View Full Version : Bush Speak
Bush said something about our economy will take a hit because of soaring oil prices again.(I can not find the exact quote). The news is that OPEC is going to curtail production to prop up the oil price. This will cause slow down in the economy worldwide - as if it has not already slowed down.
Now, you would think that the fact that we provide military support to Kuwait and Saudi and UAE so that Iraq and Iran do not annex these countries will be gratified enough to keep the oil price steady enough for our benefit.
This may be time Bush to give them an ultimatum...what do you think?
Why do you think Master G wants to drill the Alaskan refuge? We need to tap our domestic reserves, and Alaska is the key--it's not like there's any oil in Texas, or anything. ;)
Something needs to be done, and yes, we have a fair domestic reserve. I just don't see why we have to drill the refuge when we've got other oil in this country. I am under every impression that we didn't bleed California dry, either, before we capped the wells amid an energy crisis and relied on OPEC to drop international prices by the goodness of their hearts.
It's also why the US doesn't like fossil-fuel reduction agreements on an international level--it hurts the value of the coal and oil we're sitting on.
07-26-01, 01:16 PM
Yes, OPEC is going to cut production by 1 million bpd from 1 September. Prices should not be unduly affected however. Iraq's resumption of oil supplies early this month has actually meant that prices fell steeply in July and OPEC was very concerned. Supply is well above demand, and there is probably a significant lag going on as stocks build (which they have steadily since Dec 2000). The bottom would have fallen out of the oil price if OPEC hadn't acted. As it is, the cut does come at a strange time - but the economy can live with a US$25-27 a barrel oil price. The US economy has performed badly, and this means oil demand forecasts have been wildly excessive. The long-term outlook for oil is also downwards - Mexico and Russia are gearing up for a big boost in production and OPEC will start to panic when they lose market share.
You think Bush CAN put pressure on OPEC? Nope. One nudge too far and Saudi turns off the taps. Who loses more? US$50 a barrel anyone?
OPEC is partly punishing the US for its stance on Israel, and partly capitalising on short-term market conditions. Who can blame them - OPEC was crippled by the Asian meltdown when oil prices hit US$9 a barrel and even Saudi posted a huge deficit.
Iraq a threat? Perhaps, but an invasion of Saudi (fanciful as that would be) would hurt the US as much if not more. Believe me the US is not doing the Gulf any favours by offering military support, they're helping themselves.
Bush to drive oil prices down? You think his backers at ExxonMobil would like that? They made US$17bn in 2000 (more than Russia's defence budget) IN PROFIT! They don't want low prices. And what they don't want, Bush doesn't want.
Iran a threat? Not a chance. They may be rattling sabres with Azerbaijan but believe me, they're looking inward. Khatemi has his hands full - there will be no foreign adventures.
So Bush shouldn't give OPEC an ultimatum. He can't give OPEC an ultimatum. And he won't give OPEC an ultimatum. If anything, the potential for pressure is the other way around. It's not publicised, but the Saudi's had a 'quiet word' with Bush. Result: shift in Israel policy. The US can't always pull all the strings - the puppet master can easily become the puppet...
It is a little more complicated than that. Here I am going to make a few statements without my 2 cents. Fill in your ideas.
1. The area we live in, the power company wanted to put a 640 MW plant to handle the peak loads so that in summer and winter, we do not have to pay so high price especially people living in fixed income.
The environmental activists opposed the idea saying it will pollute the place without understanding the technology behind it. At the same time, they are cutting down 200 acres of dense trees to make a golf course. Those same environmentalists are no where to be found.
2. Texas has both oil and gas. But new permits are hard to get, because locals refuse to uncap or do new drilling siting "Not in my backyard".
3. Some say, the reason we do not drill on our land is, we want to use up from other peoples land before we drill ours.
4. Nuclear energy can reduce dependence on fossil fuel. Nuclear energy can be made safe even though it may cost about 15% more for the design. Again, there will be another group of people who will demonstrate against it. These people will say that we should cut down our economy by 50%. You eat 50% less, buy 50% less, etc...move to a simpler life style, no more Las Vegas.
5. US economy is going down and fast. Just this morning HP, Avaya, Infineon laying off thousands of people. It is going to drag the world economy with it. Cuts in interest rate will not help for the simple reason is that people have borrowed too much money. The only thing that will save US and World economy is a drastic drop in oil prices.
6. Most of the gasoline is used in driving to the office. Since we have the technology, why we can not use it to work from home?
7. We can put a man on the moon in last century, yet we can not come up with inexpensive solar cells or fuel cells for millions of homes! What about some government subsidy here?
I disagree with your view that Bush can not put pressure on OPEC to drop oil price to $21 /BBL by asking for a $19/Bbl. Simply because, if he does not do something soon, by Christmas it will be too late. Then Al Gore will say, I told you so.
As I said earlier, the business dynamics are such that, unless oil prices drop drastically now till December, there will be no recovery for US or the world. I am sending an email to Bush on that. There is no other scenario that is global enough to work: My $600 refund will go to paying my credit card bill, not spending on frovilous stuff.
The middle class in US are the ones that keep economy humming. And they are tapped out.
07-27-01, 06:17 AM
While it is bad, politically, for Bush if oil prices continue to rise, you really haven't explained how he can pressure OPEC. He just can't - it would be far too dangerous to toy with them right now.
The US is losing its influence in the oil world. Iraq, Libya and Iran hold 25% of the world's oil reserves between tham (probably more), but the US maintains sanctions that are self-defeating. Iran will do the US no favours and neiither will Iraq or Libya. Yes, the Saudis are still US allies, but they are angered by the US policy on Israel. If the US is really concerned about oil prices, they should have thought about the effects of renewing ILSA.
As for the global economy question. I think you overstate the impact of US$27 a barrel against US$21 a barrel. It does have a small impact on growth (about 0.05% per dollar according to most analysts), but I expect even that is overstated. The US economy is tanking not because of oil prices, but because of capital markets. It will get a lot worse before it gets better, but not because of oil prices - that is not the prime mover here. Take a look at inflation - is it that high? If oil was the cause, inflation would be rocketing.
If oil fell to US$15 a barrel the US economy would still be in trouble. Gasoline prices are actually not much higher now than they were in 1999 and 2000, and with taxes, Europeans pay a lot more for energy without crippling the economy.
You need to explain how Bush can act, and what the link between oil and the economy is. A suggestion though - take a look at productivity and output growth rates from 1992 on and compare them to company share price value. The gap between real output and value has been getting bigger. Expectations were too high, the dotcom fiasco was the spark, and the economy needs time to find a new sector to pump money into and spur growth. The problem is complex and much deeper than oil prices. A nice, easy and foreign group to blame.
You are falling into the same trap most economists fall into. Even the operations research and predictive modelling has a similar problem. That is, when you use mathematical modelling you have a problem assigning a value to the mood of the people or other so called intangiables into the equations.
For example, last year companies built up their inventories inspite of sophisticated math algorithms and predictive modelling. Everybody did that and the bottom fell out. When intangiable factors can not be folded into the equation, you (the economists)grasp what is available indicators even if the corelation and standard deviation and even the probability does not match the business dynamics.
Just as packaging business provide an indicator of what is yet to come, so does people who work in the inventory management area. From where we stand, I can not provide you with an equation with its associated weight factors (to argue about), it is just a feeling that based on my association with various businesses such as banking, retail, short term and long term supply orders, inventory management by various groups and consumer spending habits - the only catalytic factor is the oil price.
Now, there are two possible outcomes. 1) Oil price drastically drops and the economy rebounds. 2) Oil price stays steady, and the economy sputters for a while and does not come back till next year.
Since your opinion is that oil price does not have any measurable impact and you have already predicted economy will get worse before it gets better, we are in mode 2. And if the powers that be feel the same way, we are going to struggle for the next 6 to 8 months.
How Bush is going to convince OPEC? Here is how. Tell OPEC that a drastic drop in oil price will help a lot of industries including power plants, airlines, plastics, transportation, fertilizer, and everything else that the oil is a feed stock. That in turn help those businesses recoup loss and they can take the risk to expand. As businesses hire people, start all the projects that are on hold (I am sitting on 3 projects of 15 mil on hold), consumer confidence will improve. As for my family, even though I am earning the same amout I did in January, all our expenditure has been drastically cut. I heard the same from my friends.
Whatever is your mathematics, if we the consumers are nervous and do not spend any money, no amount of fancy footwork will boost the economy - it is a very simple fact. If you watch Bloomberg, they have the same opinion.
07-30-01, 05:53 AM
It's an interesting argument.
While I concede that consumer confidence has a large and immeaureable impact upon the well being of the economy, I would still argue that the economic problems in the US will not simply fade away if oil prices fall to US$21 a barrel.
First, I am not arguing from a typical economic perspective - in other words, one which attempts to mathematically model the impact of various prices and economic indicators. If I were, I would agree with you.
Second, I accept that consumers in the US are worried and not spending. Fear of job losses and rising costs etc. But I simply think that the oil price is a contributing (perhaps necessary, but not suficient) cause of the economic slow-down. There are too many anomolies which simply don't add up.
If oil prices were the main factor, we would expect to see rising infaltion and rising interest rates. This is not the case. Inflation bumped upwards slightly, but has since levelled out. Meanwhile interest rates continue to fall. If high oil prices were having a major impact on economic performance, interest rates would be the first thing to go up to curb infaltion (you simply cannot disasociate inflation from a mjor commodity price hike).
But, you may say, it is all to do with perception. This is true up to a point. But two things suggest that this is not the main cause. First, the slowdown began in spring, prior to the oil price climb. The prime mover was the dot.com collapse - many job losses, investors taking a bath, money seizing up. Even if we look at the point at which things started showing up in the figures (autumn), this was far too soon for the impact of oil prices to be felt - there is a six month lead in for that sort of impact.
And if you look at gasoline prices thay are lower now than in late 1999 (according to the DOE EIA). No one was shouting then, why not? Perception, yes perhaps, and I understand that the anecdotal evidence (from your own perspective) does contribute to a feeling of blaming OPEC, and that the perception is itself a contributing factor.
Now the solution - pressuring OPEC to lower prices. Well, you may not have noticed, but oil prices did hit US$21 a barrel in January, and hit US$22 a barrel in July - not for long admittedly. Did this filter through to petrol? No. Why? US refinery bottleknecks and increases in refiner margins. If oil prices fell would gasoline prices fall? A bit, but not much, mainly because so many comapniess want to restore margins. When oil prices fall ExxonMobil make less on its upstream interests, so it makes up the difference on refining margins. It wouldn't have a big impact.
I don't want to ramble on too much. You have a perspective and point of view that appears well reasoned, but one which I disagree with. Where we can argue perhaps is on reliance on OPEC. Assuming that US economic health did rely on oil prices, is this desirable? Not from a US perspective, and the US is not following a policy that would maximise its influence. You suggest that the US could appeal to OPEC to take onboard the reasonable view that long-term success in oil production depends upon the health of the global economy. OPEC knows this argument well - it is wheeled out whenever oil prices hover around US$20 a barrel. OPEC accepts this view, but does not believe that it is currently the case. Factor inflation into the equation and oil costs are not any higher now than they were in the 1980s. OPEC ain't convinced, and Bush doesn't have the influence to pull strings.
If US health does rely on the middle eastern oil producers, they have a funny way of showing it. Relations Iran, Israel and Libya being prime examples. If Bush wants to have a say with OPEC, US foreign policy will need to be cahnged.
Regardless of our differing diagnoses' of the cause of the US economic ills, your solution cannot happen. But don't worry too much, oil prices are headed down in 2002, and won't get too high this year. Like you say, that could mean a recovery in around 8 months, but I wouldn't count on it.
We can argue on this till cows come home, and honestly I can not provide you with a mathematical equation that works. So the time will tell what will come to pass.
If oil prices drop and economy rebounds, I win.
If oil prices stay high up and economy rebounds, you win.
If oil prices stay up and we have a world recession, again I win(the world loses).
It is my view that lower and stable oil price in this time period will act as a "catalyst". So we shall see what is about to occur.
You are welcome to provide other variants that will do the trick - that is provide a boom in the economy in case I overlooked them.
07-30-01, 11:27 AM
Yes, I think we're simply going round in circles here so best to call it a day - agree to disagree.
I'm sure we both realise that the complexities of the global economy mean that it is in truth hard to put a 'test case' together, but nonetheless I'll go along:
Oil prices fall and the economy rebounds (you're correct about the catalyst)
Oil prices stay high and the economy rebounds (I'm correct about the weaker influence of oil prices)
Oil prices fall and the economy remains weak (I'm correct....)
Oil prices remain high and the economy continues to remain weak (Neither, either or both of us are correct - the oil price theory cannot be tested under such circumstances)
We appear to have bored any other potential posters off the board, so time to move on I think. We can at least agree that we both want the economy to pick up!