1990s was a low price period.
But prices started to increase again in 21st century pushed by higher demand.
Goldman Sachs as the biggest trader of energy derivatives had made a forecast in March 2005 that prices could jump as high as $105 per barrel from then present levels of $50.
In July 2008 we saw the price over $147.
Now it is below $70 again.
Where will it go from here?
The answer lies in the competition between substitution effect of alternative energies versus demand effect of existing energies. As there is only one world, alternative energies is what logic dictates.
Sunday 13 December 2009
OIL PRICES - I
The price of oil since it was first discovered in 1861 has always been one of the most volatile and carefully watched variables of the economy.
When OPEC raised the price by 70% in October 1973 and a further 130% in December 1973 and overall ten-fold between 1973 and 1980, it turned into a volatility creating source.
In 1980s, demand for oil and price declined due to efforts of oil importing countries to find alternative energies such as coal, natural gas and nuclear power and alternative sources such as Norway.
Then came production quotas of OPEC.
When OPEC raised the price by 70% in October 1973 and a further 130% in December 1973 and overall ten-fold between 1973 and 1980, it turned into a volatility creating source.
In 1980s, demand for oil and price declined due to efforts of oil importing countries to find alternative energies such as coal, natural gas and nuclear power and alternative sources such as Norway.
Then came production quotas of OPEC.
Saturday 12 December 2009
THREE MAJOR WESTERN CURRENCIES - II
Sterling devalued both against the euro and the US dollars in 2008.
During the year, US inflation was 1% on average and UK inflation was 3.5% (Note). The inflation discrepancy is 3.4% whereas the change in exchange rate is 25%.
For the same period, average Euro zone inflation was 3.3% against the UK inflation of around 3.5%. The inflation discrepancy in this case is almost negligible at 0.2% whereas the change in the exchange rate is higher at 36%.
Although the theory is right in the sense that UK has higher inflation rate and therefore devaluation of its currency, it is not sufficient in explaining the significant differences in this case.
Note: Consumer price index is used for inflation.
During the year, US inflation was 1% on average and UK inflation was 3.5% (Note). The inflation discrepancy is 3.4% whereas the change in exchange rate is 25%.
For the same period, average Euro zone inflation was 3.3% against the UK inflation of around 3.5%. The inflation discrepancy in this case is almost negligible at 0.2% whereas the change in the exchange rate is higher at 36%.
Although the theory is right in the sense that UK has higher inflation rate and therefore devaluation of its currency, it is not sufficient in explaining the significant differences in this case.
Note: Consumer price index is used for inflation.
THREE MAJOR WESTERN CURRENCIES - I
Last year this time, sterling-euro exchange rate (€/£) was almost 1. 1£ was equivalent of 1€. This was from a level of 1.36 in January 2008, 1.44 in November 2007. (Now it is 1.11)
Similarly; dollar-sterling exchange rate ($/£) this time last year was 1.48, 1.98 in January 2008, 2.08 in November 2007. (Now it is 1.62)
One theory that would explain the movement is the inflation differences between the countries/regions. For $/£ between January 2008 and last time this year, there should be higher inflation in UK economy compared to the US economy according to the theory.
EURO MOVE
In a team work exercise I have been about seven years ago; two small groups were asked to build a tower from paper and staples.
Both groups were given “a” amount of papers, plenty of staples, “b” amount of capital. If ran out of paper you could buy more by “c” amount of money. For breakeven the tower should have been at least “d” foot tall and any foot above the breakeven would add to existing capital. The team, which would add more with consideration of scarce resource of papers would be the winner.
In my team (T1); we decided to make cylinder shaped blocks by rolling the papers - attached with staples- to make a cube of 3*3 (each cylinder making one of 9), and put some papers between each layer of 3*3. To make the foundation stronger; use three papers for each roll of the first two layers and roll them as landscape shaped. Then from third layer onwards use two papers for each roll and roll them as portrait shaped.
T1's building was getting higher and higher, as if competing to Eiffel Tower. When finished, I said, “Be careful with moving, the building may fall down” and two of the observers of the team as a joke acted like they were going to run. It didn’t fall and T1 had the highest capital.
The link to today: Just reading Financial Times of Saturday and once more seeing how suddenly global economy can shake with one walk, worse if run. Just look what happened to Euro. An economy making 3% of the zone’s GDP shook the whole Euro zone, and the value of the currency, causing 5% fall in the exchange rate against the US$ in 2010 so far. The market for Euro is moving strongly. And it may be the time to watch the Euro Zone Tower.
Similarly; dollar-sterling exchange rate ($/£) this time last year was 1.48, 1.98 in January 2008, 2.08 in November 2007. (Now it is 1.62)
One theory that would explain the movement is the inflation differences between the countries/regions. For $/£ between January 2008 and last time this year, there should be higher inflation in UK economy compared to the US economy according to the theory.
EURO MOVE
In a team work exercise I have been about seven years ago; two small groups were asked to build a tower from paper and staples.
Both groups were given “a” amount of papers, plenty of staples, “b” amount of capital. If ran out of paper you could buy more by “c” amount of money. For breakeven the tower should have been at least “d” foot tall and any foot above the breakeven would add to existing capital. The team, which would add more with consideration of scarce resource of papers would be the winner.
In my team (T1); we decided to make cylinder shaped blocks by rolling the papers - attached with staples- to make a cube of 3*3 (each cylinder making one of 9), and put some papers between each layer of 3*3. To make the foundation stronger; use three papers for each roll of the first two layers and roll them as landscape shaped. Then from third layer onwards use two papers for each roll and roll them as portrait shaped.
T1's building was getting higher and higher, as if competing to Eiffel Tower. When finished, I said, “Be careful with moving, the building may fall down” and two of the observers of the team as a joke acted like they were going to run. It didn’t fall and T1 had the highest capital.
The link to today: Just reading Financial Times of Saturday and once more seeing how suddenly global economy can shake with one walk, worse if run. Just look what happened to Euro. An economy making 3% of the zone’s GDP shook the whole Euro zone, and the value of the currency, causing 5% fall in the exchange rate against the US$ in 2010 so far. The market for Euro is moving strongly. And it may be the time to watch the Euro Zone Tower.
Friday 11 December 2009
GROWTH MODELS: SUPPLY OR DEMAND DETERMINED
Now that the global world is growing again; one question that is coming to mind is: “Is it supply or demand determined?”
The answer is demand determined for the moment, meaning supply adjusts to demand. Economist Tinbergen’s adjustment between demand and supply is in place, which is government regulating demand and supply to achieve the target/s of growth. All the recent government stimulus by developed economies are in mind.
Once the economy recovers and governments withdraw their support from the economy, the answer should change to supply determined, meaning price and market mechanism without state intervention.
The answer is demand determined for the moment, meaning supply adjusts to demand. Economist Tinbergen’s adjustment between demand and supply is in place, which is government regulating demand and supply to achieve the target/s of growth. All the recent government stimulus by developed economies are in mind.
Once the economy recovers and governments withdraw their support from the economy, the answer should change to supply determined, meaning price and market mechanism without state intervention.
GLOBALISED EXIT
Following Jean-Claude Trichet’s - President of European Central Bank - underlying the importance of large insurance companies and pension funds as important ingredients of systemic risk last month, a second announcement came out yesterday, which sounds like an indirect declaration of exit from expansionary monetary policy.
Federal Reserve has been cautiously testing the right time of the exit from quantitative easing since mid-October through reverse repos, which is basically pulling out the liquidity from the system through selling assets such as treasury bills. $1trillion additional liquidity was injected into the economy since the beginning of the crisis in 2007
2010 seems to be the year.
Federal Reserve has been cautiously testing the right time of the exit from quantitative easing since mid-October through reverse repos, which is basically pulling out the liquidity from the system through selling assets such as treasury bills. $1trillion additional liquidity was injected into the economy since the beginning of the crisis in 2007
2010 seems to be the year.
Wednesday 9 December 2009
JAPAN & DEFLATION
Japan’s deflation problem since early 1990s have been ranked lower in priority during the recession following the globally imposed problems such as fall in exports, huge budget deficits caused by attempts to increase domestic demand through government spending, dealing with Debt to GDP ratio of over 180%.
Now deflation is back in an economy, which is trying to recover from recession. People don’t spend as they expect the prices to fall more. With consumption item of GDP low, the burden is on investment and government spending. And without consumption, investment will be low too. Government issued ¥10,800billion ($110billion) bonds last fiscal year and announced a stimulus spending announcement of ¥7,200billion recently.
Now deflation is back in an economy, which is trying to recover from recession. People don’t spend as they expect the prices to fall more. With consumption item of GDP low, the burden is on investment and government spending. And without consumption, investment will be low too. Government issued ¥10,800billion ($110billion) bonds last fiscal year and announced a stimulus spending announcement of ¥7,200billion recently.
Tuesday 8 December 2009
NEW COMPETITION TREND: REPAY TARP FUND – II
After Bank of America’s attempt last week, Citigroup is demanding to repay bail-out money received through TARP funds as well, which are $45billion and $20billion respectively.
In April, when Goldman Sachs and JP Morgan Chase had requested to repay $10billion and $25billion respectively, US government was much more cautious before deciding whether to accept it or not. But now the government officials are discussing one step ahead: “how shall we use these funds: more government spending and job creation or closing the budget deficit?”
This time markets are more cautious with initial response of a decline in Citigroup’s share price today.
In April, when Goldman Sachs and JP Morgan Chase had requested to repay $10billion and $25billion respectively, US government was much more cautious before deciding whether to accept it or not. But now the government officials are discussing one step ahead: “how shall we use these funds: more government spending and job creation or closing the budget deficit?”
This time markets are more cautious with initial response of a decline in Citigroup’s share price today.
Sunday 6 December 2009
OPTIMISM IS IN THE AIR
According to Financial Times, increase in US unemployment is 11thousand in November. An incredible improvement from six digits to five digits in one single month.
When we look at the monthly trend during 2009 with the chart as below, November can be the end of the increase from 7.5million in December 2007 to 15million today.
US is leading the world out of this recession. 11thousand is almost 0 when considering the October figure of 195thousand. Numbers speak louder than words.
When we look at the monthly trend during 2009 with the chart as below, November can be the end of the increase from 7.5million in December 2007 to 15million today.
US is leading the world out of this recession. 11thousand is almost 0 when considering the October figure of 195thousand. Numbers speak louder than words.
Thursday 3 December 2009
CREDIT RATING AGENCIES
Should credit rating agencies function as informative organizations after things happen or as a forewarning mechanism?
When S&P downgraded five state-backed companies in Dubai after $59billion of delayed payments, presumably it is targeting to help for avoidance of future casualties.
They have been one of the most criticized bodies during this recession and any potential default risk just brings them back under the scrutiny of the public.
S&P’s, Moody’s, Fitch will be under more pressure to meet the dynamic nature of the current economy and update their ratings more often.
S&P’s responded to that pressure by downgrading 20 European companies yesterday, highlighting the default risk until 2011.
When S&P downgraded five state-backed companies in Dubai after $59billion of delayed payments, presumably it is targeting to help for avoidance of future casualties.
They have been one of the most criticized bodies during this recession and any potential default risk just brings them back under the scrutiny of the public.
S&P’s, Moody’s, Fitch will be under more pressure to meet the dynamic nature of the current economy and update their ratings more often.
S&P’s responded to that pressure by downgrading 20 European companies yesterday, highlighting the default risk until 2011.
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