Sowing the seeds of demand destruction

S

scriabinop23

I posted this is another thread, but figured it contains some worthwhile data. Take a look.

Look at the percentage of income spent on food in India and China per capita. The real population driven energy demand drivers can not simply afford *unsubsidized* product in the long run with current CPI/consumption balances taken into consideration.

The whole Chinese and Indian labor/export model (which is the foundation of their rampant growth) does not work if the governments stop picking up the tab.

For examples, look at Indonesia. They just raised the price of gasoline (it is subsidized) to the equivalent of $2.45/gal. At a long run breakeven for refiners of $7-8 on the crack spreads (of $3.33 avg product price at $133 crude +$7 crack), that is still 27% below market clearing price.

And even with that, there are bloody riots.

Take a look at these China statistics:
http://www.ers.usda.gov/Data/China/...Rural+consumption+&+expenditures&ReportType=0

The Urban consumer in China in 2006 has about $1469 of income annually. How much unsubsidized oil (at $3.33) can he afford with food already consuming probably in excess of 26% of his expenses (imagine these #s with the price increases in commodities/inflation) ?

The Chinese rural peasant (most of the population) has $448 of income. He spends 34% of his income on food in 06 (probably a lot more right now). How much $3.33/gallon product can he afford to be economically competitive in the rest of the world [only justified by his willingness to work for rock bottom labor rates]?

If you are the average Chinese or Indian, this is not the time to buy your first car. Any new buyer is on the margin, a very very slim margin.

http://www.ers.usda.gov/Data/China/...Rural+consumption+&+expenditures&ReportType=0

You China+India demand pipe dreamers need to get over it. This is an Olympics diesel stockpiling blowoff top and will not be sustainable in the long run.

As long as Arab oil princes are running AC to 50 degrees F in their 5 million square foot palaces 365 days a year off oil fired power plants, they are quickly sowing the seeds of demand destruction and eventual replacement of energy sources (nuclear, wind, solar, etc).
 
The U.S. gets about 80% of its oil from non-middle eastern nations.

Most oil imported into the U.S. comes from Canada, Mexico and Venezuela.

Also, big oil is not to blame for the run-up in crude prices. I'll be the first one to defend them, and their record profits.

They are benefiting from a speculative movement by institutional investors into oil the likes of which we've never seen before - pension funds, university endowments, etc.

Now that ETFs have been introduced as trading vehicles for commodities such as oil, I can certainly believe that we're closer to the top, btw.

A great primer on oil, refining, consumption, etc:

http://www.ft.com/cms/s/0/74bf31bc-992a-11dc-bb45-0000779fd2ac.html?nclick_check=1
 
It doesn't matter where the oil comes from (with regard to US supplies). The whole market is one shared glass (of price). Displacement of supplies between location is offset by complementary replacement from another source.

I never did say that big oil is to blame for this. This is just an answer to those who argue 'China/India' demand as a sustainable excuse for this to continue. Economics won't allow it until they increase profit margins (and disposable incomes) on an unsubsidized basis. To do that, they need technological innovation and productivity increases - not merely cheap labor.

Take a look John Mauldin's latest deal.

http://www.frontlinethoughts.com/pdf/mwo052308.pdf
 
I think there is another factor here that played a major role in the build-up to present prices and that is that commodities are a traditional hedge against inflation and we have known since late 2003 that big time inflation was headed toward the US economy.
 
Quote from scriabinop23:

It doesn't matter where the oil comes from (with regard to US supplies). The whole market is one shared glass (of price).
More...



Right, oil is a fungible good.

I was just responding to several comments that people have made that I believe are erroneous and/or misleading. They are typically:

1) Middle eastern nations supply the U.S. oil, when in fact, they supply the U.S. very little oil (but yes, oil is fungible)

2) 'Big Oil' is responsible for the run up in crude (they aren't)

3) There is a shortage of oil (there's not; speculative buying has locked up oil, taken it off 'the market,' and prevented physical deliveries, thus creating the 'draw downs' that have fueled supply concerns)

4) OPEC (or anyone else) can tamp down prices of oil by increasing production (no, they can't, because whatever they increase will be purchased and taken off the market by speculators, so the physical delivery that would lead to a build in crude inventories won't occur)



Governments have to intervene. Also, countries such as China and India need to quit subsidizing diesel and gasoline.
 
Quote from ByLoSellHi:

Governments have to intervene. Also, countries such as China and India need to quit subsidizing diesel and gasoline.
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Agreed. But they have to intervene with laws that dictate efficient consumption and better alternatives, all with immediacy. Thats the only way anything improves.

The cheap energy that fueled their growth will lead to their economic destruction at this point. If China strengthens the Yuan to offset this, then their export competitiveness disappears - trade imbalances correct. Fascinating and perilous stuff.

The subsidies won't work in the long run now that the markets are forcing the issue, and monetary policy won't do the job either. The only way out of this is to let everything float.

The US is in the best position of all ... we still have the wealth to afford going the right direction. Unfortunately, the country is run by a bunch of aging southern hicks that haven't a clue and think Jesus will offer them the way out.

Oh well.. looks like the only thing sowing seeds of destruction is the simplistic Christian notion that god is somehow a human being, implying we are somewhat superior and entitled (to be complacent). Thats what our government and the majority of the voting populous unfortunately is. Funny how its some of those judeo-christian theologies that are big into forecasting an armageddon, when its the very same judeo-christian-dictated human-centric view which is going to cause it (in a relative sense)... Ok I'm getting too philosophical here.
 
Quote from scriabinop23:


As long as Arab oil princes are running AC to 50 degrees F in their 5 million square foot palaces 365 days a year off oil fired power plants, they are quickly sowing the seeds of demand destruction and eventual replacement of energy sources (nuclear, wind, solar, etc).
More...

"Six Arab states join rush to go nuclear"
http://www.timesonline.co.uk/tol/news/world/middle_east/article624855.ece
2006

http://www.economist.com/world/international/displaystory.cfm?story_id=11409376
2008
 
I understand the argument about subsidized energy in India and China

But even though they stop subsidizing where are you gonna find all that oil to 1.3 billion people in China 1.1 billion people in India or 1 million a day increasing number of humans in the world? They all want to consume.

Where is the oil going to come from?

There is only one answer.

The price should go up in the long run, there is no other way.
 
Quote from misterno:

I understand the argument about subsidized energy in India and China

But even though they stop subsidizing where are you gonna find all that oil to 1.3 billion people in China 1.1 billion people in India or 1 million a day increasing number of humans in the world? They all want to consume.

Where is the oil going to come from?

There is only one answer.

The price should go up in the long run, there is no other way.
More...


In the very long run you are right (30-50 years), but per capita incomes are simply too small *right now* to justify economic growth and thus increased purchasing power versus the current price of unsubsidized oil, regardless of how big a population # you throw at me. When Chinese per capita income is in the $10K+ range, then that 1B number supports your thesis. But its closer to $1000 right now. Imagine spending 4% of your yearly income even per month on gasoline. That leaves you $500 for house, food, etc. Quite a hard life. I think that points to lower demand, and eventual downward (leftward) shifting of aggregrate demand curves as new habits adapt.

Filling my Prius gas tank last night cost me $42,
The Chinese had a billion people+ 20 years ago. They have similar population now ... supply/demand economics eventually win regardless.
 
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