Imagine a piece of elastic. Or better still, imagine a spring. At the end there is a heavy weight; no offence, we are not suggesting you are unduly heavy, but let’s say it is you at the end. And with that spring tied to you via some kind of a harness, you jump. And you fall. Just before you hit the ground, the spring reaches its limit, and you bounce back up again. There’s a law in physics which describes this: Hooke’s Law. It is just possible we have now reached that stage in the credit crunch when the bungee jump that is the global economy has reached the bottom for the first time.
This does not mean, of course, that the world is set to boom again. The bungee jump has several more rises and falls yet before it finally stops. In any case, it all happens in very slow motion.
But it appears that something very significant is happening about now. There are good reasons to believe the credit crunch has reached a new stage – the last few days have seen some of the most dramatic developments to date. It was told earlier this week that the world appears to be re-aligning; well even stronger evidence has now emerged to support that view.
The credit crunch stage 2 has begun. To find out why and what this means, we need first to pay a visit to the banks of the river Seine, just a hundred yards or so from the Eiffel Tower, to the head office of the International Energy Agency. For yesterday saw news from that organisation which has significant implications indeed.
Demand for oil in the West is falling. And it is falling fast. Global demand is still growing, but by nowhere near as fast as was recently expected.
It seems that at last we may be seeing the consequences of what happens when oil becomes too expensive.
According to the International Energy Agency (IEA), the OECD is on course to consume 48.6 million barrels of oil per day this year, compared to 49.2 million in 2007. Across the globe, oil consumption per day is likely to be around 800,000 barrels a day higher than last year. According to an article by Ed Morse, chief energy economist at Lehman Brothers in the FT earlier this week, last October, the International Energy Agency expected global demand for oil to be 2.1 million barrels a day more than in 2007. In other words, growth in demand this year is barely a third as fast as previously forecast. Demand from the OECD is 600,000 barrels a day less than last year.
Ed Morse said in the FT: “In our judgment, the IEA’s forecasts for emerging markets will turn out to have been far too optimistic by year’s end and OPEC countries will again complain about the inability of oil importers to guarantee sufficient demand growth to warrant investments in expanded production capacity.”
Mr Morse went on to expand on a theme expressed here many times over the last few months, that when prices get too high, demand falls. We start looking for alternative products. We start looking for efficiencies.
Sometimes there are false dawns before a bubble bursts. The Dotcom boom saw many mini crashes followed by new peaks after the point when people started fearing a crash was inevitable. In 1928 and 1929, the stock market had several big falls that were then reversed before the crash. The current sell off in oil may well prove to be temporary, but sooner or later the oil and wider commodity bubble is set to burst.
The report from the IEA illustrates why this is so.
But in the slow tick–tock of economic change, the path will be gradual. First to feel the benefit will be those who were first to feel the pain. It seems that just as the Eurozone and Japan have surprised all by seeing GDP contract before the US and UK, they are likely to recover first.
But before we see the full tale unfold, let’s first take a look at what is happening in Europe and Japan – where recession currently threatens to descend from on high, like a poorly aimed mallet on an innocent finger, trying to hold the economic foundations in place.
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