Posted by: mulrickillion | December 17, 2011

Oil Exporters to the Euro’s Rescue?

by Philip K. Verleger, Jr.

Peterson Institute of International Economics

Policy Brief, Number PB11-22, December 2011

[Synopsis]:

Energy-exporting countries have more at risk than any other participant in the world economy if the euro crisis plunges Europe into recession. These countries would likely experience greater losses in 2012 should Europe fail. Oil and natural gas prices would plummet, and the price collapse would likely be larger than the 2008–09 decline. Energy-exporting countries therefore should be working feverishly with the International Monetary Fund (IMF) and the European Union to rescue the euro. They, along with China and other large holders of foreign exchange reserves, should lend to the IMF to help it construct an emergency lending facility with capacity of more than €1 trillion. The fund, administered by the IMF, could be used to buy bonds issued by Greece, Italy, Spain, Portugal, and Ireland. The goal should be to bring interest rates on long-term bonds down to 3 percent. Simultaneously, efforts should be redoubled to fix the economic problems in the troubled nations and restore balance to their budgets. An energy price collapse would increase disruptions in energy-exporting countries, promote economic ills in some consuming nations, such as Canada, and almost certainly start yet a third, even more violent, economic cycle.

[An excerpt from the Policy Brief reads]:

Between July and December 2008, crude oil prices dropped from $145 per barrel to $32 per barrel. Between 2008 and 2009, natural gas prices fell 30 percent in the European Union. The 2008–09 price declines were arrested due to the combined efforts of the Organization of Petroleum-Exporting Countries (OPEC) and central banks. Oil-exporting countries cut production.

At the same time, commercial banks purchased large volumes of oil as investments, using money supplied by the US Treasury and Federal Reserve. The banks’ actions removed more oil from the market than OPEC and earned those firms good returns.

Should a serious global recession occur, the global oil and gas price collapse in 2012 would likely be larger than the 2008–09 decline for two reasons. First, oil-exporting countries would be alone.

The financial reform mandated by Senator Chris Dodd (D-CT) and Representative Barney Frank (D-MA) would prevent banks from intervening. Furthermore, central banks would likely look askance at the idea of advancing monies to help commercial institutions accumulate commodity inventories.

The price decline would also likely be greater because global oil and natural gas use would not rebound quickly in what would be a less-vigorous economic recovery. Oil and gas consumption fell briefly in 2009 and then surged ahead, thanks to the United States and China adopting Keynesian stimulus programs. China’s effort was particularly noteworthy and all commodity markets felt its impact. This kind of support would probably not be forthcoming in 2012. . . .

>> Read the full policy brief here [pdf]

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