Why Oil is Falling: Wall Street Journal item

Heineken

Good questions, yeahbut.

Chindia is obviously quite vulnerable to financial busts---although perhaps less vulnerable than we are, since we foolishly transferred a huge portion of our manufacturing base to them, and gave them and the Arabs all our cash in exchange for endless mountain ranges of debt. Now that they have their own massive industrial society, they need a lot of their manufacturing capacity for their own use and not just export. So that buffers the impact on them if WE turn our white bellies to the sky.

Also, no matter what happens to Chindia economically, its oil consumption will always be vastly higher than it was before the big boom.

Let's say Chindia has a big recession and the number of cars it's adding to the roads declines by an order of magnitude. That's still lots of new cars that weren't there before. At a time when the total number of ICEs should be falling, not rising, to adjust for the growing constraints on oil production.
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yeahbut · Heavy Crude Joined: Oct 30, 2007 Posts: 286

ReverseEngineer · Heavy Crude Joined: Jul 16, 2008 Posts: 300

There is a certain amount of talk going on now about the "decoupling" of the Chinese and Indian economies from the US economy. In other words, these folks aren't so dependent on us to buy their goods, their economies can motor onward without us from internal demand and consumption.

Somewhat true, but not entirely true. First off, we are saddled with mountain of debt, no doubt, but who holds a lot of the paper? The Chinese. Who is investing in that economy at a mile a minute because the perception is that these "emerging" economies hold more growth potential than the American economy? Pension funds and Hedge funds of course, problem being these sources of capital are ALSO generally speaking insolvent, any money they are investing is mostly funny money, its leveraged up to beat the band. As more of these financial giants go belly up, so also does the source of capital driving the expansion of the Chindian economies.

So yea, for a year maybe the "decoupled" economies of China and India slog onward, but really they have exactly the same problem we do which is that as a multiplier of wealth, oil doesn't work so well anymore because now it actually COSTS too much to produce all sorts of stuff, including of course food. An Investor looks at this HUGE "undeveloped" market and chomps at the bit, and a million new Tata's are produced for Indians to drive around, but hey, they gotta gas them up just like we do! Does your average Indian actually make so much more than your average American that he can afford to gas up his Tata and drive from Bombay to Calcutta to visit Uncle Mahatma every weekend? He's gotta cut back also. LOL.

If we are having trouble filling up the gas tank, so is everybody else. Our economy is crashing sure, but despite "de-coupling" its all so interconnected that everyone gets drawn down into the same sewer. There are political problems going down in China now that make Tiananmen Square look like a Square Dance. Not to mention they got a million people or so displaced out of Guangzhi and Guangzou provinces as a result of THEIR flooding problems. I'm sure FukDumSucker Bernanke, the Chinese Central Banker has at least as many problems as his brother Ben here trying to print up enough funny money to keep China floating. Not like China is awash in Oil Fields you know, and neither is India. So the paper wealth actually is flowing about entirely in the direction of anyone producing and exporting oil, their general problem is that those same countries don't actually produce a whole heck of a lot of food, and you can't actually EAT oil. Anybody who produces food efficiently gets a good deal of money BACK from the oil exporters if you price up the food correctly. This is the symbiosis between the economies, and it doesn't decouple all that easily.

The fact is, while oil is getting expensive, food is getting MORE expensive, and the quantities produced will shrink faster than the oil fields go dry, because food has a tendency to go bad if its not moved around in a timely fashion. You might buy Corn Futures, but if the supplier can't deliver at ANY price, what are you gonna do? Sue him? Ask Ben Bernanke for a Government Bailout? LOL. Betting in the commodities market is outta control as big money flees equities in search of a safe haven, but commodities are NEVER safe. The freaking weather alone can run up a 20% shortfall in any given year for agricultural commodities. Oil is a better bet, you know the stuff is in the ground somewhere and it doesn't spoil or get tainted with Salmonella, but it does have the problem everybody is FIGHTING for it in the literal sense, strikes in Nigeria and threats of war in Iran and Tropical Storm Dolly working her way toward Oil Rigs in the Gulf, you can buy a contract but no sure bet there that its gonna get delivered.

The idea that oil consumption can rise inexorably in China and India is preposterous. They can't afford the stuff any more than we can, and they can't bootstrap up an industrial economy the way we did either, because when we did it, Oil was CHEAP. They might run a year or two behind us in crashing, but no doubt, they will crash also, and in some senses harder, because the bigger you are, the harder you fall, and these countries have some BIG populations to deal with.

ReverseEngineer

HKFarmboy · Coal Joined: Jul 09, 2008 Posts: 16 Location: Hong Kong

ROCKMAN

There’s another factor that may have a bearing on China’s net cost of oil. For quit a few years they have been buying interests in producing oil fields as well as supplying capital for expansion projects. Venz was an early target. Lately they have been shifting towards Angola, which has now become their No. 1 oil supplier replacing Saudi. I haven’t been able to quantify the net magnitude of such deals yet. And probably won’t be able to for lack of details on individual deals. But their share of the oil they’ll receive from these fields won’t be a current market price…..it will be at the net cost of their investment. I can only make a wild guess but that cost could be around $60/bbl for investments in the last year. Years ago the Chinese gov’t sunk over a $billion in Venz. That oil maybe making it to them today at a net cost closer to $30/bbl. Again, the difficulty is estimating how much of their imports are coming from these lower cost sources. The Chinese gov’t has one big advantage over traditional investors: they don’t measure the rate of return on these investments as a tradition buyer would. Their prime motivation is more the access to this oil then the profit side of the picture.

yesplease · Fission Joined: Oct 03, 2006 Posts: 2100

yesplease · Fission Joined: Oct 03, 2006 Posts: 2100

threadbear · Expert Joined: Jan 22, 2005 Posts: 7249

Heineken

yesplease · Fission Joined: Oct 03, 2006 Posts: 2100

Fiddlerdave · Heavy Crude Joined: Mar 18, 2007 Posts: 268

derekj

it seems to have fallen just in time for me.. Im doing a 4033 mile road trip in a few days in a diesel powered car. Maybe fuel prices can drop a few cents or atleast stay where there at.