Wednesday, October 9, 2013

Discourse on the Great Recession – Oil


For the most part one can contribute “the lions share” of the blame for the Great Recession on the collective human mind; in fact, the entire world enterprise is a product of the human mind and its interface with the world environment. What we humans want, we get, supply does wane, prices do go up – oil is no exception. Oil is the single biggest influencer on the human enterprise, without a doubt, where oil goes we follow. There are replacements, just none that come into play quickly enough to offer a liberating degree of fungiblity for this item, as George Bush said “we are addicted to it”.  When oil goes up, economic growth wanes, it is a constant in reviewing the modern economy. The good news is that there has been somewhat of a decoupling of oil and GDP post the 1970’s oil crisis. The move to a more efficient fleet is partly responsible and of course, we have moved to a more “intellectually” based economy – less physical stuff relative to information and services.   

The challenge in the run up to the Great Recession was in no way related to the presence or absence of oil reserves, but rather, a product of the perception of possible supply constraints due to geo political events – this is evidenced to some degree by the post crisis high price that stabilized much lower absent the speculative fluff that had accumulated in the run up to the crisis. Oil went parabolic – the economy slumped. One might assert that oil is still harbouring speculative fluff at $100 / barrel given an average world price of less than half that since 1947. Technology is giving access to more and more oil. High oil price is certainly a causal agent for the Great Recession, it is hard to determine where in the harmonic between the physical world and the financial world that the genesis for the rise originated. 

Note: In August 2015 this speculation has come true, the price is now half what it was when I wrote this.  
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