ossettia, which looks likely to be occupied by the Russians, and so far supplies have not been affected by the fighting. But the real danger lies in a prolonged state of armed tension between Russian and Georgia, perhaps with guerrilla attacks on strategic Georgian installations, like the BTC line.
The oil price blipped up a few cents on the world's markets in response to the Caucuses crisis, but it was barely a flicker compared with the huge one-day surges of early June. Then crude oil touched $149 a barrel, but, while I was enjoying la vie francaise, it plunged back to below $120, and now stands around $114. There are two apparent reasons.
First, the oil price has finally woken up to the fact that world economies from the US to China are not going to grow as fast as they have done in recent years.
The economic recession, sparked by the year-old financial credit crisis, is finally beginning to bite, and industrial output will need far less energy that previously predicted. Hence, with falling demand, the price of oil is set for a long-term bear phase, with some even suggesting it might drop to $70 per barrel in the near future.
The second apparent reason for oil's decline is that Western consumers have finally had enough of soaring energy prices, and are drastically reducing their energy consumption.
In the argot of the economists, inelasticity of demand has reached the point where marginal consumption has been permanently affected. In plain English, at nearly $150 per barrel, the West cannot afford to pay any more and is beginning do do without.
Both are pretty persuasive arguments, but not enough to convince the long-term oil bulls, led by US investment bank Goldman Sachs, that the current weakness in energy prices is anything more than a temporary aberration on the inevitable track to $150 by the year end, and the infamous $200 soon after. Goldman's track record is so impressive in this sector – they were the first to predict $100 a barrel, remember – that I feel obliged to stick with them for the time being. I believe oil will resume its rise in the near future, so the West should enjoy low prices while it can – they will not last long.
As for the world's stock markets, the share price surges of recent days are welcome in a financial world that has often this in 2008 shown signs of being on the brink of collapse, of Great Crash proportions.
Markets have taken heart from the oil decline, and the recent strength of the US dollar, and have been encouraged by the effects of US regulatory action to halt the financial crisis.
Once again, I believe it is too early to say we are out of the crisis. There is a curious contradiction at the heart of the recent upsurge in equity markets, which I feel should make us suspicious about its longevity. If oil is falling because we are on the grip of a real industrial recession in the big economies, how can they financial markets regard that as a positive indicator? Surely they are not so divorced from reality as to believe that anything, including an imminent world recession, is preferable to high energy costs? That sounds to me as though the cure is worse than the disease.