Most analyses of the maelstrom that has wiped trillions off global equity markets and continues to plague financial markets correctly identify the bursting United States housing bubble and associated subprime fallout as the cause of the crisis.
But this analysis misses the underlying cause of the collapse, says economist Jeff Rubin of CBIC Markets. The recessionary conditions now stalking most major economies were triggered by the same factor as in four out of the past five recessions: high oil prices.
Rubin says the world economy is coming off the mother of all oil spikes.
“Over the past expansion, real oil prices rose 500%, twice the climb in real oil prices that produced the two biggest recessions in the post-war era: the 1974 recession and the double-dip recession in 1980 and 1982.”
Rubin says that oil shocks create global recessions by transferring billions of dollars of income from economies where consumers spend every cent, and then some, to (Opec) economies that sport the highest savings rates in the world.
“For example, the transfer of income from US consumers to Saudi producers involves money from basically a zero-savings rate economy to one in which the savings rate is about 50%.
“In effect the income transfer from American motorists to Saudi Aramco means that more and more of the world’s income gets saved and less and less is spent. That demand leakage shows up in a weaker world economy.”
Rubin says that triple-digit oil prices have seen the annual fuel bill for OECD countries grow in the past five years to an additional $700-billion a year. “Of this $400-billion annually has gone to Opec producers.”
He says countries without oil of their own, such as those in Europe and Japan, have been much worse hit by high oil prices than the US, which produces about 25% of its own oil needs.
Properly diagnosing the cause of a disease is always a good step to finding a cure, says Rubin. If you believe that subprime mortgages have caused the crisis, then you will have to wait to see housing prices find the bottom before market prices can recover. If, however, the global recession is seen to have primarily been caused by high oil prices, then low prices, such as $60 a barrel this week, is the real road to recovery for Rubin.
The problem for the world economy, though, is that oil prices are projected to return to stratospheric levels. A report by the International Energy Agency (IEA) this week warned that investment in new oil production is falling short, risking a supply crunch.
The IEA analysed 800 of the world’s most productive oil wells, concluding that production from these wells is likely to decline from an annual average of 6,7% today to 8,6% in 2030.
The IEA’s Nobuo Tanaka says that even if oil demand did not increase until 2030, roughly four times the current capacity of Saudi Arabia would have to be built by then just to offset the current rate of oilfield decline.
The IEA says there is no shortage of oil reserves, but increasing investment costs, particularly for non-Opec producers, could see supply crunches and oil prices heading to $200 a barrel by 2030 with periods of price volatility in between.
It says the production in non-Opec countries has already peaked and will peak in most others before 2030.
The IEA analysis suggests that no sooner will the world economy have recovered from the current crisis than it will be presented with another, even greater crisis as oil prices rise steeply again. You could speculate that this will mean that the now partially nationalised banks in the developed economies will then end up wholly state owned.
The same will apply to other until now private companies such as AIG, General Motors and others which are deemed to have TLTF status (too large to fail).
The IEA says the world’s energy system is at a crossroads. “Current global trends in energy supply and consumption are patently unsustainable — environmentally, economically, socially.
“But that can — and must — be altered; there’s still time to change the road we’re on,” the IEA report says, calling for an energy revolution to decarbonise the economy.