A $10-per-barrel drop in oil prices seems a curious response to the ongoing disaster at BP’s Deepwater Horizon wellhead, and to its potentially devastating repercussions on future world oil supply. But when the Dow loses 1,000 points in the same week, there’s obviously something else going on.
If the world’s economic outlook is the same as Greece’s, both stock and oil markets have every right to be concerned about valuations. Brutal fiscal austerity and the general strikes and growing social unrest it triggers are not normally the ingredients for a sunny outlook for world oil demand, nor, for that matter, world anything demand. Given where Greece’s economy is likely to be heading, its citizens will consume less oil, not more, in the future.
Of course, it isn’t really Greece that Wall Street cares about. Financial markets are certainly justified in seeing a lot of Greece’s problems in other countries. And they’re not all in Euroland. As I’ve said before in this blog, we’re all PIGS (Portugal, Italy, Greece and Spain) now—at least all the oil-guzzling economies of the old economic order are. Today, the countries whose fiscal futures traders are shorting aren’t developing countries with fragile financial markets but rather developed nations with their supposedly world-leading financial institutions.
For example, the US federal deficit is now a double-digit ratio of the country’s GDP, a statistic that might have an IMF SWAT team arrive if we were talking about the same fiscal situation prevailing in a developing country with a lot of international IOUs outstanding. And the US has a lot more debt out there than all of the PIGS put together. Will American taxpayers soon be asked to make many of the sacrifices Greek taxpayers are being asked to make today? And what will that do for their future fuel consumption? Probably the same thing it will do for the Greeks’.
What markets have yet to recognize is that although the fiscal crises in those economies can only hasten the downward spiral, oil demand had already peaked before they occurred and begun its terminal decline. But in a world where oil supply will no longer be growing (and may even decline, if deep-water fields become off bounds), oil consumption suddenly becomes a zero-sum game. There must be fewer cars on the road in Greece and in the United States if there are to be more cars on the road in China and India.
The fiscal crisis in Europe and the US doesn’t mean the world will want less oil. It just means that global demand will become even more driven by the Chinas and Indias of the world. If you thought global economic growth and commodity demand were skewed to the developing world before all the developed economies ran up massive fiscal deficits, just wait until you see what the gap will look like when those economies have to start paying those deficits down.