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谢国忠

谢国忠博客:只说出心中真相

 
 
 

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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the oil bubble lives on  

2008-06-12 20:21:43|  分类: 默认分类 |  标签: |举报 |字号 订阅

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Oilprice has gyrated in recent days? WTI topped above $135/barrel in lateMay but dropped quickly to $126/barrel in the following week. The pricevolatility has increased demand for opinions, especially shocking ones.On the bull camp, many are arguing for a super spike-productiondisruption pushing price to $200/barrel. On the bear side, some arearguing for price peaking and demand destruction bringing price down to$80/barrel soon. I think that the price is still rising in an upwardwave motion. The price may peak when China and India liberalize theprices for refined products. The bubble will burst when the Fed raisesinterest rate to a level close to or above inflation (possibly bymd-2010).

The oil price fluctuated around$20/barrel until 2002. The strong global economy that began in 2003pushed up the price. It didn’t feel different from a normal cycle untilthe second half of 2004 when the price rose substantially above theprevious range. The US property downturn weighted on oil demandexpectation in the first half of 2007. The bubble was on the verge ofbursting. Then, the Fed cut interest rate to bail out the financialsystem, which sparked financial capital flowing into oil market. Istrongly believe that the surging oil price since the summer of 2007 isa monetary phenomenon.

The most importantargument against the bubble theory is lack of inventory accumulation.Inventory is common but not necessary for a bubble. During the techbubble, many companies invested massively in building up bandwidthcapacity. It was a form of inventory. In the US property bubble, manyhouseholds bought second homes that were not occupied most of the time.Again, it was a form of inventory. But, the 1997 property bubble inHong Kong and the current one in London don’t have overbuilding or highvacancy rate. Regulatory constraints blocked supply response to priceappreciation in both cases. The hallmark of a supply-constrained bubbleis declining yield and rising share of capital appreciation in totalreturn.

Under normal circumstances risingoil price should boost supply and suppress demand. Hence, inventorywould be a necessary condition for a bubble to last. The current supplyand demand dynamics are highly unusual and make the current oil bubblea supply-constrained one like the Hong Kong property bubble ten yearsago. The International Energy Agency (‘IEA’) still predicts global oildemand to reach 87.3 million barrels/day (‘mbd’) in 2008, up from 86mbd in 2007. I am suspicious of the forecast. According to the best IEAestimate, global oil demand in 2007 rose 1.3% or 1.1 mbd. 2008 globalGDP growth rate is likely to be one percentage point lower than in2007. Together with oil price nearly twice as high, it is hard tobelieve that oil demand could rise in 2008 by the same amount as in2007. Actually, oil data are quite poor. The past data from the IEA orother sources could be significantly off the mark. The predictions, ofcourse, are less reliable. Nevertheless, we can believe that, despitefivefold increase of oil price over the past five years, oil demand hasbeen rising or, at least, not falling. No one could have predicted suchan outcome before the price surge.

Accordingto the IEA, over 80% of the demand increase comes from the Middle Eastand Asia/Pacific Region. Middle East accounts for over half of theglobal oil export. The high oil price has enormously increased itsexport revenue. Rising income has generated extra demand for oil athome. The income effect that boosts demand exceeds the price effectthat depresses demand. This unusual dynamic makes oil consumption inthe Middle East positively correlated with oil price. Also, many oilexporting countries could afford to keep the prices for refinedproducts low at home, as it doesn’t cost them. The combination of highincome and low price is extremely positive for demand. This analysisapplies to other oil exporters. About half of the oil demand could beexplained by this dynamic among oil exporting economies.

Pricecontrol or subsidy has supported demand in emerging economies likeChina and India. Energy is a higher proportion of production and livingcosts among developing economies than in developed economies. Mostdeveloping countries have found it difficult to pass the rising oilprice to consumers without causing political trouble. Governments thatespouse subsidy policy always believe that it is temporary, hoping thatoil price would drop back. As oil price has kept rising, theconsequence of removing subsidy has become bigger and bigger, whichmakes the governments even less willing to end subsidies. Unwittingly,they have played a large role in supporting the high price that theyare so afraid of. As demand growth in oil exporting economies dependson high price, the so-called demand resilience ultimately depends onthe subsidy policy among oil importing developing economies. Also, oilsubsidy keeps down the prices of the exports of developing economies,which subsidizes western consumers and boosts their ability to copewith high oil price at home. This subsidy policy among developingeconomies is the most important force that sustains demand growthdespite surging price.

The oil demand amongOECD economies seems to be contracting three years in a roll. IEApredicts that the OECD demand would contract by 0.3% or 0.2 mbd, alldue to the US’s demand contraction. The OECD demand should be moreresilient than that from developing economies. Oil demand, especiallyin the US, is for driving and, hence, is more lifestyle dependent.Lifestyle change doesn’t occur suddenly. Consumers will first adopt await-and-see attitude, hoping that the price would fall back. Onlyafter they have abandoned the hope will they adjust their lifestyle. Itseems that the US consumers are beginning to do so. Most US householdshave more cars than drivers. The easy option is to drive the small carsthat consume less gasoline. When purchasing new cars, Americans areswitching to small and fuel efficient cars. The recent auto purchasedata suggest that the sales of big cars, especially SUVs, arecollapsing. (Ironically, the sales of such cars are booming in China.Many US car dealers are exploring the possibility of sending theirinventories to China.)

Europe and Japanconsume half as much oil as the US per capita and have less scope todecrease their oil demand. Unexpectedly, Japan’s oil demand appears tobe rising strongly as it has shut down some nuclear power plants. Itsoil imports rose by 10% in April to 4.3 mbd. Its LNG imports rose by20.8% in April to 5.72 million tons. Japan’s import increase istemporarily surpassing China’s. Japan’s problems with its nuclear powerplants may be the most important factor supporting the current pricesurge. Japan is an efficient oil user otherwise. It is hard tell howlong it takes to fix its nuclear power plants. When it does, it couldbe a catalyst for a significant price decline.

Europeanoil demand appears to be stagnant, but not contracting. Europe has highgasoline taxes. Its consumers are used to high gasoline price. Theirgasoline price is nearly three times as high as China’s. They arealready driving fuel efficient cars. There are no easy ways to savegasoline consumption there. Some consumers have switched to takingmetro from driving. Its impact is still limited so far. In the Europeantradition at times like this, its consumers are staging protestsagainst the high price. It is putting pressure on their governments todecrease fuel taxes to offset the price increase. If Europeangovernments do succumb and decrease the taxes, it would lend furthersupport for high oil price by cutting linkage between market price andconsumer price.

On the demand side, we arewitnessing a complex picture that dents the negative effect of risingprice on demand. The US is the only major economy that is seeing normaldemand response. Japan’s problem with its nuclear power plantscomplicates the demand story. Europe could cut fuel taxes and lendfurther support to the high price. Above all else, the subsidy policyamong developing economies is the most important factor that keepsdemand growing despite price surge. The price that consumers pay amongemerging economies may be $50/barrel on average. As the dollar hasdeclined by 30% in the past five years, the price is $35/barreladjusting for the dollar depreciation. Hence, the consumers amongemerging economies have been spared most of the impact of the priceincrease. Unless emerging economies remove their subsidies, oil demandshould remain resilient.

The supply sidestory is easier to tell. Oil wells normally produce at full capacity.Supply increase depends on new fields going into production. Because anew field requires years to develop, the supply is relatively fixed inthe short term. The exception is Saudi Arabia that still keeps sparecapacity of over 2 mbd. Saudi Arabia plays the role of a central bankin the oil market. Its spare capacity is supposed to be a pricestabilizer. When price is low, it cuts back production and vice versa.It is the only major producer that can boost production to depressprice. It has so far resisted the pressure from the US to boostproduction, blaming speculation rather than supply shortfall fortoday’s high oil price. Of course, high price boosts its revenue and isgood for Saudi Arabia. Then only concern is that high price mighttrigger the development of alternative energies that will decrease oildemand in the long run. This concern was a major reason that it triedto keep price around $25/bbl in the 1990s. Today’s high price may havetriggered a strategy change. Saudi Arabia may be prepared for futuredemand reduction by earning as much as possible today. Its vast foreignexchange reserves would help it through a prolonged period of low pricein future. Instead of stabilizing oil price, it is turning to cashreserve management to stabilize its economy.

TheUS does have the power to force Saudi Arabia to boost production. Itcould threaten to pull out its troops that protect the Saudi royalfamily. Such a showdown could damage the prestige of the royal familyso greatly that may trigger a revolution there. Potential politicalturmoil in Saudi Arabia could cause oil price to double or triple fromthe current high level. Hence, the US government may not be able to usesuch high pressure tactic on Saudi Arabia. It seems that supply reliefis not coming anytime soon.

With resilientdemand and fixed supply, financial speculation is very effective atboosting price. Speculative capital has been boosting the price waveafter wave. When the price jumps ten dollars or so, the market takes apause to observe the political reactions. Angry rhetoric frompoliticians and consumer complaints surely follow each wave of pricesurge. As words are not followed by actions speculative capital pushesup the price again. This game of chicken has been played again andagain over the past three years.

Manymutual funds have been set up to invest in commodity futures. Thisdemand seems to be playing a more important role than hedge funds inboosting the price this year. The subprime crisis has caused credit andstock market to tumble. Inflation is turning the bond market into abear market. As money pulls out of these markets, it is looking for aplace to land. Weak dollar and inflation plus demand resilience andsupply constraints make oil an attractive place to land the excesscash. I wrote in this page on the inflation consequence of the Fedbailing-out the financial institutions last August. The Fed is puttingfinancial stability ahead of price stability. Hence, speculativecapital has ample room to play until financial institutions havestabilized.

Under the pressure from the USCongress, the U.S. Commodity Futures Trading Commission (‘CFTC’) isinvestigating how much financial capital has contributed to theincrease of oil price. The data on how much financial capital is in oilare not good. Whatever data we cite here may be significantly off themark. The funds that invest in commodity futures may have risen from$13 billion in 2003 to $250 billion now. Some estimates put the totalamount of speculative capital in commodity market as high as $2trillion. While we may not be able to estimate the speculative capitalaccurately, we could confidently conclude that it is a major drivingforce, probably the most important force, at driving commodity pricesover the past three years. As the US cannot force Saudi Arabia toincrease production, it is belatedly investigating the role ofspeculative capital. The investigation process may drag on for a longtime. When it reaches conclusion, the bubble may have burst already. Wecannot count on the US government to bring down the oil price.

Ianticipate the oil bubble to deflate in two phases. First, whenemerging economies remove subsidies, it could cap oil price, i.e., oilprice would peak. Many countries like Indonesia and Malaysia arecutting subsidies as they cannot bear the fiscal burdens anymore.Indonesia recently raised its gasoline price by 33% to 64 US cents,still half of the market price. It shows how far the prices in emergingeconomies are from the market prices. The biggest players in this gameare China and India. India’s refiners are losing $1 billion per week,about 5% of GDP. The burden is impossible to sustain for India. It hasto remove the subsidies. Indeed, India could get into a crisissituation soon. If it removes the subsidies, its inflation could spiralout of control. If it keeps the subsidies, the government finance couldget out of control. If India does get into a crisis, it could dampenthe confidence in the financial market and cause oil price to retreat.

Moreimportantly, China must remove its subsidies for the market to beconcerned about demand. China’s economy is three times as big asIndia’s. Its fiscal situation remains good. China has the financialresources to sustain its subsidy. Shortage is the unstable factor thatmay force the government to change its policy. Gasoline and diesel arebecoming hard to find in less prosperous areas. The shortage may spreadto major cities. The electricity shortage in the coming summer could bethe worst in recent years. The main reason for the shortage is pricecontrol. The shortage may pressure the Chinese government to loosen theprice control gradually.

Linking consumerdemand to market price in developing economies is the most importantfactor that could stop oil price from rising. Otherwise, financialmarket can continue to push up price and make it stick. When China andIndia remove most of their subsidies, oil price may stop rising.

Foroil price to come down significantly, i.e., the bubble bursting, we mayhave to wait for the Fed to raise interest rate. The bubble may notburst until the Fed has raised interest rate above inflation. The USproperty bubble, for example, didn’t burst until the Fed raisedinterest rate to 5%. The current oil bubble may go through the sameprocess. The money market expects the Fed to raise interest rate latein 2009. This may be too aggressive. Large financial institutionsremain weak. The turmoil at Wachovia and the downgrading of the debtratings of the major Wall Street firms remind us that financial systemremains unstable. The Fed may not be in a position to raise interestrate until the middle 2008. The interest rate may surpass inflationrate only by the middle of 2010. High oil price may stay with us a longtime.

To summarize, oil price may peak whenChina and India remove their energy subsidies. For the bubble to burst,we may have to wait for the Fed to raise interest rate above inflationrate, which may be mid-2010.

谢国忠博客 http://xieguozhongblog.blog.163.com/

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