World Economy Would Collapse If Oil Hit $200, Deutsche Says

TreebeardsUncle · Intermediate Crude Joined: Jun 15, 2006 Posts: 572

Agree with mel... . The economy will do just fine with $200/barrel oil and $5.50/gallon gas. $300/barrel oil would bring us up to about $8/gallon gas which would really set back suv production. $500/barrel oil would bring us up to about $13/barrel. That will be enough to make driving around everywhere in cars a bit less appealing. In America it would encourage car pooling. In the third world, they would move to scooters and motorcycles.

g

gazzy_mondo · Coal Joined: Jun 23, 2008 Posts: 4

Anyone here remember when the World would end when oil hit $100 a barrel?

The fact is if there is still petrol to buy then people will pay for it regardless of how much it costs. The reason being is because the vast majority of people are ignorantly addicted to the stuff.

The affects of $200, $300 won't make a difference to those addicted.

yull

The world economy was never going to collapse overnight the second oil hit $100. It takes years just to work it's way through the system. Have patience!
Oil price sustainned at $100 a barrel is going to be extremely damaging. Besdies, it is SUSTAINED oil price that matters. A spike doesn't matter. The 1 year moving average has only just nudged above $100 a barrel.
Oil sustained at $140 for at least a year could collapse everything. $200 sustained doesn't bear thinking of.

I think a more useful thing to look at in fact is to take a 2 or 3 year moving average. I'm not sure what that would be at the moment, but only around $80 a barrel I would imagine.

Some also seem to think that the only use of oil is personal transport, but personal transport is only a small fraction of world oil use, around 20-30% if I remember correctly. The rest goes into industry, agriculture, shipping, truckers, airlines etc. It doesn't matter if we can afford oil at $30 a gallon, the rest of the economy won't. The recession from the rest of the economy buckling means inflation, rapid price rises in everything, wage cuts, unemployment. This alone is enough to hurt people in their cars as there's less to spend on personal transport.

patience · Expert Joined: Jan 04, 2008 Posts: 1504

Yull, I agree, oil forms too great a part of developed economies to dismiss a sharp price increase. I see it now in my relatively poorer area of Indiana. Those with the lowest incomes are in desperate straits, losing homes to foreclosure, moving in with relatives, eating poorly, and trying to sell whatever they have. The poor young guys are scrounging junk to sell, and stealing it if necessary. If the price of oil (and everything else) ratchets up, so does this line of desperation, and we get more crime, more foreclosures which lowers real estate values, and more failing businesses.

Two local employers here are near a breaking point, one makes auto parts, and the other makes high-end hardwood flooring. Both have lost about 20% to 25% of their business, and that is falling more. A third company makes lawn mower components, and has had some layoffs, but I don't have as much info on them,

For our local economy, I see $200 oil (and doubled gas prices according to some) as being far too much for the US economy to handle. Like you said, it's the knock-on effects that hit hardest, especially food prices.
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Local fix-it guy..

gazzy_mondo · Coal Joined: Jun 23, 2008 Posts: 4

oh I know the World wasn't going to end overnight. I'm just using it as an example. The frightening reality is how quickly we have started a discourse on oil at $200.

When I joined PO back in Nov 2005 (under a different name now lost in the ether like so many oldies on here recently) $100 to many was a fantasy and there were plenty of Cornucopians lambasting Peak Oil as Doomer porn. How many months has it been when oil hit $100?

Answer = Seven.

Oil hits $100

I like the fact that they live under the misguided belief that a recession is a sure fire way to reduce consumption

As my previous incarnation I posted this chart I drew up. Note the bit where the early 90's recession caused a huge cut in demand for oil. Wink

cannedsalmon · Tar Sands Joined: Jun 29, 2008 Posts: 61

Agreed, the economy will not collapse until the money supply contracts, you know, when they start raising interest rates.

I do not know if this is true but a chinese foreign exchange student from the forbidden city area told me today that gas prices in china are 50 cents a liter. I assume this is correct.

So how do they do this? Something is not right in the gas market.

manu · Intermediate Crude Joined: Jul 26, 2006 Posts: 752

ROCKMAN

For those a tad younger than me let’s jump into the Way Back Machine and view a set of circumstances fairly similar to today:

I can make a model of oil dropping to $40/bbl in 5 years that’s both credible and defensible. You need only remember that every model is based upon assumptions. And the validity of those assumptions determines the credibility of the model.

Back in the late 70’s when I was just a pup of a geologist companies were using a price forecast of $70 to $90 per bbl by the mid 80’s. This would equate to a price of $250+/bbl today. Such forecasts were needed to run economic models to evaluate drilling deals.

It didn’t quit shake out that way. The oil price run up caused a worldwide recession that knocked consumption down (vague memory of a 6% to 8% drop) which, in turn, led to $10/bbl oil in 1986. I personally knew of dozens of small companies that went belly up as a direct result of this bad forecast. The number was thrown around that the oil industry lost over 500,000 jobs but who knows. But I know I was getting up at 2 in the morning to deliver produce to restaurants for a while. (but doing much better now….thank you)

OK…wipe your tears and pay attention. My forecast is just as credible as anyone else’s (and more defensible then many). I don’t know if the world will slip into a recession as it did in the mid 80’s. But if it does then my model is a valid extrapolation of what happened a little more then 20 years ago.

This is just a model…not a prediction. What will happen will depend on the world economy. And no one (and I mean NO ONE) in the world predicted a collapse of the world economy anywhere close to what occurred in the early 80’s. And this included all the smartest economists in the world at that time, just like all the predictions coming out of all the smartest economists in the world now.

vision-master

ROCKMAN

vision-master,

Yes...in many ways they seem worse. The price spike in the late 70's was not caused by a lack of producible oil. And the price collapse was not the result of voluntary conservation or a swith to renewables. And the world economy seemed to fucntion on a simpler level.

The WW economic collapse took several years to reach a true impact level. I suspect identifying the tipping point today would be similar to predicting US recessions: easily done when looking back 6 months to a year. Given the new China Syndrom (expanding economy regardless of oil prices) I think anticipating net demand decline is all the more difficult. But if prices eventually knock demand down 5% that's 4.3 mmbo/day at current consumption levels. That makes the call for Saudi to up production a few hundred thoudand bopd look puny.

As usual in these discusions it falls back on "time will tell"

Revi · Fusion Joined: Apr 25, 2005 Posts: 3235 Location: Maine

This is going to be a catastrophe for those who are still doing things the way they did in the late 90's and those at the lower end of the economic ladder.

People who get smart and switch their consumption will be okay for a while.

$300 a barrel could bankrupt even them.
_________________
Deep in the mud and slime of things, even there, something sings.

ROCKMAN

Speaking of which this story just popped up. I wonder what the BIS predictions were back in the early 80's? I have no doubt that some of the secretaries at BIS understand the "Big Picture" better than I do. But it goes back to the same point: eveyone can make a prediction. And of all the possible outcomes one prediction will be exactly right. But it just like a lottery winner: he didn't know what the winner number would be. But whenever every possible outcome is predicted someone will have it right...even if they didn't know what they were talking about.

BASEL, Switzerland (June 30) - The global economy could face a deeper downturn than many currently expect amid rising inflation and the turmoil on financial markets, the Bank for International Settlements said at its annual meeting Monday.

"In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation," the BIS said in its annual report.

"While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."

The Basel-based bank added that the current "consensus view is still that the global economy will slow only modestly further in 2008" and that growth continued to be strong in the euro zone, Japan, and major emerging market economies.

Often called the central bank of central banks, the BIS said during its last fiscal year central banks worldwide reacted to the financial and monetary policy situation differently, and that given their countries' different economic situations, a "one size fits all" monetary policy can't necessarily be predicted or suggested.

The bank said that with inflation rising, a global bias toward higher interest rates was probably appropriate. Higher interest rates can cool inflation, but run the risk of lower growth.

The bank warned against a cookie-cutter approach to interest rates from country to country, and warned than an excessive tightening exacerbated by the credit contraction caused by the crisis over mortgage-backed securities in the United States could worsen any downturn.

"Unfolding developments at the core of the global financial system have, however also created great uncertainty about the future economic prospects," the bank said. "Banks in several advanced industrial economies have been tightening lending standards, and thus a generalized squeeze in the availability of credit remains a distinct possibility."

The European Central Bank has indicated it could raise its key interest rate from the current 4 percent "by a small amount" as soon as this week, in an effort to combat rising inflation in the 15-nation euro zone, which is well above its preferred level of at or near 2 percent.

The BIS said it would have been best to avoid the large buildup of loose credit in the first place and urged new regulatory frameworks to prevent a recurrence.

The BIS is a center for economic and monetary research, and coordinates regulations in the fields of financial services to promote international financial stability. All of BIS' capital is held by central banks BIS' customers include international central banks, as well as international organizations..

The BIS board of directors has 20 members and is currently chaired by Jean-Pierre Roth of the Swiss National Bank. Six non official directors are the central bank governors of Belgium, France, Germany, Italy and the United Kingdom as well as the Chairman of the Board of Governors of the U.S. Federal Reserve System.

shortonoil · Fission Joined: Dec 02, 2004 Posts: 2684 Location: VA USA

The US doesn’t have to wait for $200 oil to go bankrupt. It is already there. $140 oil is costing the US in excess of $800 billion/yr. This money has to be borrowed, and there are, at present, no private foreign investors investing money into the US. At present, SFW funds and central banks are keeping the US afloat.

The drain on foreign economies from foreign central banks pouring money into the US is producing massive problems in their own economies. They will not be able to sustain this huge outpouring of cash from their economies into the US economy much longer.

Once they stop, which could be any day in the very near future, the monetary/financial system will come apart. Without a working currency system, the US economy will come to a halt!

manu · Intermediate Crude Joined: Jul 26, 2006 Posts: 752

KevO · Expert Joined: May 24, 2005 Posts: 2358