Saturday, November 17, 2012

Stock Markets and Oil Part IV: Shifting Consumption

Supply Shock vs. Demand Shock
The 1970s oil price shocks were supply driven.  OPEC, in demonstration of a Middle Eastern war, embargoed countries from their exports.  The price of oil was increased by using the withdraw of supply to justify the price increase.  In the late-1970s as Iran revolted agains the Shah, oil production declined - another supply shock.  The 1970s price increases and the 1980s oil price collapse were supply driven events.
From the late-1990s to the late-2000s, oil prices increased from around $10 to almost $150.  Unlike previous sharp increases in oil prices, this price increase was driven by demand.  The money to bid up the price of oil came from what Ben Bernanke called a "global savings glut".  The US ran a large trade deficit, allowing surplus nations, with their dollar reserves, to purchase oil and invest in dollar denominated assets - dollar recycling. 
A third of humanity doesn't want to ride bikes anymore. That has profound geopolitical implications.  Anne Korin (referring to China and India)
 From 1971 to 2011
 Each year, China and India and other emerging economies consume a greater share of the world's available oil while the United States and other developed economies consume a lesser share.  Over the past 40 years, Asia and Middle East consumption has increased as a percent of world consumption while Africa and South America have stayed flat, and North America has Europe have decreased as a percent of world consumption. 

Here are the countries included in the regional areas (not a pure analytical collection):

Countries in each region listed below in the pie charts.
The changing trends in consumption growth:
1971 oil consumption by region; Europe and North America make up the largest consumers.

From 1971 to 1991, Asian oil consumption as a percent of world consumption grew by over 30%.

In 2011, Asia was the world's leading consumer.
To put the change into perspective, let's look at major consuming countries and regions:

Consumption amongst major consumers. China:US and India:US ratios show relative consumption trends between the two countries. At the current rate, China will consume as much oil as the US in about 15 years.
The rapid increase in consumption amongst China and India, and rising prices, stands in odd contrast to price-related 2008 drop in production and exports:

Oil exports declined amid credit contraction in 2008 and are slow to recover to previous levels.

The Shift
Two nations, China and India, have been bidding up the price of a commodity that has come in short supply over the past few years.  Because of the decrease in supply (production and exports) amid the credit crisis there are elements of supply influencing today's prices, but prices were bid up to their current levels on a surge in demand.  Countries of the Middle East, many of them members of OPEC, are increasing their share of consumption.

Nostalgia: The 1990s
In the mid- to late-1990s, the price of oil stayed within a stable range but mostly remained below its early-1980s levels.  As financial crises ensued in Southeast Asia and Russia, the price of oil plunged toward $10.  US stock markets saw a sharp increase starting in 1995 with momentum continuing until 2000 despite significant changes in the tax code in 1993 and 1997.  The historic 5-year run brought back discussion of the historic Mississippi Company and its ill-gotten gains. 

Fueled by an emerging online retail enterprise, the flight to capital and a diminishing offering of US government debt, the SP&500 hit an all-time high relative to the price of oil in the late-1990s.  The large increase in consumption from Asia was stagnated during the Asian financial crisis as South Korea, Indonesia and Southeast Asian nations experienced sovereign debt crises and rapid changes in foreign exchange rates.  The contagion would eventual spread to other countries, such as Brazil, but was eclipsed by Russia's sovereign debt default which wiped out Long Term Capital Management.

SP&500/Oil divisor frm the 1980s oil price collapse to present.

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