Francisco Blanch of Bank of America Securities-Merrill Lynch is one of the biggest advocates of the view that oil prices helped push the world into recession. In an FT column he expands on how we got here, and how there has been an underlying shift in the relationship between oil and the rest of the economy. And why, by extension, another rise in oil prices could be so much worse for developed economies.
The run-up in prices, he says, was mostly due to the relative disinterest in commodities investment during the boom years:
The largest rise yet in global commodity prices and the most pronounced credit collapse in history occurred in the same quarter, in that precise order, for a reason. During the previous decade, investment capital failed to go into commodities to facilitate productive capacity expansion and went instead into other sectors such as property.
Moreover, Blanch says, the entire energy-economy dynamic has changed:
For decades, the expansion of global oil consumption closely followed the expansion in global economic activity and global money supply. This relationship between the economy, oil and money started to change in 2005, owing to serious physical oil supply bottlenecks. Unlike oil, the supply of money and credit grew unconstrained from 2005 to 2008 as the global economy expanded, pushing up asset values worldwide.
He then covers ground that will be familiar to Energy Source readers: as higher oil prices were an under-appreciated contributor to the recession, so lower oil prices have been an unsung form of stimulus. Blanch also reiterates the point made in a note last week that the countries experiencing the biggest monetary expansions are those with large populations in the income range most likely to consume more energy.
High prices, of course, will likely dampen this demand. But worryingly, Blanch says the results of continued under-investment in oil production will compound the problems piled on developed world consumers, in several ways:
Governments in OECD economies have pushed credit problems into the next decade by nationalising bank debt, but higher oil prices are likely negatively to impact on terms of trade and partially offset the positive impact of lower imports on GDP growth. Moreover, higher oil prices will act as an important drain on disposable income for most of the developed world.
For now, Blanch says, oil prices won’t go sustainably above the $80 range that he says would be risky for OECD countries. Next year, however, is another matter.
Emerging markets’ monetary policy: The key to oil demand (FT Energy Source, 10/08/09)
Are oil prices threatening the world economy already? (FT Energy Source, 01/06/09)
It’s not a liquidity crisis, it’s an energy crisis stupid! (FT Alphaville, 30/04/09)