Why It's Now Easier to Predict the Outcomes of the Coming Recession

Monday, December 19, 2011, 2:55 PM
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Why It's Now Easier to Predict the Outcomes of the Coming Recession

by Gregor Macdonald, contributing editor
Monday, December 19, 2011

Executive Summary

  • Western economies are more sensitive to oil prices than the developing world.
  • Global oil supply is extremely tight by historical measures.
  • Oil prices will likely not go much higher in 2012, due to the failing global economy.
  • The next oil-price induced recession (coming ASAP) will have predictable outcomes on the economy and its key sector.
  • Understanding these predictable economic outcomes resulting from oil supply dynamics
  • Prediction offers more value to the investor than simply betting on oil prices (which will likely be extremely volatile).

Part I: Why Oil Prices Are Killing the Economy

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Why It's Now Easier to Predict the Outcomes of the Coming Recession

The Oil-Sensitive West

Consumption of oil in the West started to flatten out as early as 2004. And readers of my previous essays know that after the crisis started in ‘08, both Europe and the US shed even more oil demand. Let there be no doubt: Oil demand in the OECD has been highly elastic (responsive) in the face of oil prices above $80. In the data, you could even see some early signatures of reduced demand coming in 2004, when oil prices rose above $40.

One of the paradoxes that repeatedly trips up analysts, because it’s so counter-intuitive, is the fact that the wealthy Western countries are hurt more by high oil prices than the poorer, emerging market countries.

Your average Westerner is consuming quite a lot of oil, per capita. It's embedded in shipped goods and in shipped foods, and also comes via high penetration of automobile ownership. Westerners drive lots of miles, comparatively. But people in emerging markets have only just begun to use oil. It hardly matters whether petrol is $4.00 per gallon or even $8.00 per gallon if you have just upgraded from a rural existence, and for the first time ever your family is consuming 4-6 gallons of petrol per month (enough to power a motorbike each day for a short distance). This is precisely what Bernanke is alluding to, when he allows that we have no control over emerging market oil demand.

More vexing is that emerging market economies are primarily running on coal, so they are able to produce and align their consumption with the power grid, while being more discretionary about liquid fuel use for mobility. This is really perplexing, as I said, to Western analysts but I do want to point out that its empirically true (see Stuart Stanford’s post on the subject, Wow, Just Wow, from earlier this year).


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