|
|
|
|
‘Katrina’, ‘Rita’ and per barrel oil price
|
|
Hurricane Katrina hits at US energy heartland, pushes up prices of oil derivatives and threatens supply at petrol stations.
|
|
Oil rigs damaged, refineries not working, oil pipelines wrecked and thousands of workers evacuated. Prices of petrol, diesel oil, kerosene and other oil derivatives sky-high: this is the picture hurricane Katrina left in its path through the Gulf of Mexico at the end of August. Quite apart, of course, from the human disaster, the destruction of homes and public utilities and the flooding of most of the unique city of New Orleans. Less than one month later, the threat of a new hurricane, Rita, brought evacuation of the oil producing area of Houston, Texas.
|
|
|
|
The Gulf of Mexico area accounts for 30% of oil production and 50% of US refining capacity, according to JPMorgan. Katrina had a direct impact on this area while at the same time affecting natural gas production and port activity related to oil imports.
|
|
Using up of extra production and refining capacity in United States brings about further rise in per barrel price and spreads impression that problem is structural, meaning high prices for some time.
|
|
The problem is that refinery capacity in the United States was already at its limit before the hurricane season. The closing down of refineries brought about by the tropical storms meant some risk of cuts in fuel supply in the US market. As a result, petrol prices at pumps on US roads and highways went above the psychological barrier of 3 dollars a gallon. Suddenly, the price of crude oil made another jump going to 70 dollars a barrel in the case of West Texas quality oil. Alarmed by the state of events, the International Energy Agency approved an emergency plan involving the use of strategic reserves to ease the scarcity.
|
|
|
|
Following the passage of Katrina, the oil market recovered relative calm except just before the arrival of Rita. The heavy demand in recent years, however, has almost fully taken up extra production and refining capacity. In mid-September, the Organization of Petroleum Exporting Countries (the cartel bringing together around 40% of world exports) offered to raise supply by 2 million barrels a day. This announcement scarcely made any change in the markets. The dominant feeling is that in recent years there has been insufficient investment in production and refining. Given the time needed for such investment to mature, it seems inevitable that the problems in the market for oil and oil derivatives should be seen as structural. That is to say, we shall have high prices for some time.
|
|
Oil prices would be lower if world economy were to slow down but this view not shared by IMF...
|
|
This will apply, of course, if current growth of the international economy continues. This is what economists from the International Monetary Fund (IMF) believe and they maintain that the world economy will grow by 4.3% in 2006, the same as in 2005. The ministers and central bank governors in Washington for the IMF and World Bank meetings in the last week of September were less optimistic. According to the pessimistic view, the risks are that growth will drop. It may be that we have already reached the top of the cycle. From now on, we are going to see problems both in energy and those arising from other imbalances in the world economy.
|
|
...or Alan Greenspan, chairman of the Fed, which continues to raise reference rates.
|
|
Alan Greenspan, chairman of the US Federal Reserve, does not seem to share this pessimistic vizew. The monetary policy committee he presides over decided on a new rise on September 20, the eleventh consecutive increase in the reference rate. While recognizing the economic damage caused by Katrina, which will slightly cut growth in the United States this year, the US central bank system is concerned more about the inflationary risks that the rise in oil prices may bring.
|
|
|
|
The European Central Bank has come out along the same lines and the fact is that growth in the euro area (1.2% in the first half of 2005) is far from the 3.6% in the United States. In optimistic vein, the IMF feels that things are going to improve to the point where the single currency area will reach 1.8% in 2006. We believe this is possible but for this forecast to be fulfilled it is essential that the German economy begin to take off.
|
|
In Europe, German election results raise doubts about capacity of country’s economy to ensure recovery, quite the contrary to situation in Japan.
|
|
German voters, however, have not made things easy. The result of the elections on September 18 has caused concern given that no one came out a clear winner.In the weeks before the elections, it was generally felt that the Christian Democrat Angela Merkel would defeat the Social Democrat Gerhard Schröder who has been Chancellor since 1998. As a result, this would push forward the reforms needed to make the German economy equal to the needs of the global economy. Now, the virtual tie coming out of the elections leaves many big questions still open. It is feared that the future government will not push forward reforms and that, as a result, the German economy will continue to be stagnant and unable to drive the economy on the Continent.
|
|
|
|
This is the opposite of what has happened in Japan. There, the Liberal Democratic party of Junichiro Koizumi obtained a clear victory in the elections on September 11. Now the Japanese prime minister is free to carry out the profound reforms he has announced which are oriented to liberalizing markets. Finally, the Japanese economy may be coming out of the structural recession in which it fell at the end of the Eighties.
|
|
European and Asian stock markets continue reaching new highs while bond yields remain very low.
|
|
Another centre of optimism is to be found in the stock markets. This is not the case in the United States where the sustained rise in Federal Reserve interest rates has kept indices from moving up. The Japanese stock market, however, was marking up its highest levels for the last four years at the end of September based on the positive prospects now seen for the Japanese economy. European indices also are showing substantial advances so far this year. Among these indices, the Spanish IBEX reached highs not seen since the end of 2000 with some shares showing gains for the year above 50%.
|
|
|
|
In a situation of high liquidity, investors have also shifted to bonds. As a result, bond yields (the inverse of bond prices) remain at very low levels. At the end of August, US 10-year bonds reached 4% with German bonds at 3%, although both later showed increases.
|
