Archive for June, 2011
As if the ongoing Greek saga hadn’t already got markets excited enough, yesterday’s announcement by the International Energy Agency that 60 million barrels of oil will be released from world stockpiles over the next month tipped them over the edge. The near Brent crude future slid 6% to reach its lowest level since February, taking most other commodities with it; equities – already nervous – tumbled further, and there was a bullish reaction from fixed income and the dollar.
The logic of the decision is that 2m or so barrels per day of extra crude will (over)compensate for the loss of supply from Libya, which is estimated to have fallen from about 1.6m bpd at the beginning of the year to 0.2m bpd at the moment. Prices should therefore stabilize at a lower level, which will feed into cheaper energy costs and help the world recover.
The oil-as-a-tax-on-growth line is something we have looked at before, arguing that the “tax” of more expensive oil actually operates as a direct, indirect and second round cause of inflation. Whichever way one looks at it, however, it is true that cheaper energy and lower prices should have all sorts of benign effects on productivity, consumption and so on (though not if you happen to be an oil company), and militate towards stronger growth at the macro level.
All well and good so far, then. But before we get too carried away, we should reflect that daily demand for oil runs close to 90m bpd; the extra supply will contribute a little over 2% extra, and that for a limited time. If there are longer term, structural issues behind the boom in oil over the last decade or so, this will not address them.
On the other hand, it is nice to see some recognition from policymakers that lower energy prices are on balance good news for the economy. Many of them have spent the last ten years agitating – if not legislating – for more expensive energy in the name of environmental protection, curbing oil exploration, penalizing “fossil fuel” power, and subsidizing “renewable” energy from e.g. wind and solar. If some of this programme had been less enthusiastically embraced, perhaps the release of stockpiled oil would not have been necessary.
Of course the environmental considerations may be seen as non-negotiable, rightly overriding the economic ones. But the economic danger is real.
Which brings us back to the theme of British exceptionalism. The US / IEA have made a serious short term effort to reduce energy prices and achieve benign economic effects. The UK has in place tax rules and a utility pricing regime that are (on the same logic) economically malign, but are designed to achieve benign environmental effects.
When it comes to energy prices – and to an awareness of their importance to a still vulnerable economic recovery – it is hard not to feel that this constitutes a dangerous gamble at the present time.
As markets resume a pattern of negative behaviour that has become familiar of late, one of the reasons cited remains slowing global growth. There are fears over growth problems in the US and in the developing world. From an outside perspective, however, some of these problems would be nice to have.
Take America. Yes, annualized quarterly growth in GDP fell to 1.8% in the first quarter from 3.1% at the end of 2010. But US GDP had already eclipsed its pre-recessionary peak by then (and so reached a further record high this year). That looks pretty good from a European or UK perspective – still 2% and 4% below peak GDP in real terms respectively. And let’s not mention Japan.
So, it’s no surprise that US employment – a lagging indicator of growth in any event, but one which receives a lot of attention and can affect confidence – turned the corner some time ago. The number of those claiming unemployment insurance is on its way to halving, having fallen from a peak of 6.6m in summer 2009 to 3.7m now. Payroll data shows the net creation of 1.8m jobs since the labour market bottomed in Q1 2010. Yes, there is some way to go before employment recovers its pre-crisis peak, but the country is some distance from a “jobless recovery”.
Turn to the developing world and growth fears look positively baffling. China began increasing interest rates last October, and resumed increasing banks’ reserve requirements at the beginning of 2010. The result for 2011 growth? 9.7% in real terms on the year to Q1, exactly in line with the average for the last ten years (though forecast to fall as far as a mere 9.3% for this year as a whole).
As ever, this is not to say that the world is a problem-free zone (whenever is it?) But clouds in the sky do not mean it is falling in.