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Wake-up call to U.S. on oil?
William Neikirk, Chicago Tribune
If fighting worsens, price may reach $100 a barrel, analysts say
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…”We are in a higher risk situation than we have been at any time in years,” said Andrew Weissman, an energy consultant at FTI Consulting in Washington. A year from now or five years from now, he said, there’s a “substantial possibility” that Americans will look back on last week “as a major turning point” in the price of oil.
“Some of the softening in prices has been due to the fact that the dollar is strengthening,” said Jason Schenker, energy economist at Wachovia Securities. “I still think there might be some upside risks.”
Philip Verleger, a Colorado energy consultant, said the rise of Islamic fundamentalism in the Middle East could be a major influence on the price of oil as more radical political leaders gain power. If democratic reforms are instituted in Egypt or Jordan, he said, radical groups like Hezbollah could gain new strength in elections.
“The implications for the supply of oil are not good,” he said.
In the past Verleger has been criticized for predicting that oil prices were going to surge much higher. But his so-called “extreme” outlooks have come true. He was one of the first analysts to predict that oil prices would rise to $60 a barrel, and then to $70 a barrel. Within a year, he said, oil prices could easily go to $100 a barrel because of the tightness of the energy market.
A major issue among economists is how much of a “risk premium” exists in today’s oil price. Schenker said, for example, that today’s supply-and-demand situation likely would produce an oil price of no more than $55 a barrel. The rest of the price results from market fears about supply disruptions.
Weissman took issue with this point of view. He said there is only a small, if any, risk premium in today’s price, and that Americans should get prepared that they will continue to pay close to current prices for oil for a long time.
The idea of a big risk premium in today’s oil price “is a complete myth,” he said. “I think what we are really seeing is that the price of oil is exactly what is needed for the market to balance supply and demand.”
(18 July 2006)
Weissman’s contention that a risk premium is a myth is echoed by the recent post by Jeff Vail: De-bunking the geo-political premium in oil prices.
Reluctantly Adjusting to Oil Cost
Louis Uchitelle, NY Times
Every Monday morning Dean England, chief executive of a family-owned trucking company, logs onto the Energy Department’s Web site and checks the latest average cost of a gallon of diesel fuel. If it is up enough, he raises the charge to haul produce across the country in his tractor-trailers.
A formula has evolved. For every 5-cent rise in the price of fuel, Mr. England’s company, C. R. England Inc., based in Salt Lake City, adds 1 percent to its freight rates. Since 2003, those rates are up 37 percent, yet demand has not slackened. The company’s 2,800 trucks are constantly on the road.
“The market has been good to us,” Mr. England said. “But ultimately the extra cost of hauling food has to fall on the consumer.”
Demand is similarly strong at other energy-dependent operations, notably railroads, airlines and chemical companies. They, too, are raising prices to recapture as much as they can of the run-up in oil prices.
That is gradually adding to the inflation rate and appears to be contributing to a slowdown in growth – but it has not crippled the economy.
“As oil prices rise, a noose does tighten around the expansion,” said Nigel Gault, chief domestic economist for Global Insight.
Mr. Gault estimates that rising energy prices are currently shaving 1 to 1.5 percentage points from the economy’s annual growth rate, which is one reason that he expects the rate to slow from the robust 5.6 percent of the first quarter to roughly 3 percent for the rest of the year.
“I’m guessing that if oil gets to $100 a barrel, that could provoke a recession,” Mr. Gault said, “but even then it depends on how quickly we get there. We do seem to be adjusting to gradual increases.”
(20 July 2006)
Federal Reserve: U.S. ‘Could Be Going Bankrupt’
Cryptogon.com
Cryptogon—and thousands of other sites—have been telling this story for years, but that has just been a bunch of tinfoil hat, conspiracy theory nonsense unsuitable for discussion in polite circles… Except for now, it’s on U.S. Federal Reserve letterhead.
Have a nice day:
The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country’s central bank.
A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.
Prof Kotlikoff said that, by some measures, the US is already bankrupt. “To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors,” he asked.
According to his central analysis, “the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds”.
(17 July 2006)
Link to Kotlikoff’s piece (PDF). Matt Savinar points out the related article: More Foreign Firms Buying Up U.S. Infrastructure, writing, “This is what happens when any entity is on the verge of bankruptcy: it starts selling off its assets. (a “fire-sale”)” -AF
