from Follow the Money

Growth slowing, oil rising … not good

July 31, 2006

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If Roubini  hasn’t done enough to convince you that the US is at risk of a slump … check out Calculated Risk.   A big fall in residential investment would put something of a dent in the US economy.

And perhaps the global economy as well.   Like Dr. Roubini, I am not convinced that Chinese growth is entirely independent of US growth.    China may be more like Mexico than many think.  Exports to the US (using US import data) account for over 10% of China’ GDP now.  Sure, lots of Chinese exports come from the reprocessing trade – importing parts for final assembly.  But Mexico does its own share of reprocessing as well.

It is enough to make me wonder whether oil should be trading at $70 plus.   Particularly with high inventories in OECD countries.   And by some accounts (notably that of Ben Dell of Bernstein Research), global spare capacity is beginning to rise.  Check out the Capital Spectator’s post on fear v. fundamentals – it is my source.

But then, well, pick up a newspaper.   The Levant doesn’t have oil.  The Gulf does.  But the big players in the Gulf have a range of interests in the Levant.  And the Gulf itself has no shortage of flash points.

Even Iraqi seems to be producing a bit more (p. 31 of the Iraq index).  Official exports may be up too, in part because unofficial exports are down.  The FT reports on Iraq’s new oil for fish policy:

(Mr Shahristani) said that the government had managed to curb smuggling by reducing subsidies – a policy initiated last year and which is expected to lift the budgetary burden on Iraq’s government, which spends several billion dollars a year to import refined products.

…. His ministry has also reduced fuel rations to Basra’s fishing fleets, who take it down the Shatt al-Arab waterway to the Gulf to sell – a policy enacted under Saddam Hussein’s government to encourage sanctions-busting smuggling. Basra fishermen freely admit that they make far more from the trade than from fishing.

“We have told them to come to another port very far from Shatt al-Arab and bring their catch of fish and market it, and then they will be supplied fuel for their next trip,” he said – an initiative that he acknowledged could be called the “oil-for-fish programme.” (hat tip, an anonymous commentator) 

Alas, even with a bit more spare capacity and a bit more production from Iraq, it is hard to argue against a big geopolitical risk premium for oil.  

That premium seems to be rising even as global growth seems poised to slow.    That is good for oil producers, but not for anyone else.

Michael Sessit’s (Bloomberg) estimate for the oil states’ current account surplus -- $300b – is, incidentally, way too small.  Saudi Arabia and Russia are both individually on their way to current account surpluses in the $120b range.   $500b or more strikes me as more likely.  But in a broader sense, he is right: the oil exporters have more new cash to play with right now than Asia’s central banks.  I suspect that the oil exporters’ 06 current account surplus significantly exceed that of China, the rest of emerging Asia and Japan.

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