“Give me a one-handed Economist. All my economists say ‘on the one hand…’, then ‘but on the other…”
As I am off on holiday to Spain I thought I would spread some cheer for the weekend…The Bull case for oil was made by the Federal Reserve Bank of San Francisco yesterday looking at oil demand in China and combining it with The Varian Rule (which I hadn’t heard of either):
A simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade.
The economists from the Federal Reserve conclude what every offshore bull hopes for, even if it is in a delightfully non-commital and unspecified in timeframe:
In particular, if both domestic and foreign oil producers are reluctant to invest now in exploration and development, they may be unable to expand quickly to meet a sharp increase in Chinese demand. If global supply cannot expand fast enough, oil prices will have to rise to balance the market, as they did in the early 2000s.
On the other hand DNB came out with this graph this week:
The point about being “unable” to expand is a good one. Even if the price spiked now the supply chain has laid off so many people in the short term all that will happen is there would be an explosion in wage costs not asset utilisation (and therefore day rates) as projects would take time to wind up. For the supply chain there is no easy solution to the current problems apart from slow deleveraging and the occassional exogenous shock maybe?
To all my friends in Houston I hope all is well and you are hunkered down safely. For the record no one obviously wants an increase in demand generated in such a way.