Recently an acquaintance shared with me a very interesting video on Youtube. It was a recording of the lecture, canadian economist Jeff Rubin at the International Center of Management of Innovation(CIGI). Jeff Rubin has long been a leading economist of canadian investment Bank CIBC World Markets. In the early 2000s, he was able to predict a sharp jump in oil prices that occurred a few years later in 2007-2008.
In 2009, Jeff published the best-selling Why Your World Is About To Get A Whole Lot Smaller("Why Your world will have to settle for a much smaller"), which has already sold over 50 thousand copies and was included by the Financial Times in the list of the best books of the year. Today Jeff Rubin is considered one of the world's most respected experts in the field of energy. Jeff leads his weekly blog on the website of the canadian newspaper The Globe and Mail. Title of a lecture by Jeff Rubin of course was in tune with the title of his book: “Oil and the end of globalization”
According to him, the understanding of the essence of the disease is the first essential step to finding the cure. According to the generally accepted version of events, the recession that began in 2008, was the result of the crisis in American ipotechnim the market. The reckless lending of Americans, who often were unable to repay previous loans, was a well-oiled mechanism. This mechanism for a short time made millionie profits for investment banks on Wall Street and all those who were engaged in the resale and appraisal of mortgage pseudo-securities.
However, why the crisis began in the U.S. eventually became international? Why is the abandoned and boarded-up Windows in Cleveland became a symbol of worldwide economic collapse? And why signs of recession in other countries appeared simultaneously with those in the United States? Obviously, it was a different reason. Maybe it was the fact that the oil at that time was worth 148 dollars per barrel?
All of the recession over the last 40 years inevitably coincided with the peak in oil prices. The rise in oil prices caused the recession in 1973, 1979 -1982., 1991, How about the recent crisis? In 2004, oil was around 30 dollars per barrel, while in 2008 “only” almost $ 150 per barrel.
What does the oil price to economic shocks? The main component of the link between oil price and economic environment is inflation. In turn, the higher inflation leads to higher interest rates on loans, which makes many kredituvannya insolvent. It is low interest rates helped to inflate the bubble of American ipoteki in the early 2000s, when oil cost about $ 30 per barrel. It is a sharp increase in rates in 2007, 2008 led to the fact that the bubble burst. At that time oil was at an all-time height of 148 dollars per barrel.
Low interest rates allow us to increase the debt load of the population. Many in the United States in the early and mid-2000s with credit cards. They were offered the opportunity to use almost free of other people's money at almost zero percent per annum. Who will refuse money sent to you by mail?
But the music in the financial markets began to subside, when suddenly inflation increased from 1% to 5% in a very short period of time. The increase in interest rates was the instant response of the Central Bank of the U.S. on inflation.
As the oil price connected to inflation? To answer this question you can go to any large supermarket that sells food and household goods. What is the percentage of goods or food products in your nearby supermarket was produced in your city or in the suburbs. Obviously, this percentage is small. As popadaut other non-resident and foreign goods in your supermarket? Apparently, their there bring. And what do you think is the main cost item for carriers? Of course fuel. What will happen with the prices in your supermarket, if the cost of their transportation, for example, tripled due to rising fuel prices? It is obvious that these costs will be reflected in the increase of final consumer prices for food and goods of life. The rise in consumer prices - that is called inflation. Additionally only mention that oil is a component of cost of production of all plastic products in your home and your everyday life.
Why oil prices tend to increase for the last 20 years, excluding temporary padenie during the recession? There are a number of objective reasons. The first one is that the available oil reserves on our planet have been steadily declining. The number of new untapped oil fields are becoming less and less. Another reason is to reduce the share of oil exports in the OPEC countries caused by the depletion of reserves and rising domestic consumption. Do not forget about the ongoing armed conflict and instability in the Middle East, North and Central Africa and Latin America, which make the market to play it safe, waiting for any interruptions in the supply of raw materials. And last, but not least, the reason lies in the objective growth of expenses for oil production. With prices of 50 to 60 dollars per barrel the international oil industry is curtailing investment in oil production, which leads to the lack of oil on the market and higher prices for that resource. This means that three-digit oil prices are no longer extraordinary; rather, they reflect the cost of supply of this key mineral to the international market.
In a world where triple-digit oil prices become reality, you lose the benefit of cheap foreign labour force, as the savings in production will be more than niveliruya of the transportation costs. According to Rubin, this indicates that in the near future the world will again return to local production and consumption of household goods and food products.
On the eve of the 2008 crisis in the U.S. for the first time in the last 20 years, the steel production grew by 15%, while steel exports from China to the U.S. decreased by 15%. Maybe the reason for this unusual phenomenon for the last years lies in the fact that to produce steel in the United States was cheaper than to import from China? For the production and steel imports China needs to get iron ore from Brazil across the Pacific ocean. The steel production is also energy intensive. Then China needs to send steel across the Pacific ocean in the United States. In all this uchastvuet oil. Three-digit prices for energy imports became unprofitable. A similar example can be any product of import at your local supermarket.
We go back to a world where production of goods will become local and the import share will fall significantly. Competition for natural resources will increase substantially, which risks escalation of armed conflict.
The rise in oil prices has triggered an increase in the share of alternative energy sources in the international consumption of energy. However, the share of these sources is much less than the share of oil in the energy market. Thus in the near future, oil remains a key player in the global energy market, a kind of DNA of the international economy, and the pulse netago market will determine the state of the global economy.
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