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2008-06-06 Saudi Oil Production

Saudi Oil Production

This does not bode well for oil prices.

Increased Saudi output means demand has increased at current prices, and the Saudis (and Russians, etc.) remain firmly positioned as ‘price setter’.

The Saudis continue to have the only excess supply, with about 1.5 million bpd excess capacity.

The Mike Masters sell off seems to be over. Actual legislative effort could cause a subsequent temporary sell off but will not dislodge the Saudis from total control.

The only thing that can dislodge their ability to set price is a net supply response in excess of 5 million bpd, which is highly unlikely in the near future.

Any efforts to increase aggregate demand to support growth will also function to support prices.

My twin themes remain:

  1. Weakness (low domestic demand supported by exports) as GDP muddles through. No recession yet, but could happen down the road should exports falter.
  2. Higher prices as Saudis remain as price setter, continuously hiking prices, and inflation continues to march higher, and our real terms of trade and standard of living continues to deteriorate.

‘Solutions’ remain:

  1. pluggable hybrids – this switches demand from crude to coal, and dislodges the Saudis from being price setter.
  2. dropping the national speed limit to 30 mph for private ground transportation. (Just heard JKG dropped the national limit to 35 mph during WWII)

Biofuels continue to link crude to food, and the political response to food shortages and markets allocating life by price is likely to continue to be ‘cash’ payments regardless of inflationary consequences. The body count is likely to exceed that of WWII over the next few years and is probably already in the millions.


7 Responses

  1. Does the most recent jobs report combined with saudi oil production levels weaken your muddling through outlook.

  2. as long as the foreigners spend their now higher revenues on our products exports will make up for lost domestic demand (to the penny, in theory). so far they are doing exactly that.

    so higher oil prices should not necessarily slow US gdp

    they will continue to eat away at our real terms of trade and standard of living

  3. Bankruptcy is playing an increasingly important role in the economic ‘muddle through’.

    People are shifting large amounts of debt back onto the financial industry. How much? $400-$500 billion realized so far? $1-2 trillion unrealized?

    So far these shifts have not been ‘monetized’ by fiscal policy. Fiscal monetization may never need happen if Bernanke continues to use monetary policy to lubricate system functioning while ignoring capital requirements.

  4. losses are all’rear view mirror’ unless they alter agg demand going forward.

    with the fiscal package kicking in, seems we are going to muddle through with positive GDP for at least an other few months

  5. >losses are all’rear view mirror’ unless they alter agg demand going forward.

    Agreed if the loss accrual has stopped.

    Continuing flow of homeowners who stop making the mortgage payment find an increase in cashflow available for other purchases. Many people are not even paying rent as they live in the defaulted property, waiting to be evicted which can take over a year.

    Accruing losses to bank capital provides temporary stimulus to the real economy.

    The question becomes, will eventually those losses be monetized through nationalization or bailouts? The signals seem to be mixed.

    Will the monoline Ambac’s stockholders be nominally compensated by the Fed as were the investment bank Bear Stearns’, or are even the bondholders and depositors at risk this time?

  6. Anecdotally, here in south florida(epicenter of foreclosure’s) hear lots
    of stories of people living up to a year for free. Banks/Courthouses are overwhelmed with foreclosure processing paperwork. People who don’t
    pay rent can continue putting gas in the car.

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