In Article 2 in the book I discuss the role of OPEC in the spring of 2008 when oil prices were well over $110/barrel. In the last part of my analysis of the article from the Financial Times I conclude with the following:
"Against this background the economic power of OPEC looked as strong as ever and consumers would seemingly have to get used to permanently high petrol prices".
Sometimes it is just best to hold your hands up and admit you were wrong. And this is a perfect example. At the time of writing that part of the book it was widely expected that oil prices would remain high driven by limited supply and high demand. A few months later that view crumbled in the face of rising supply and in particular falling demand. The slowdown in World economic activity led to a collapse in the demand for crude oil. As a result prices have fallen back to less than $50/barrel.
Last week we saw the response of OPEC who are:
"the most important example of a cartel operating in practice. This is where a group of suppliers come together to create a formal agreement to control the volume delivered into the market. The members of OPEC have been meeting in Vienna since the mid 1960s to set the level of their output and to influence the level of world oil prices. Each OPEC member is allocated a specific quota that they are allowed to produce. Their members include Algeria, Indonesia, Iran, Iraq, Saudi Arabia and Venezuela".
The 13-nation OPEC plan to cut oil output by some 2m barrels a day. The aim is to reduce the available supply to match the sharply reduced demand. As a result OPEC hopes that this move will see oil prices return to at least $75/barrel. It must be careful that this action does not undermine economic confidence and so force an even deeper slowdown. This will be a tough balancing act for an organisation that owes its primary responsibility to the oil-producing members. I would like to end with a clear forecast for the prospects for oil prices in 2009. However, after my last effort I will keep quiet for now!
Monday, December 22, 2008
Thursday, December 4, 2008
Spend spend spend!
Reading the Guardian this morning it was hard to see why the newspapers are so concerned about the fall in advertising expenditure. Today's paper was full of large glossy adverts from various retailers offering special discounts to get consumers back into their stores.
Just look at these headlines:
Laura Ashley: 25% off everything Mega weekend
M&S: One day spectacular with 20% off everything for today
Debenhams: Festival with 20% off for three days.
If this is not enough to get us all spending, the Government's cut in VAT kicks in this week. And finally the Bank of England is expected to follow up last month's 150 basis point cut in the Repo Rate with a further sizeable reduction at lunchtime today. We might even see UK interest rates fall to an all time low. The question is will all these measures work?
If economics was an exact science we could examine some hard evidence of how consumers have reacted in previous recessions to find the precise inducement needed to produce a set increase in consumer spending. Sadly the reality is that even if you employed the top ten economists in the World and paid them a fortune (By the way I am cheap and available!) they could not say with any certainty just how consumers will react. We are all independent and relatively free decision-makers and we might just decide to ignore the inducements and just leave our money in the bank.
For what it is worth (probably not too much!) my own guess is that caution will prevail and consumers will not all rush out to spend what little cash they have. They have been scared by the onset of a severe economic downturn and they fear that theyl could lose their jobs. Against this background any hopes that the British consumer will once again lead the economy out of the wilderness might be dashed. The sensible ones will hold onto their cash because the prices of goods and services on the high street could soon be falling a good deal more.
Just look at these headlines:
Laura Ashley: 25% off everything Mega weekend
M&S: One day spectacular with 20% off everything for today
Debenhams: Festival with 20% off for three days.
If this is not enough to get us all spending, the Government's cut in VAT kicks in this week. And finally the Bank of England is expected to follow up last month's 150 basis point cut in the Repo Rate with a further sizeable reduction at lunchtime today. We might even see UK interest rates fall to an all time low. The question is will all these measures work?
If economics was an exact science we could examine some hard evidence of how consumers have reacted in previous recessions to find the precise inducement needed to produce a set increase in consumer spending. Sadly the reality is that even if you employed the top ten economists in the World and paid them a fortune (By the way I am cheap and available!) they could not say with any certainty just how consumers will react. We are all independent and relatively free decision-makers and we might just decide to ignore the inducements and just leave our money in the bank.
For what it is worth (probably not too much!) my own guess is that caution will prevail and consumers will not all rush out to spend what little cash they have. They have been scared by the onset of a severe economic downturn and they fear that theyl could lose their jobs. Against this background any hopes that the British consumer will once again lead the economy out of the wilderness might be dashed. The sensible ones will hold onto their cash because the prices of goods and services on the high street could soon be falling a good deal more.
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