from Follow the Money

Oil at $58. A bit on the global savings glut too

June 17, 2005

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Oil closed above $58 a barrel on Friday. That’s kind of high.

Kevin Drum nicely summarizes the range of explanations that have been put forward to explain oil’s recent rise. I tend to agree with his explanation: rising demand and tight supply. Add in a few market jitters, and the price surges.

I am not the best person to talk about oil’s impact on the US economy. I expected $45 a barrel oil -- the 2004 average price for WTI was around $41, but it was far higher in the second half of the year -- to exert a far bigger drag on the US economy.

No doubt the fact the oil prices are rising largely because global demand is rising, not because of any major fall in global supply (See this IMF study), has something to do with the United States’ relatively smooth (to date) adjustment to higher oil prices. Oil exporters seem increasingly comfortable with high prices in part because higher prices have not not prompted a major slowdown in the oil consuming countries, though they may be one factor contributing to Europe’s current slowdown. But it is not entirely clear that the oil producers could pump out more oil and lower prices even if they wanted to.

On the other hands, with tight global markets and basically no spare capacity, if something ever took Saudi -- or for that matter Iranian -- production off line, god help us all. Saudi Arabia’s capacity to act as the central bank of oil and stabilize global oil markets hinges on its spare production capacity. Current close to all-out production maximizes Saudi income, but it also limits the Saudi’s ability to take steps to prevent oil prices from rising further (the Saudis could, of course, take some production off line if oil prices started to fall).

But this post is really not about rising oil prices -- or even the shifting balance of power between oil producing countries and the world’s major oil firms.

Rather, it is about the hottest topic in global macroeconomics, Ben Bernanke’s global savings glut -- a debate that Dan Gross has nicely summarized.

If you look around and ask where savings are rising, the answer is really in two places. China, which obviously does not produce oil. And, the oil exporting countries. Sure, as their incomes rise, they are consuming more. But oil prices keep increasing even faster than their consumption. By my back of the envelope calculations (assuming OPEC production of 30 mbd and Russian production of @ 9 mbd), every $10 increase in the global oil price adds about $143 billion to coffers of OPEC countries and Russia. Not bad. Oil has gone from around $25 a barrel in 2002 to around $55 a barrel in 2005 -- that works out to an increase in oil revenues for the major oil exporters of around $430 billion. They could increase their spending by $130 b and still save $300 b more than they did in 2002. Want to find the source of the world’s savings glut? Compare the current account deficit of oil and commodity exporting regions in 1998 (when oil was small) to the projected current account of oil and commodity exporting regions surplus in 2005. The 98 deficit: $145 b. The IMF’s forecast for the 2005 surplus (a surplus based on oil prices almost $10 a barrel below current levels): + $262 billion. That’s a swing of $407b. Even if you use the (mostly pre-crisis) 1997 current account deficit in commodity producing regions rather than 98 deficit, the swing is $335 b. (Commodity exporting regions = Russia and the CIS, Middle East, Africa and the "developing" Western Hemisphere)

That trumps the swing in the current account surplus of "manufacturing" Asia -- Japan, the Asian NICs, China and the rest of emerging Asia. Their combined surplus went from $110 billion in 97 to $233b in 98 (that Asian crisis, remember). But it has kept on rising, and is forecast to reach $346 b in 2005. That’s a swing of $235b since 1997, and $113 b since 1998 -- a smaller swing than the swing in the oil and commodity exporting regions.

My data comes from the IMF.

The IMF incidentally, forecasts the US deficit will increase by $590b from its 1997 level, and $515 b from its 1998 level. But the IMF assumes a US current account deficit of only $725 b in 2005, which is far too low. Its estimates of the surpluses of China and the oil exporting regions are also on the low side.

No matter. It is pretty clear that the huge surge in oil prices -- and the absence, i gather, of a comparable surge in either consumption or investment in oil exporting countries -- has a little something to do with the apparent glut of global savings. According to the IMF, savings in fuel exporters averaged 22.9% of GDP from 91-98. In 2004 it was 34.2% of GDP. To state the obvious, that is a big swing.

There are lots of petrodollars and petroeuros floating around. At least for now. If the rise in oil prices proves permanent -- as proponents of peak oil suggest -- I suspect those petrodollars will start being spent rather than saved. Just look at what is happening in Venezuela, and the impact it is having on other commodity exporters in Latin America.

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