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Do Rising Oil Prices Predict Another Economic Recession? |
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Written by Steve Austin/Oil-Price.Net
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Friday, 17 December 2010 10:11 |
By STEVE AUSTIN for OIL-PRICE.NET, 2010/12/13 This article was written by <a href="http://oil-price.net/en/articles/rising-oil-prices-predict-economic-recession.php">Oil-Price.net</a> which provides free information on crude oil. The year 2008 saw the American economy topple over like a towering stack of light weight cards with the financial and market crash. The recession changed the economy of the country and left many people without jobs and means to sustain their families. More houses were put on foreclosure than ever before, leaving an even larger number of families homeless and destitute with no one to bank on. The initial contention was that the primary reasons for the recession that hit the country in 2008 was the downfall of the financial services market and the housing market. More and more financial experts came forward with another, more accurate reason for the financial crash. The reason put forward and accepted widely was that the market financial crash was caused by the high oil price rise which shot to an all time high of $147 per barrel in the year 2008. Looking Better BrieflyIn order to help the economy to gain a firm footing, the Federal Reserve took up the initiative of increasing the monetary base (quantitative easing). Two years down the line however, this idea seems to be showing wear. Pumping billions of dollars into the lagging economy boosted spending budgets for some but at the cost of devaluating the dollar. On the plus side, the country's economy is slowly recovering. The oil consumption of the country that had taken a hit after the recession has also been picking up. Crude Oil NowIn a developed nation like the United States, every single aspect of business and life requires some or the other form of oil. As per the current scenario, crude oil is trading at much higher than what it was last at $87.82 per barrel on December 10, 2010. Truth be told, this price is nowhere as high as that which caused the Great Recession of mid 2008. The nation's economy is still recuperating from the recession though. Even a comparatively lower oil price at $85-90 per barrel adds to the heavy burden being lugged around by the consumers. It also adds to the woes of the financial market. When it is considered that the United States economy is still recuperating from the recession, the impact of rising energy prices is amplified. Reaching New HighsExperts predict that the end of the year 2010 might see the crude oil prices rise to $90 per barrel which would bring the already tottering economy to its knees. The economy is still running at its sluggish pace whereas the oil prices are rising unaffected by the situation of the economy. This non-elastic relationship has forced people to accept the fact that these high oil prices might just cause another recession in the year 2010. The reason a crash might be on the cards is not just the primary fact that the oil prices are rising but that the prices are rising at a fast rate making it impossible for the economy to keep up with it. China Taking Over World EconomyWhile market analysts are running pillar to post to come up with solutions before the market crashes and brings them all down, the fact remains that the peak oil crisis has no reasonable solution in sight. The world economy now has a new backbone and that is the consumer rich country of China. The Red Dragon seems to have replaced the United States at least as far as relevance to the world economy goes. Most Asian economies seem to be thriving at the time when the American economy is reeling on a downward spiral path. Cycle of CrashesThe problem here is that we seem to be caught in a vicious circle as far as market crashes and high oil prices are concerned with both of them aiding and abetting each other. A higher oil price increases the trade deficit of the US. This increased export bill leads to a weaker state of the dollar currency. A weak dollar in turn pulls up the international prices of dollar denominated commodities. This allows the oil prices to increase further leading to exorbitantly higher oil prices. A market crash for the US then becomes inevitable. Analysis shows that there is a cyclical process where market health and oil prices modulate each other in opposite direction. In other terms the oil prices affect the global economic health adversely while at the same time, being greatly affected by it. The gains made as far as the US export and related avenues are concerned will inevitably be offset by the high oil prices as oil is priced in US dollars. It also needs to be understood that oil prices are factored in the export expenditure as shipping expenses for various companies as well. A weaker dollar might have some short term advantages for consumers but these will in no way outweigh the long term disadvantages of a weaker currency rate. Oil Crisis ImpendingAt the same point in time, lack of new significant oil discoveries confirm that there is an impending oil crisis that will hit the global economy. This would further drive up already accelerating oil prices making it all the more difficult for the US economy to keep the stock market from crashing without preamble. Peak oil prices are set to cause the largest tumble down in the history of the economy. Protect Your InvestmentsWhile do not typically make investment recommendations, we encourage investors to act defensively. To ensure that your investments do not suffer, read our research, anticipate macro-economic changes and think for yourself. The global economy is headed toward an inexorable standstill. The reason for this is the shortage of energy channels available at a reasonable price. Consequently, the earnings that companies will show are bound to be a reflection of what is happening in the financial markets around the world. Protecting your investments and money ought to be your highest priority in these changing times. | © oil-price.net 2009, all rights reserved. Permission to redistribute articles from oil-price.net on other sites can be obtained by contacting us. | | |
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Last Updated on Monday, 28 February 2011 20:35 |
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Oil Price at comfortable level? |
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Written by Steve Austin, Oil-Price.Net
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Friday, 17 December 2010 13:30 |
|  OPEC stated oil price is now at comfortable level. For whom? |
By STEVE AUSTIN for OIL-PRICE.NET, 2010/08/02 Something to chew over: The reference basket of 12 crude oils of OPEC stood at 79 dollars on Friday, July 30. This year, the OPEC reference basket has been moving between $70-$80, to average $76/b. OPEC had suspended its official price band in 2005, so the reference basket doesn't reflect the oil price in the market as itself. However, it still gives an idea of the value of OPEC's crude output. So now, why does the OPEC consider the current prices, 'comfortable'? Well, according to Secretary General Abdalla El-Badri, that's because, "The economic recovery is sluggish, unemployment is still high and the debt crisis is causing a lot of uncertainty, so if you look at all these factors, the current price is comfortable." OPEC is scheduled to meet in Vienna on Oct.14. Said El-Badri ,"I don't see any change in the production and I don't see a meeting coming before October" . When they met last in Vienna on March 17, the cartel kept the production quotas unchanged. Indeed, it was the fifth time since 2008 with unchanged output levels. Then, they had expected the emerging markets to absorb the excess oil and maintain the 'healthy crude prices.' Things haven't changed much since then, at least with that outlook, with the energy giant still looking at the consumers in China and the Middle-East. With good reasons: Right now, there is: confusion on the extent of economic recovery the sovereign debt concerns, uncertainty in future growth prospects and policy responses, slow recovery and weak property market in the US debt crisis in Europe sluggish growth in the US fiscal and monetary tightening in China uncertainty over the European banks capital buffers On the Global economy-some indicatorsThe IMF has raised Global economic growth from 4.2% to 4.6% this year, while the growth for next year has been kept at 4.3 percent. IMF has also predicted the advanced economies to grow by 2.6 percent this year. It estimates the U.S. economy to expand by 3.3 percent this year and Japan's Gross Domestic Product to increase by 2.4 percent in 2011. For the euro area, the IMF has kept its forecast for 2010 unchanged at 1 percent and reduced its 2011 outlook from 0.2 percentage point to 1.3 percent. China's growth is the fastest at 6.8 percent, from 6.3 percent in April while India's GDP growth pegged at 9.4% this year. The overall growth prospects for the emerging markets kept at 6.8 percent, from 6.3 percent in Apri.l According to EIA, consumption from emerging economies-outside Organization for Economic Cooperation and Development -account for 52 percent of the world's oil use by the year 2015, compared to the 47 percent this year. IMF feels that faster expansion in China, India and Brazil are helping the global recovery. According to OPEC, the world economy has gained momentum and expected to grow by 3.8% this year. So far the recovery supported by fiscal and monetary stimulus would have to be taken over by private consumption and investment to compensate. OPEC expects the world economy to grow by 3.7% in 2011, due to the fiscal austerity measures in most of the developed world and monetary and fiscal tightening in China. The indicators, positive so far, now for oil; Oil Demand:In a monthly oil report released this month, OPEC has forecast world oil demand to grow by 1m bbl/day to 86.4m bbl/day in 2011. The report further said that the demand growth would be fuelled by non-OCED countries like China, India, Latin America and the Middle-East. "On the product side, demand for industrial fuels will be strong as a result of the ongoing economic recovery. Demand for transportation fuels is also forecast to increase," it added The world's oil demand growth this month has been kept at 900,000 bbl/day, the same as last month. OPEC predicts that OECD region will not see any growth this year, mainly due to declining demand in Europe. "In 2011, non-OPEC oil supply is expected to grow by 300,000 bbl/day. Brazil, Canada, Azerbaijan, Colombia, and Kazakhstan are forecast to be the main contributors, while Mexico, UK, and Norway are foreseen to experience the largest declines," OPEC said. So, the demand for OPEC crude this year has been pegged at 28.7m bbl/day, which is about 100,000 bbl/day lower than the previous month's estimates. Compared to last year the estimate is lesser by 300,000 bbl/day. Demand for OPEC crude is expected to be in the range of 28.8m bbl/day, or an increase of 200, 000 bbl/day in 2011. EIA predicts oil demand increasing by 1.3 million barrels a day in 2011. And according to the Paris based agency, China is the world's largest energy consumer, exceeding the US by about 4%, a claim dismissed by China as 'unreliable'. In 2008, the US consumed 19.4 million barrels a day, out of 84.4 million barrels a day total consumption. BofAML (BofA Merrill Lynch Equity Rating System) is predicting the total oil demand in Europe to fall by 273 thousand b/d in 2010. Clearly, demand is just picking up. Oil Inventories:BofA Merrill Lynch Equity Rating System (BofAML) had forecast $88.50 per barrel for the second half of next year. The analysts see 'some downside risks' to the 2011 oil forecasts, according to weekly research data from BofAML. And a worrying factor, according to the bank's analysts, is the high OECD oil inventories. U.S. stocks of middle distillates had climbed to 3.935 million barrels for the week ending July 16. That is 24% above the 5-year average. For the same week, oil inventories reported a rise of 400,000 barrels according to U.S. Energy Information Administration, even as analysts expected a decline. The stockpiles of distillate, including diesel and heating oil, rose 3.9 million barrels more than the predicted 700,000-barrel increase, while gasoline inventories rise 1.1 million barrels. According to OPEC, non-OPEC supply, due to better production data, was expected to increase by 700, 000 bbl/day in 2010 this year, an increase of a little more than 100,000 bbl/day from the previous month. So to go back to the 'comfortable levels' alluded to by Mr. El-Badri : Comfortable for whom and why do they say "comfortable"? Is this a poor translation or a double entendre? Does it mean equilibrium? Obviously OPEC wants it as high as possible, without killing the economy, and demand is slowly improving, so now what? Maintaining a normal inventory is easier for OPEC. Oil inventory levels could be difficult to maintain, if the demand level keeps falling. 'In this environment, OPEC's best bet to keep control of prices is to normalize stock levels across the oil market,' BofAML analysis maintains. Together with the production cut and the softer demand, the compliance should be high. Production quotas are usually tweaked around, resting at only 53 % according to the latest figures from OPEC. Which prompted call for better compliance, "There is a lot of oil in the market and we need better adherence to our production quota," El- Badri said. In terms of that, here it's not exactly demand and supply as most understand, its maximizing return on an ever depleting resource. Which leads to the question of availability of the resource: There is a six month moratorium on offshore drilling in the US in the wake of the oil spill in the Gulf of Mexico. (Though it's still unclear at this point, if the moratorium will stay, as the U.S. District Judge, Martin Feldman has granted a preliminary injunction, barring the enforcement of the moratorium.) According to the U.S. Energy Department, the moratorium will decrease by 70,000 barrels a day from the previously estimated 2011 oil production. "I am sure after the six months that they will at least revisit the decision and try to let things go back to normal," El-Badri said. Almost in a domino effect, Norway has suspended the issuance of new deepwater offshore permit, while Russia has tightened the rules of deep water drilling. Currently, according to EIA, one-third of the world's oil supply comes from offshore drilling. Of course, there is oil with the current inventory levels, but the moratorium will impact the oil prices in the long term with delayed drilling projects. Specifically then, is the oil price really at 'Comfortable' levels? Go, figure out. | © oil-price.net 2009, all rights reserved. Permission to redistribute articles from oil-price.net on other sites can be obtained by contacting us. | | |
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Last Updated on Monday, 28 February 2011 20:34 |
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Written by Miriam Elder, Global Post
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Friday, 18 February 2011 15:20 |
Egypt: Why the price of oilis on a rollercoaster rideSuez Canal remains controlled, but unrest unnerves markets. Global Post - Miriam Elder February 2, 2011 06:17 (Cargo ships navigate in the Suez Canal between Port Said and Ismailia, northeast of Cairo, Nov. 24, 2008. (Cris Bouroncle/AFP/Getty Images)
MOSCOW, Russia — Turmoil in the Middle East reliably translates into one thing: turmoil in the global oil price. As Egypt enters its second week of anti-government protests, the oil price has twice risen above $100, hitting a two-year high. If the unrest continues, it could soar even higher. If the unrest spreads to other countries, then all bets are off. Egypt is neither a major oil producer nor one of the world’s top energy consumers. So why the concern? In addition to worry over spreading unrest, it comes down to the Suez Canal, a 120-mile sliver of waterway that cuts through the country, connecting the Mediterranean to the Red Sea. Its opening in the mid-19th century revolutionized shipping, cutting transport time and costs and putting Egypt at the center of modern global trade.Any threat to Egyptian stability immediately raises concerns over the fate of the canal. Past conflicts — with Britain in 1956 and with Israel in the 1960s and 1970s — forced Egypt to shut the key waterway, in one case for eight years, dealing a harsh blow to international trade.Yet the circumstances this time around are entirely different and experts say concern is largely unwarranted: Since the canal is a key source of income for the Egyptian government, any leader hoping to secure the support of the people would have little interest in shutting it down.“No one is going to want to lose that source of money,” said Hani Sabra, a Middle East and Africa analyst at Eurasia Group, a political risk consultancy. “In the short-term, the risk is actually quite limited — tanker traffic through the Suez Canal hasn’t stopped, this is one thing the military is keen on ensuring is secured.” The military's firm control of the canal is a good sign for its unfettered operation. As evidenced during the daily protests across Egypt, the military continues to hold the trust of most people, unlike President Hosni Mubarak and his widely hated police. Although Suez was the site of some of the tensest protests at the start of the movement, there were no reports of ships or trading sites being targeted. “We believe the Canal does not appear to be under immediate threat from the current political crisis in Egypt,” Barclays wrote in a research note Tuesday. “There are no indications that the protesters in Egypt have yet developed the intent or capabilities to carry out organized attacks on tankers like that seen in the case of the USS Cole,” it said, citing an extreme example when the American ship was attacked by terrorists while anchored in Yemen. The Suez Canal provides the shortest shipping route from Asia to Europe, allowing ships to forgo the long trip around Africa’s southern tip. In 2009, about 8 percent of the world’s seaborne trade passed through the canal — mostly container traffic but about 15 percent crude oil and oil products. About 2 million barrels of oil traverse the canal each day, roughly 5 percent of the global amount in transit (another 2.3 million bpd go through Egypt's Sumed pipeline, which opened in 1977 in the wake of tensions with Israel). Analysts were loath to speculate on longer-term implications of the current unrest. Although Mubarak indicated Tuesday night that he would not seek re-election in the country’s September presidential election, there was little sign that the hundreds of thousands of protesters would readily accept his concession. Who could replace Mubarak, and whether the next governing coalition would contain a radical Islamist element, remain even larger questions. “If we talk about long-term implications, then it’s a much more complicated question,” Sabra said. “Egypt does have the potential to have a contagion effect on the rest of the region.”“If other Arab regimes that have been considered stable for the past few decades start to fall," he added, "then it becomes a much more open question." For now, the greatest effect might be reflected in a fluctuating oil price, analysts say. Oil has risen 30 percent since September, thanks largely to increased energy use thanks to the global economic recovery and seasonal factors. The unrest in Egypt has briefly sent the oil price over the $100 per barrel mark, a psychologically important level. By Tuesday evening, it had sunk back down to $90.77. “Unrest in Egypt has contributed to market uncertainty and created greater price pressure,” said a statement released by the International Energy Agency (IEA), which advises 28 industrialized nations, mainly energy consumers. It urged oil producers to “be sensitive to market signals and exercise flexibility in ensuring ample and affordable supplies,” a thinly veiled nudge to the Organization of the Petroleum Exporting Countries that it should consider increasing production. IEA member states, which include the United States, together hold emergency oil stocks that could last 145 days, it added.It also threw in its two cents about the Suez Canal: “While disruption to the Suez passage through the canal and pipeline could have an important impact on oil and gas markets, it does not currently appear likely.” “A closure of the canal or pipeline would add considerably to the time needed to ship oil from the Middle East to markets in Europe and further westward, but would not remove the oil from the market,” it said, meaning unrest in Egypt does not have the same potential to disrupt the flow than unrest would elsewhere in the region. |
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Last Updated on Thursday, 11 August 2011 09:32 |
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How Exxon paid zero taxes in 2009 |
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Written by Merlin Flower/Oil-Price.Net
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Friday, 17 December 2010 15:20 |
|  The move towards more exploration is aimed to reduce oil imports |
By MERLIN FLOWER for OIL-PRICE.NET, 2010/04/15 This article was written by <a href="http://oil-price.net/en/articles/how-Exxon-paid-zero-taxes-in-2009.php">Oil-Price.net</a> which provides free information on crude oil. Here's a simple question in Economics: If Exxon Mobil, the largest U.S. energy company, made a profit of $35 billion, and if the income tax paid is $15 billion at a tax rate of 47%, how much did it pay to the IRS? The answer is, according to a report published recently in Forbes magazine, zero. How come the results when 47 percent of the profit had been paid as taxes? Well, it helps to have wholly owned subsidiaries domiciled in countries such as Bermuda, Cayman Island and Bahamas to pipeline cash flows from operations in Azerbaijan, Abu Dhabi and Angola. The report, as expected, created a huge outcry in the media as well as among the general public when it detailed the taxes paid by corporations in the US last year. Truly, Exxon is not alone. GE submitted a mammoth 24,000-page tax return and managed to avoid income tax for profits worth $10.3 billion last year. Likewise many companies though benefiting from corporate welfare in the U.S., use tax shelter practices to send their earnings overseas. According to a report by the Government Accountability Office (GAO), 2008, two out of three US companies paid no federal income taxes from 1998 through 2005. The report had covered 1.3 million corporations in the US with collective sales of $2.5 trillion. So to the important question: Is it illegal to do so? No, not at all, in fact, it's well within the purview of law. Under Net Operating Loss Carry forwards (NOLs), if a company makes a profit of, say, a million this year but incurs a loss of a million the next year, the previous year's loss could be tallied against the gain. Thus a company could get a zero tax liability in the US. It's the same story in the case of foreign tax credit too. The foreign tax credit is applied to situations where the company has already paid taxes elsewhere in the world. This is done by the IRS to prevent double taxation for corporations. Thus there is a choice of tax credit or deduction against the US taxes. If a corporation pays over the US corporate rate of 35%, that could offset the tax in the US. Since in Exxon's case the rate was 47% it helped the company offset the income tax in the US. Since the news broke out, Exxon has clarified that it had paid substantial income tax to the U.S. Treasury in 2009, and that it had overpaid taxes in 2008. The company says that it was expecting a significant income tax liability for 2009. Still, unclear is the actual income tax liability as the company hasn't disclosed it so far. Besides, the company has recorded U.S income tax benefit of $46 million, with non US income taxes accounting to $15.165 billion. The company's 2009 Financial and operating review, states, 'strong earnings of $19.3 billion in a challenging business environment' with 'sales and other operating revenue include sales-based taxes of $26,936 million for 2009'.
Still, some points to ponder upon: Last month the unemployment rate in the US was 9.70%. Exxon Mobil provides stable jobs 79,000 employees- as of march 2009. These 79,000 employees pay income and property taxes, a taxable bounty to local government. If Exxon had to pay income taxes it would most likely shed some of its 79,000 workforce, which would have a devastating effect on families and the local economy (schools, hospitals, etc...) Society may better off not taxing the company but its employees instead. Taxes paid by Exxon employees are taxes paid by exxon indirectly through salaries. This is accounts for billions in Federal tax revenue generated by Exxon, which usually isn't reported by mainstream media Most of the profit earned by the company was from operations abroad The company hasn't done anything illegal. Ultimately, it is for the US government to plug all loopholes in the tax extraction process. Ironically the oil giant has agreed to pay $32.2m in a settlement with the US government, last week. This is to resolve claims that the company intentionally and falsely reduced royalties for natural gas from Federal and Native American leases. The company, it seems, had claimed deductions for money spent on transporting the gas, and had understated the value of their natural gas production every month. Exxon Mobil, meanwhile, continues to lament its increased tax burden saying that additional taxes raise prices and reduce supplies. It says its U.S. tax burden is already very large, that for the first three quarters of 2009, the worldwide income tax rate had increased to over 48 percent with total tax obligations exceeding $59 billion. "From 2004 to 2008 our earnings grew by 79 percent, but our income taxes grew by 130 percent" says the oil giant. And the clincher, "Imposing punitive taxes on American energy companies, which already pay record taxes, would discourage the sustained investments needed to safeguard U.S. energy security." True, we do need investment in the energy field but not by denying income to the government. And, though, Exxon boasts of 'record performance in workforce safety that continues to lead industry', check this: Last month, the company was ordered to pay $1.2 million to sixteen Louisiana workers for exposing them to dangerous radioactive materials while cleaning used oil drilling pipes between 1977 and 1992. Looks like words hardly match the deeds-What do you think? | © oil-price.net 2009, all rights reserved. Permission to redistribute articles from oil-price.net on other sites can be obtained by contacting us. | | |
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Last Updated on Monday, 28 February 2011 19:58 |
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