global recession » Mental Pluff Mud

The economy just keeps getting worse

Dec 242008

On the 17^th I blogged about OPEC’s gambit to force a rise in the price per barrel for oil on the world’s market, here, and how their efforts would fail due to the current economic climate.

Today oil futures fell 9.3%, to close at $35.35 a barrel.

The world economy is on life support and failing fast.

From Breitbart.com today…

Russia, China warn of dire economic straits in 2009
[Excerpts]

Russia and China issued stark warnings on Wednesday about the impact of the crisis on their recently booming economies in 2009, with Moscow saying the downturn could spark unrest in the streets.

[snip]

In Moscow, a top Kremlin economic aide said there would be a budget deficit in 2009 for the first time for a decade as Russia — the world’s second-biggest producer of crude oil after Saudi Arabia — reels from the global crisis.

“The deficit is caused by the fall in oil prices, above all,” Arkady Dvorkovich was quoted as saying in reference to the plunge in prices from record highs of above 147 dollars per barrel in July to under 40 dollars now.

With oil prices heading towards the year end at their lowest level for four years, the price of Brent North Sea crude for February sank to 38.63 dollars per barrel on London’s InterContinental Exchange (ICE) amid weakening demand.

Commenting on the worsening situation, Deputy Interior Minister Mikhail Sukhodolsky, warned that unpaid wages, the threat of layoffs and unpopular government anti-crisis measures “may aggravate the protest mood.”

China’s top economic planner also warned of “great challenges” ahead.

The head of the National Development and Reform Commission, Zhang Ping, said “grave risks” lay ahead for goals of fast growth and high employment if the government did not manage to stimulate demand and maintain export growth.

Economists have warned that the global downturn could mean that China will end 2008 with its weakest economic growth for nearly two decades. China has not posted annual growth of less than 7.6 percent since 1991.

No one can say how long the economic freefall will continue, where the bottom might be, or how long it will take to turn positive. However, I do have a great deal of concern over trying to maintain prosperity during a time when just stemming the bloodletting seems to be beyond our ability.

It’s time to lower expectations and accept the fact that we will be feeling painful effects for at least the immediate future.

OPEC needs a lesson in economics

Economy, General, News of the day 2 Responses »

Dec 172008

OPEC is announcing a cutback in oil production in an attempt to boost the price. By making it less available they hope the market will drive the price up as buyers compete with each other. That tactic works when demand outpaces supply however, it is not effective when demand is decelerating.

The world’s demand for oil is going through as severe a retraction as the world’s economy. It doesn’t take a degree in economics to understand that as people and companies stop purchasing “stuff” manufacturing slows, and in some cases production ceases, at least temporarily.

What the price increase might mean, however, is that families and companies that are already struggling will cut back even further, further reducing worldwide demand for oil.

Millions of people around the globe have lost their job, and the layoffs just keep coming. These jobs are concentrated within whatever passes for the middle class of the country where they occur, the very sector that fuels the economies of the world. A vicious cycle.

OPEC’s attempt to push the price of oil up, while understandable, is only going to make what we can’t afford now all the more unaffordable, becoming yet another component of the above vicious cycle.

The the last number of quarters, when public companies release their earnings report, many become outraged over the “windfall profits” enjoyed by oil companies. Each quarter seems to break the record set by the previous earnings report. These “windfall profits” are not driven by price gouging, the profit margin is actual quite small, instead, it is volume. Earn a “little” on an ever increasing number of “units”. Well, need I say those record-breaking windfall profits are probably on hold for big oil as well because they are seeing record breaking reduction in demand as well.

It does seem a bit strange that at a time when countries are scrambling every bit of wherewithal to stem the effects of recession on their economies OPEC chooses to feed their greed. Admitting I’m no fan of OPEC, their actions still boggle my brain. But hey, if the US reduces its consumption enough we can fill our needs more readily from non-OPEC exporters.

Two of those non-OPEC exporters happen to be Canada and Mexico. 2007 statistics of US oil imports list Canada as supplying 18% and Mexico supplying 14%; Saudi Arabia supplies slightly more than Mexico.

So here I sit hoping OPEC’s actions backfire on them and benefit Canada and Mexico, two countries that actually have broader positive impact on the US economy and in turn, US jobs.