Consumption Junction, Part Three ($200/bbl oil?)
June 03, 2008
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Newsweek has an interesting article this week, starting here:
http://www.newsweek.com/id/139395/page/1
Entitled “The Coming Energy Wars”, it brings up some good points, though the byline is a bit glitz-mongering, even for Newsweek: “Oil prices could hit $200 a barrel in the next few months. How the spike changes everything.” Now, I don’t think oil is going to hit $200/bbl in the next “few” months, and neither does Newsweek seriously, I think. The actual quote is from Goldman Sachs, you know, the ones who’ve supposedly kept their noses clean of the financial fiasco in which we’re currently embroiled. GS warns that “the $200 barrier could be hit within the next six to 24 months.” Well, yeah. Duh. Two years is a very long time in the pricing of commodities. And the word “could” pretty much covers your prognosticating butt for all intents & purposes. So much for the objectivity of Newsweek’s bylines. Oh well, I’d hoped for better, but I suppose ya gotta get those readers to your servers somehow…
But don’t let my pessimism about new magazine editor’s choice of marketing phrases prevent you from reading the article. It’s got some good points. I think what was most interesting to me is something I’d not thought about until I read the article: as oil continues to rise in price, all manner of modern transportation will suffer (well, most of it for sure), in particular long-distance shipping. Shipping goods from China may get so prohibitively expensive that free global trade shifts to regional areas, with more of America’s goods coming in from Latin America. The familiar “Made in China” stamp or sticker will be replaced by “Hecho en Mexico”; wait-a-minute, they’ve already beaten me to the punch on that one! Seriously, we’ll see a lot more “Produced in Peru”, or “Constructed in Columbia”, or “Built in Brazil” (or the like) than ever before. This trend has already begun to take shape as goods as varied as our clothing to consumer staples to wiring harnesses to complicated sub-assemblies continue to be imported from Mexico. A quick review of this web page:
http://www.census.gov/foreign-trade/statistics/product/enduse/imports/c2010.html
shows that nearly all categories of Mexican goods have increased from 2003-2007 in quantity of imports into the USA, from coffee to cocoa to sugar to fish to cement to metals ( aluminum, copper, nickel, tin, zinc, iron, etc.), sulfur, telecomm equipment, aircraft parts, and yes, even crude oil. Sure, NAFTA is responsible for a large majority of this, but rising fuel prices certainly contribute as well.
According to Jeff Rubin, chief economist for CIBC World Markets, the forth-coming stratospheric rise in oil prices is "a harbinger of the reversal of globalization. At $200 a barrel, you'll see transport costs rise so much that they will effectively reverse the trade liberalization of the last 30 years." In the first linked article above, Rubin points to the last time oil prices spiked, in the 1973-1979 period: “[when oil spiked] you'll find the same thing happened. The share of imports to the U.S. from Latin America and the Caribbean rose by 6 percentage points. That was all about freight costs."
Maybe “warp drive” will finally be invented? (Where's Scotty when you really need him?!) Or nuclear-driven oil tankers? Just some wild guesses…
Other trends that will most likely occur: accelerated wealth accumulation by Russians, Venezuelans and Iranians. Boy, are we gonna look back at the Clinton & Bush Junior years and wish we’d stretched out our hand to the fledgling Russian nation (before Putin took over) more than the paltry gestures we’d made so far…
Additionally, higher oil prices make drilling for oil more profitable, even in the most remote areas of the world. Places like Cambodia, Borneo, and the Amazon Rain Forest may become populated with oil machinery, just as we are seeing now in Nigeria. And like Nigeria, as more under-developed nations drill for oil, those places become targets for political instability, murder, and civil war. These nations either cannot or will not put enough money into their infrastructure fast enough to guarantee the continued safety of their oil production. As the article points out, it is often the case that many small states struggle to invest their oil windfall wisely, and invariably “the percentage of the world's wars that take place in oil states is growing.” Which will only tend to drive up the price of oil, not offset it.
Finally, I agree with the author’s extrapolation that the Big Three automotive manufacturers in Detroit may be on their way out, most notably GM, which has struggled for years with lackluster results. In 2007, Cerberus Capital Management bought out GM’s financing arm, GMAC (much to the chagrin of Cerberus’ owners), then bloated itself even further by chowing down on Chrysler Corp. and Chrysler Finance. Chrysler has struggled ever since its failed ugly-step-sister merger attempt with Daimler, one of those mergers when everyone inside was happily drinking their Jim Jones Kool-Aid while everyone outside the company’s walls (ok, maybe it was just me) was left scratching their heads, replying “What are they thinking?!”. To quote Michael Lewitt in his recent HCM Market Letter: “Chrysler has three North American plants producing full-size pickup trucks but last year sold only 358,000, or less than two plants' worth. In the dictionary of private equity terms, the automobile industry may soon come to be defined as Waterloo”. I’ll talk more about this in my next blog; stay tuned.
Meanwhile, I don’t think we’ll see $200/bbl oil this summer, so you’ve still got time to bury that huge underground tanker system in your backyard, fill it up with $4.00/gal gasoline and dig out your Mad Max attire. Happy Driving!
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