The Markets: Blowing Bubbles...

In the 1990's we had the Internet bubble and now in the noughties we have massive increases in the price of oil and food. But are these bubbles or indications of long term trends?

According to the International Herald Tribune of May 15th 2006:

"Robert Shiller, a Yale University economist and author of "Irrational Exuberance," thinks commodities markets resemble the technology-stock bubble of the 1990s.

"It's the same phenomenon," Shiller said. "When you have something that has glamour value, it opens up the possibility of a speculative bubble. You can't have a speculative bubble if there isn't a story."

Analysts, including Tom Fitzpatrick of Citigroup in New York and John Noyce in London, say crude oil prices may have peaked at the April 21 record of $75.35 a barrel, while the Société Générale analyst Frédéric Lasserre in Paris said last week that oil might have reached a "tipping point."

"A speculative bubble is forming," said Tony Dolphin, director of economics and strategy at Henderson Global Investors in London. "It may be sensible for some investors to get out of these markets now and return once there has been a correction in prices."

$73.35? We'll probably never see the price per barrel that low ever again. So what has caused this massive increase in oil prices? Obviously, it's not one single thing but a combination of factors that include:

A US dollar that has been weak for two years without respite, pushing up the oil price, which as it strengthens adds further to dollar weakness. A perfect vicious circle.

Massive demand from China and India, reducing the availability of cheap oil from the middle east to traditional markets in the West.

The threat of international conflict or terrorist attack disrupting supplies.

Peak oil. This is the new phrase de jour. Effectively it means that the world consumes more oil than it can drill. The countries that reach peak oil levels very quickly end up as net importers rather than exporters. A case in point is Indonesia which has just left OPEC, because it can no longer export oil without harming its domestic economy.

According to Casey Research:

The United States hit peak oil production in 1970. Here is a list of nations whose oil production is now in irreversible decline, followed by the year of their peak oil production:

www.caseyresearch.com

Egypt: 1987
France: 1988
Germany: 1966
Iran: 1974
India: 1997
Indonesia: 1991
Libya: 1970
Mexico: 2003
New Zealand: 1997
Nigeria: 1979
Norway: 2000
Oman: 2000
Syria: 1996
Tobago: 1981
Venezuela: 1970
UK: 1999

From the Associated Press:

"Protests broke out in India and Malaysia on Thursday as consumers reacted angrily to sharp fuel price hikes that could undermine governments in both countries.

With global oil prices soaring, authorities in the two countries said a day earlier they were slashing fuel subsidies that were draining government coffers.

In Malaysia, gasoline pump prices jumped 41 percent overnight and diesel prices surged a stunning 67 percent.

The gasoline price hike in India, the second this year, was smaller — about 11 percent in the capital, New Delhi — but will still weigh on consumers. India also raised prices on diesel and cooking gas".

So is this a bubble and will we see oil at $73.35 again? The answer has to be no. Just the demand from China and India alone means that less cheap oil will be available globally. The fact that GM is shutting down its Hummer manufacturing plants indicates their belief in a longer term high oil price. In fact 19 of their next 20 car launches are either compact or hybrid. Some second hand car salesmen no longer accept SUV's in part exchange. Nobody wants to buy them. But more significantly, the erosion of fuel subsidies in Asia, is a massive indicator. Politicians do not like to make tough decisions which increases voter hardship.

The higher oil price has also effected the cost of basic food. Food needs to be transported and if those costs escalate, so does the price of your loaf of bread. But your daily loaf is also being pushed up in price by the cost per bushel of wheat. More wheat needs to be grown as the emerging market middle classes in Asia eschew rice for bread. But less wheat is now grown as farmers in the US and Canada jump on the ethanol band wagon. And what is the main use of Ethanol? As a fuel additive. Again we go full circle with oil.

Food may provide an even more serious global problem than oil:

From the Guardian:

Trade barriers should be lowered and export bans removed to stop the spread of hunger, the UN said at its summit on the global food crisis today, as its secretary-general Ban Ki-moon declared world food production must rise by 50% by 2030.

Ban Ki-moon estimated the "global price tag" needed to overcome the food crisis would be $15bn-$20bn a year and urged a quick resolution in the world trade talks to alleviate the crisis.

"Nothing is more degrading than hunger, especially when manmade," he told the summit. "Some countries have taken action by limiting exports or by imposing draft controls," he said.

Countries that are net exporters of food are now holding on to their excess inventories and are reducing supplies to poorer countries. This has already led to food riots in the Philippines and Thailand, the worlds largest supplier of rice to propose an OPEC style cartel for rice.

If food becomes a nationalist issue, it could become a catalyst for further unrest and maybe even war.

So are we experiencing a series of bubbles? I think not. I think that we are living in the first stage of a massive global sea change in the world economy. Globalisation used to be a much bandied about concept. It is now a reality and if the whole world participates in global growth, who are we to restrict the benefits to the newly affluent?

We live in tumultuous times. The 19th and 20th centuries were defined by their first two decades, I get the feeling that so will the 21st.