Posts Tagged ‘russia’

Something went wrong with the commodity cycle during the year after the financial crisis of 2008, and that something may explain why the recovery took so long. Now there are reasons to believe that this time the commodity cycle is turning.

That is good news for commodity importers everywhere – and that includes the UK. It is not so good for commodity exporters, however – expect tears in Brazil and Russia, for example.

On paper it is supposed to work like this. Commodity price are high, therefore commodity producers – be they oil companies, miners or in the agriculture sector – invest and try new ideas, until eventually supply increases, forcing the price of commodities down.

Cheaper commodities mean that commodity producers invest less, supply falls – or at least fails to keep pace with demand – until price rises, and the cycle begins again. That is how cycles are supposed to work in business, the economy and nature. See: Arctic Hare and Lynx: the business cycle working in nature 

Lots of theories are put forward to explain why the recession of 2008/09 was so nasty, but it is possible that we just suffered a perfect storm: a banking crisis, too much debt, and commodity prices at record highs.

Price collapsed in late 2008, as the theory of commodity cycles said it should have, and the UK, the US and Europe came out of recession. So far, so very predictable.

Then in 2010/11, things went topsy turvy. Commodity prices rose again, oil surged from around $35 a barrel, to over $100 within 18 months. The UK and the EU went back into recession. Some believed it was as a result of peak oil – that is to say that oil production had permanently peaked. Others looked at demographics, at the rising population, and said: “Well, that’s it then. This time it is different, the cycle has broken down forever. We have simply used up too much of this planet’s scarce resources.”

The pessimists may have been overlooking something. The recession of 2008 had multiple causes, amongst them a banking crisis, and the banking crisis meant lack of demand and lack of finance, so the normal rise in investment in commodities – which occurs when prices are at a new high – didn’t happen, not at first, anyway.

It is different now. According to the latest Statistical Review of World Energy from BP, 2012 saw the largest increase in oil production ever recorded.

You don’t need to look far for an explanation. Massive investment in shale gas and oil, especially in the US, into this particular resource is as far as you need to go.

In other words, the cycle is at last working the way it should.

This is how the World Bank put it: “Since early 2011, industrial commodity prices have been weakening, a process that appears to be intensifying in 2013, despite signs that the global economy is gaining strength Indeed, since their peak in early 2011, the price of metals and minerals is down 30 per cent and that of energy is down 14 per cent, with prices off 12 and 5 per cent, respectively, between January 2013 and the end of May 2013.

This price weakness has sparked discussion about whether a super-cycle in commodity prices is coming to an end—particularly within the metals industry, where large increases in supply are coming on stream in response to investments spurred by the high prices of the past several years.”

If the idea that the super-cycle in commodities has turned and prices are set for an extended period of falls is right, then this is good news for commodity importers – such as the UK, US, most of Europe, China and most of South East Asia. It is not so good for most of Latin America, although Mexico is less vulnerable.

But is this really good news? If you still sign up to the idea of manmade climate change, then that means you probably want energy prices to stay high for a little longer, while investment in renewables grows. The shale gas and oil miracle may not be quite so good for Earth PLC, or Gaia.

© Investment & Business News 2013

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Shale gas and oil – -it is everywhere, or at least if feels that way. It is in Russia, and the US, China, Argentina, Venezuela, Brazil and Mexico. It is in Libya and Algeria, Pakistan and Indonesia. It is in Australia and South Africa, and, at the other end of the world, it is in Canada.

For some more good news, there is some in the UK too, and for the really good news, most of it is up north, so there will be no need to spoil the aesthetic qualities of southern England’s rolling hills with wind farms. Instead all we need to do is dig up the Yorkshire Dales, and other areas that Londoners hardly ever visit.

Here is some bad news. There are also deposits in the south – bring back wind farms.

In all, the Energy Information Administration (EIA) reckons there are 26 trillion cubic feet of shale gas and 0.7 billion barrels of shale oil in the UK. So what does that mean? Well, the UK currently consumes around 3 trillion cubic feet of gas a year, so 26 trillion would last around ten years. Click here .

Actually, compared to some countries the UK is small fry. The EIA reckons that China has over 1,000 trillion cubic feet of shale gas – or a quadrillion, as they also call numbers with nine noughts. The countries that make up the top ten, in terms of reserves of shale gas – with the largest first – are: China, Argentina, Algeria, US, Canada, Mexico, Australia, South Africa, Russia and Brazil. As for shale oil, Russia has 75 billion barrels, followed by the US, China, Argentina, Libya, Venezuela, Mexico, Pakistan, Canada and Indonesia. You may have noticed there is a pretty good correlation with size of country – Venezuela, perhaps, is the exception.

All in all, analysts are talking about there being enough shale gas and oil to feed world demand for ten years. You may have noticed that the global economy slipped into recession just as oil started to approach $150 a barrel. The good news on the US economy went from a trickle to gushing torrent, just as the price of gas fell. The cost of energy matters, and may yet be the key to determining economic strength.

Stop: let’s repeat that STOP. The EIA says its estimates of shale oil and shale gas resources outside the US are highly uncertain and will remain so until they are extensively tested with production wells. As for the UK, the jury is out on how practical it is to access shale gas and oil deposits, and not everyone is all that keen on the idea of digging up Yorkshire, or fracking in a country as small as Britain. Some might choose to switch the r in the word ‘fracking’ to a u and then add the suffix awful.

We keep hearing about how shale is not a global warming gas. Well, maybe that is right, but as this article points out: “Gas fracking involves the release of significant amounts of methane into the atmosphere in the form of ‘fugitive emissions’ – an extremely powerful greenhouse gas (72 times the warming potential of carbon dioxide over 20 years).” See: Gas fracking will cause ‘irreversible’ damage, says Conservation Council of WA 

The clue may be in the name. On the south coast of England there are what the EIA calls Jurassic-age shale formations. We have all heard of the Jurassic-age and know it happened a long time ago. Less of us have heard of the Carboniferous age, which occurred from around 359.2 million years ago, to 299 million years ago. There are reserves of Carboniferous age shale gas in northern England. In other words, we are talking about reserves of shale gas and oil that have been sitting in the ground for a very long time. And in just ten years we are talking about digging up a big chunk of these reserves that have sat in the ground for hundreds of millions of years; that took hundreds of millions of years to form. Does that strike you as a good idea? How do you think future historians, from say 200 years in the future, will respond when they read about all this so-called “good news on shale gas” in 2013?

What we forget is that the Earth’s climate has changed over millions of years, and it changed as carbon dioxide was sucked out of the atmosphere and deposited in the ground. In just a few years we are reversing a process that took place over millions, maybe even a billion years.

Just to play devil’s advocate, here is question for you: what will shale gas exploration do for renewables? Will investment into shale gas and fracking crowd out investment in renewable energies?

Remember Moore’s Law. In its literal sense, this refers to computers doubling in speed every 18 months or so. But use Moore’s law as a metaphor for rapidly increasing technology and maybe it can be applied to renewables.

Where renewable technologies differ from other energy industries and yet are similar to the computer industry is that the generation gap between each stage in their development is quite small. It can take three decades to build a nuclear power plant, months to build wind farms, and just days to install solar panels.

The more we invest in renewables, the cheaper they get, and the progress rate in the efficiency of the technology can be very rapid.

Forward wind the clock 20 years, and assume that in 2013 the world moved away from carbon fuels and instead invested billions, even trillions, in renewables. Is it not possible that by 2033 our energy would be much cheaper than it is today?

James Martin, in his book ‘The Meaning of the 21st Century’, said: “The world’s reserves of oil, not counting the undiscovered ones, have a value of about 60 trillion US dollars… coal reserves have a similarly high value. If humanity set out to save energy and move to non-carbon forms of energy… much of this vast amount of energy would be abandoned. Both oil-rich countries and petroleum companies want to hang on to their potential wealth.”

Apologies if this sounds like a conspiracy theory, which is not something this column tends to support, but why don’t we hear as much hype about renewables as we do about shale gas, when, by the way, surveys show that most people do not think wind farms are aesthetically ugly at all.

For the EIS report, go to Shale oil and shale gas resources are globally abundant 

© Investment & Business News 2013

If there is one thing finance ministers and their equivalents from Brazil, Russia and China had in common, it was their criticism of the US policy of quantitative easing. Brazil was especially vocal, and its finance minister accused the US of engaging in currency wars as QE in the US led to a cheaper dollar, and a more expensive Brazilian real relative to the US currency.

Brazil and Russia had two other things in common, however, and that is a threat from inflation, and reliance on the sales of certain commodities. As one effect of QE seems to have been to drive up the price of assets, including commodities such as oil, both Russia and – to a lesser extent – Brazil have benefited from QE via their exports. That QE arguably pushed up the price of both their currencies relative to the US dollar, then US QE may also have helped to lead to lower inflation in both countries.

Since markets have begun to price-in the effect of the US ending QE, the Brazilian real and the Russian ruble have fallen relative to the dollar. In Brazil the government and the central bank have responded by upping interest rates, and reducing Brazil’s tax on foreign transactions from 6 per cent to zero.

In Russia, despite falls in the ruble and the fact that inflation was 7.4 per cent in May – which is well above Russia’s central inflation target of between 5 and 6 per cent – hikes in interest rates are not thought likely.

Of more concern is Russia’s reliance on oil and gas. In projecting its latest budget, the Russian government assumed an oil price of $105 per barrel. The IMF projects Russia’s fiscal deficit to be around 2 per cent of GDP in 2014, but stripping oil and gas out of the equation means the deficit is likely to be around 12 per cent of GDP.

If the price of oil and gas fell significantly, which is possible in the era of shale gas, while interest rates rose, the Russian economy may be vulnerable to a backlash against emerging market bonds.

Before 2008 the Chinese economy grew without running up massive debts. In 2008 total outstanding credit, as recorded by the People’s Bank, was 130 per cent of GDP. Since 2008, however, according to Capital Economics, outstanding credit in China has risen to 187 per cent of GDP. Capital Economics also stated: “Outstanding credit stood at 195 per cent of GDP in March, an increase of 66 per cent of GDP in little over four years.”

According to the ‘FT’, local government in China has run up massive debts. The ‘FT’ stated: “Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy.”

Recently, Fitch credit ratings agency downgraded China’s credit rating. To quote the ‘Telegraph’: “Total credit has jumped from $9 trillion to $23 trillion in four years, an increase equal to the entire US banking system.” George Soros, according the same ‘Telegraph’ article, has warned that there could be a run on China’s entire banking system akin to the collapse of Lehmann Brothers.

In the ‘Financial Times’, Martin Wolf wrote: “The fragility of the [Chinese] financial system could increase very sharply, not least in the rapidly expanding “shadow banking” sector.”

India’s economy has slowed down sharply in recent months, dashing hopes that its growth rate would be even greater than China’s during the first few years of this decade. One of India’s challenges relates to its current account deficit – around 5.1 per cent of GDP in 2012, according to the IMF. This makes India vulnerable to a backlash in emerging market debt.

© Investment & Business News 2013

It has happened before, and when it did oil bears said told you so. And then it rose back up again. Brent Crude oil has fallen below $98 for the first time since last July. At the time of writing, US Sweet crude oil is at $86.57, the lowest level since last November.

The reasons for the fall are not obvious. Economic pessimists have been predicting falls in the price of oil for some time, and the economic news has not been so good of late. Notwithstanding falls of the last few days, the markets have been pretty euphoric of late, and, rightly or wrongly, many have invested a good deal of hope in Japan’s new QE friendly regime.

Capital Economics, long time oil bear, has already started factoring the effect of recent falls in the oil price on the Russian economy. After Saudi Arabia, these days Russia is the second biggest oil exporter in the world. Oil accounts for no less than 60 per cent of Russian exports, and around 50 per cent of government tax receipts.

Capital Economics calculates that, roughly speaking, for every $1 per barrel change in the price of Brent oil, Russia gains or loses – depending on which way the oil price moves – $2 billion worth of exports. But Neil Shearing, Chief Emerging Markets Economist at Capital Economics, said: “Prices would need to fall much further to pose a threat to economic stability (and fiscal sustainability) in Russia. We would only become concerned if oil fell below $80pb for a prolonged period.”

Okay, so that’s Brent, which – as was said above – is trading at just under $98 right now.

Looking at US crude, for which Investment and Businesses News has data going back many years, the story is as follows.

Over the last few years, oil has traded in a range between $80 and $110. The last time US Sweet crude was over $110 was in 2008. The last time it was under $80 was in 2011. The last time it was under $70 was June 2009.

In other words the current price of oil is nothing unusual. It is merely at the lower end of a range it has fluctuated within for some time.

In contrast, 2009 saw US Sweet crude fall to less than $40, and the global economy saw a reasonably strong pick-up soon afterwards.

We would need to see much stronger falls than we have seen over the last few weeks to start concluding that – thanks to the falling price of oil – the global economy is set to see a major impetus for growth, and that recessionary risk may return for Russia.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Never forget that before 2008 the Spanish government was held up as a beacon of fiscal responsibility. Of the world’s richest developed economies, its public debt as a percentage of GDP was the lowest. Its banks were held in pretty high esteem too, and when Northern Rock and then RBS and HBOS hit the buffers, the media said we could learn from Spain, and how its banks managed to maintain prudent management of their balance sheet, while at the same time providing mortgages with a very high loan to asset values.

It just goes to show that in hindsight it is easy for people to say: “Of course the problems were obvious all along,” but it is also possible that their backwards vision is a touch rose tinted.

And when others say: “You can’t fix a crisis caused by too much debt by borrowing more,” they miss the point where Spain is concerned.

The real problem for Spain is that during the boom years, the one size fits all approach to monetary policy in the euro area meant that its interest rates were too low, and unencumbered capital flows meant money from Germany and other richer nations flooded into the country.

Actually, if you are experiencing déjà vu, there is a good reason for it. The names were different, and so were some of the circumstances, but the Asian crisis of 1997 was largely caused by similar factors. It was not Malaysia and other so called tiger Asian economies who messed up during the 1990s; it was those who flooded the countries with money. Yet when the bubble burst and the IMF was called in to help, and Alan Greenspan waded into the fray, the priority was to ensure creditors got their money back. They imposed sharp austerity on the countries to which they provided backing. The result was that an economic nightmare was foisted on Malaysia and other countries in the region. A year later, the IMF dealt with the Russian crisis in a similar way. The long term implications of that has been mistrust of the Western economic policies, leading to deterioration in relations between Russia and the West, and the emergence of China’s policy of protecting the yuan.

When the priority is to protect creditors over debtors when the problem was as much down to the errors of the lenders, you end up with a distorted world.

The management at Barcelona might say: “Why don’t you run your football team like we do, and pick all the world’s best footballers, then you too would be unbeatable. “Alas they would be wrong. Some teams must be beatable. And when creditors dictate terms and say: “Be more like us,” we risk creating a world that can only ever know permanent depression.

Before we get to the fix, let’s take a look at Catalonia, and the snag with single currencies.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here