Juggling Dynamite

Following up on my entry from last week and its graph of per capita oil consumption rates, this site gives us the 2008 breakdown on a country basis.

Here we can see that although Canada is number 2 for per capita consumption, because there are less of us in the country, we rank number 9 in terms of overall consumption totals. Meanwhile notwithstanding the incredible populations of China and India, together they account for just under 12% of world demand. The US accounts for over 25%. This underlines why the ongoing US recession will put a slack in oil demand (once speculators move on). It also makes the point again why we in North America have lots of room to reign in wasteful consumption habits.
Some interesting comments in the past few days on present oil prices.
First OPEC's Sec'y-General, Mr. Abdallah El-Badri, speaking near the end of last week repeatedly stated that current prices are not being driven by natural demand forces:
“We are not very happy with this increase in oil prices. Volatility has nothing to do with the fundamentals. It has nothing to do with world demand. The price was $130 [one day} and today is at $135, so it is really a crazy market…this price has nothing to with the market, there is a lot of oil in the market. There is no shortage whatsoever; the stocks are very high, at comfortable levels. The main problems are speculators.”
John Mauldin quotes antecdotal evidence that there is a shortage of available oil tankers for lease in the world at the moment. Lease prices are a large $140,000 a week, and in the past few weeks these lease prices have soared. There is now a serious shortage of available tankers in the world because so many people are using tankers to store and hoard oil supply. Speculators are betting that oil prices will continue to soar enough from here to still make $140k a week storage fees palatable.
Apparently this was a common tactic among speculators in the early 80’s oil boom. It was also a hallmark of the top of that bubble. Once prices soften, these excess “reserves” help to violently drive prices down as speculators move to dump their hoards at the same time. See “Whither the price of oil?”
Buyers and holders at these levels should do so forewarned. Risk to capital is very high.

The drag of present oil prices is evident today in Japan’s trade surplus data for April. Japan’s trade surplus (exports over imports) “tumbled by a worse than expected 46.3% in April due to the rising cost of energy imports and falling exports to the US economy,” the government said Thursday. “Exports to the European Union grew by the slowest pace in more than two years.”
“The data showed that Asia’s largest economy continues to be pressured by a global economic slowdown,” despite “brisk shipments to fast-growing emerging markets.”
The point to be understood here is that Japan’s exports over imports shrank by almost half in April, notwithstanding ongoing strong demand from emerging markets.
Emerging countries are just not nearly as good at consuming as westerners. As a point of reference, US consumers in 2006 consumed 9.7 trillion dollars worth of goods compared to about 1.3 trillion of goods consumed in China and 750 million in India. US consumers are almost 10 to 1 better at buying goods than Chindian consumers. This is why a big contraction in western consumption inevitably brings a big contraction in world GDP.
What is happening to Japan and other export nations on a macro level is also happening to manufacturing corporations on a micro level. Rising commodity prices are putting a strain on corporate costs. Ongoing demand reflects in reasonably strong sales volume and revenue, but not necessarily in strong profits. The soaring costs of energy and raw materials are silently undermining corporate profitability. Commodity prices have now risen faster than companies can pass through price increases to consumers, this is resulting in contracting profits and waning investor confidence.
While there has been much talk of rising CPI or consumer prices, the more troublesome increases are mounting in the PPI, producer price index. In the UK for example, producer prices in March jumped 19% y/y compared to only 2.4% y/y in the CPI.
Now falling demand, rising commodity prices, and higher financing costs are all creating the perfect storm for corporate profits. See Overview: The commodity squeeze.
Survival will mean increasing prices, and cutting overhead costs that can be cut, such as labour. This will mean less hours worked, further lay-offs and in some cases corporate bankruptcy.
We have had an abnormally high period of corporate profit growth over the past few years, compression of this will be a natural part of mean reversion over the months ahead.

The following chart lends perspective on who is exerting the greatest demand on global oil supplies.

The source of the data is from BP and Nationmaster. The chart is from the Sudden Debt blog.
I have not yet found a version updated to 2008, but the relative demand of the players has not changed too much in 2 years.
We can see that North America and other developed countries are by far the greatest oil consumers. This is why suggesting that emerging market demand is the problem behind current prices is ludicrous. We westerners, and particularly in North America, have simply been gorging like pigs at a trough. It is actually embarrassing. For us to complain that emerging countries are causing the demand stress is the equivalent of obese people complaining that the malnourished now expect to share in the daily food supply.
The good news is that we can use less and survive quite happily. There are many bright innovations that can substantially reduce our consumption. We just need the political and individual will to make the right choices. If we could get government oil subsidies knocked off, oil would spike past $200 a barrel and there would be much greater incentive to implement immediate improvements for conservation and other clean energy options. I am 100% sure we can solve this issue, but people need economic incentive to change. $130 oil will be some incentive. Time will tell whether it will be sufficient to prompt permanent change. Perhaps more pain will be needed first.