Here Is Why Those Who See In IEA's SPR Release A "Shadow QE" Are Dead Wrong

Tyler Durden's picture

Leave it to Goldman to explain why the surge in crude prices is actually a good thing. Enter the good old ("recycled" some may say tongue in cheekly) recycled petrodollar thesis. The logic, in brief, is as follows: Petroleum exporters are the primary beneficiaries of rising oil prices and, assuming they don't use the bulk of the funds to buy their citizens' endless love (a big if in recent months), use this "savings" flow to purchase various assets from developed capital markets. To quantify, Goldman suggests that that the $70/barrel rise in crude over the past 2 years "has caused petrodollar saving flows to rise from roughly $10bn to $70bn per month, thus adding roughly $700bn of asset demand to global capital markets." Which is supremely ironic: those who claim that the IEA's action is comparable to a QE are 100% dead wrong. It is actions which raise the price of oil that have an implied QE effect, whereby the abovementioned $700 billion in recycled capital is only possible due to the surge in crude. As prices drop, whether it is due to idiotic, politically-driven actions like that by the IEA, or otherwise, the recyclability of petrodollars plunges, and far less "savings" end up being reinvested in US asset. What would be further ironic is if the administration realizes this paradox, and in order to save the market (which it will have to very soon in the absence of ongoing flow monetization by the Fed), it send the price of WTI well over $100 to generate bond buying interest in the short-term. That said, based on some of the stupidity we have recently seen out of the White House, such an outcome would not surprise us in the least.

More from Goldman:

Flow of petrodollar savings is back

Last week in our Global Economics Weekly, we revisited the global savings impact of higher oil prices and came to a conclusion that harks back to the last legs of the credit boom: Petrodollars are back (“Petrodollars redux”, Global Economics Weekly, June 29, 2011). The report estimates that petrodollar saving flows over the coming year will average $70bn/month, which exceeds the highest monthly flow of $63bn/month reached during credit boom of 2005-2007, and is exceeded only by the transitory peaks reached during the summer of 2008.

This is almost entirely a reflection of higher oil prices. Back in June of 2007, Brent crude oil was trading in the vicinity of $70/barrel, and our commodities team was forecasting $72/barrel. Based on this oil forecast, we estimated that global petrodollar savings had probably peaked at rate of around $45bn/month (“A Peak in Petrodollar Savings?” Global Economics Weekly, June 14, 2007). Petrodollar savings eventually surged to over $90bn/month in July 2008 as Brent crude oil prices soared to $140/barrel. But by March 2009, oil prices had fallen to $46/barrel, and petrodollar saving flows had collapsed to a mere $10bn/month.

Our commodities team forecasts a continued upward trajectory for oil prices. Once the market negotiates the current slowdown in the pace of economic growth, they expect Brent oil prices to rise from current levels of around $110/barrel to $114.50/barrel this year and $126.50/barrel by next summer. (They have more recently warned that the release of strategic oil reserves may cause them to adjust these levels down by $5-10/barrel, but that the upward trajectory would remain and the forecasts would still likely be above forwards.)

We focus on petrodollar flows for two reasons. First, petrodollar savings have become more important over the past decade. With emerging market oil demand growth outpacing global oil supply growth, both the level and dollar volatility of oil prices have risen substantially. The standard deviation of monthly oil price changes has increased from roughly $1.50/month during the 1990s to over $6.50/month over the past five years – a four-fold increase. In the long-standing view of our commodities research team, these changes reflect secular trends that are not likely to reverse over the foreseeable future. In our view, the long-run trajectory for oil prices is up, in which case petrodollar flows are here to stay.

Second, petrodollar savings are closely correlated with fluctuations in oil prices, so they are easy to monitor. For big oil exporting economies like Saudi Arabia, national income is heavily dependent on oil exports (in Saudi Arabia, for example, the oil sector represents roughly 50% of the gross value added). Changes in oil prices for such economies translate almost 1-for-1 into changes in export revenues. And in the short-run – before domestic demand for consumption and investment has fully responded to the increase in domestic income – the import response is small. Hence, a $1.00 increase in export revenue causes import demand to rise by roughly $0.35, which means petrodollar savings rises by roughly $0.65.

Saving rates higher, interest rates lower

The asset market implications of higher oil prices alongside higher petrodollar saving flows are bounded by two offsetting considerations. On the one hand, higher oil prices obviously represent a headwind for domestic demand in the US and Europe. Indeed, higher oil prices top our list of reasons for the recent slowing of US economic growth. On the other hand, we estimate that the $70/barrel rise in Brent crude prices over the past two years has caused petrodollar saving flows to rise from roughly $10bn to $70bn per month, thus adding roughly $700bn of asset demand to global capital markets. In a world where developed market borrowing demand is expected to remain high, this is not necessarily a bad thing.

From perspective, the slower growth and higher petro savings implied by higher oil prices are both supportive of low, long-term global interest rates. To be clear, we think these effects are well-priced at current levels. Our forecasts for 10-year Treasury remain at 3.75% for this and 4.25% for 2012, and we went tactically short the 5-year on June 28.

That said, it seems likely that just as in the pre-crisis period, greater global saving supply will disproportionately benefit fixed income. (For additional evidence along these lines, see also “The Savings Glut, the Return on Capital and the Rise in Risk Aversion,” Global Economics Paper No: 185, May 27, 2009.)

Credit market implications

For credit markets more narrowly, we have long argued that credit markets were disproportionately exposed to the push from global savings supply. This is certainly how things looked back in the fall of 2006 (see “Credit 2007: Peak or Plateau?” Credit Outlook, Dec. 12, 2006). Back then we argued the global savings were driving both easy credit and low yields, causing “increased risk appetite, easy financing for distressed firms, rapid growth of the leveraged loan market, unusually low default rates, a proliferation of leveraged, yield-enhancing credit products, and a continual compression of spreads on credit default swaps.”

As for “round two” of the surge in petrodollar savings, it is difficult to say whether the effects are likely to be greater or smaller this time. We see offsetting arguments. On the one hand, global savings flows have already begun to reallocate away from fixed income and away from the developed market economies – the US in particular. In this sense, the demand for plain vanilla credit instruments is likely to be less heated this time around. On the other hand, we strongly suspect that due to the experience of the recent crisis, financial markets in developed economies will prove highly resistant to the lure of “easy credit.” New and tighter regulatory oversight, bank capital standards, and risk management processes will all effectively work to reduce the developed market supply of credit instruments and securities available to global investors. Paradoxically, this will increase the scarcity value of plain vanilla credit products, which should push their prices higher.

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macholatte's picture

'But I don't want to go among mad people,' said Alice. 'Oh, you can't help that,' said the cat. 'We're all mad here.'
Lewis Carroll

Yen Cross's picture

 I'll start from the top "Gentlemen" EGO's Abound!   LET's

  { work together } good minds I see.  Thank you.

Seize Mars's picture

So wait, let me get this straight; GS would say things that are the *opposite* of true?

knukles's picture

Goldman is absolutely spot on Truthful, Right and Honest about the Goodness of Petrodollar Recycling.

Petrodollar recycling is fabulous for Goldman Sachs for it generates additional transactional commissions and principal positioning opportunities via the petrodollars sucked from the middle class who never ever see their moneys again, channeling such from Tehran, Bahrain, Dubai, Saudi, etc., through brokers and banks into capital assets, which Goldman underwrites, trades, repackages, swaps, collateralizes, lists, deals in, prices and profits from.

After the QE business' free monies, this is the next best game in town....

                  ....for Goldman.

The Street needs somebody to Skullfuck.

fallout11's picture

Bring out the bagmen....oops, I mean, counterparties!....for this one.

Just another steaming pile of propaganda from the vampire squid.

Franken_Stein's picture


Can we please switch to Thorium and wind power already ?

It's so ridiculous that grown up adults are shooting each other dead over some brown viscous liquid made up of dead animals' long-chain carbohydrates.

Truly idiotic !


Motorhead's picture

I think dead animals' carbs are delicious...add a little mittelscharfen Senf to a Schweinshaxe....umm, lecker!

ctb89's picture

Carbohydrates?  I think you mean hydrocarbons.

Franken_Stein's picture


There is no difference between the two.


phungus_mungus's picture

Really? This outta be a good one!



Franken_Stein's picture


Yeah really.

Both consist of hydrogen and carbon and have energy stored in their bonds that gets released when oxidized aka burnt, into water and carbondioxide.


In your cells, the same process happens when you metabolize carbohydrates as when you burn hydrocarbons in a motor.


It gets oxidized in an exothermic reaction.

That's why you exhale carbondioxide through your lungs, as well as water vapor.


From an energy and reaction path standpoint there is no difference.


Ok, I know, they have different geometrical structures and may differ in length and you can't eat the one, but you can set afire both.

That's probably what you mean.


knukles's picture

Fossil fuel?
Try abiogenic.

Urban Roman's picture

The creamy nougat center ...

Oh noes! Peak oxygen!

knukles's picture

Or abiotic...
But thar weren't 'nuff them dinosaurs and dead plants ta make all thet thar oearl...

"fossil" fuel
Tripe, rubbish, pablum, twaddle, twif, illogical and just plain silly.

Mr Lennon Hendrix's picture

God made cotten candy, and then he made oil.

fallout11's picture

To be fair to Franken, both are thermal energy sources whose content can be expressed in calories and joules.  Energy IS energy.  Burning food in your gastank via ethanol isn't fundamentally (thermodynamically) much different than burning it in your body.

traderjoe's picture

Wind? Not from what I've read...

cpnscarlet's picture

We can't switch to Thorium because it is "atomic" and that word makes the common lumpen prol shit his pants.

We need a Technocracy.

cpnscarlet's picture

We can't switch to Thorium because it is "atomic" and that word makes the common lumpen prol shit his pants.

We need a Technocracy.

snowball777's picture

Closed cycle? Generates lots of actinides that'll sit around for years and years.

Open cycle? I find it amusing that the U232 contamination is sold as a "benefit" because it would "discourage proliferation".

A "technocracy" that would....last at most 1000 years (could you make it the TechReich for complete irony?).

This is why people who think they're smart can be the most dangerous of all.

malikai's picture

I think you got some wires crossed here.

Closed cycles burn U235 and actinides, leaving (in theory) only fission product wastes.

Open cycles burn only U235 and P239, leaving both actinides and fission product wastes.

css1971's picture

They're not. They're shooting each other over women.


Our entire civilisation, the skyscrapers, the space race, war, you name it., everything. It is all peacock feathers. It is all so one set of males can say I am superior to these other males. And thereby get laid.


Also, thorium based nuclear industry is 2 decades away at least.

ibjamming's picture

It's funy but true...the house, the car, the boat...ALL just to get laid!

boiltherich's picture

I hope you do not intend that bitches in burkas count here, my great uncle Joe is prettier than they are, why do you think they make'm wear those black tents in the first place? 

BlackVoid's picture

We cannot switch to Thorium, because after decades of experiments, we have only a few experimental Thorium reactors.

If it worked, we would already have commercial applications. But we don't.

And the EROEI rate of a Thorium reactor (energy produced / energy invested) is much lower than that of conventional oil.

The problem with alternative energy is that it is lower quality and less dense than fossil fuels. EROEI is lower.

The result of this, is that  we are switching to an energy source that reduces the net energy available for society. It won't work.

Switching to wind, solar, sun, nuclear: won't work. Switching to oil shale, oil sand, deepwater (also low EROEI): won't work either.

Deal with reality or reality will deal with you.

snowball777's picture

a) Thorium still creates plenty of actinides

b) Wind power will require some REMagnets and a low-loss distribution system to get the power anywhere but the coast

c) The biomass compressed into said liquid was made up of more dead plants than animals

Why not just go for space-based solar with u-wave transmitters to ground as long as we're in pie-in-the-sky mode?

surfersd's picture

I guess the Arab countries know how to spend our money better then we do. Gee, they just like Congress. I think I am going to give the money doesn't tax away and wire it over to Saudi Arabia that way I can sleep at night, knowing our economy is still going to be booming.

At to think I was worried.


tiger7905's picture

Don Coxe Update, he notes the SPR announcement sent a ‘we aren’t helpless here’ message. He would have done the same thing. I can't say I'd agree to each their own I guess.

LetThemEatRand's picture

The average American spends more of his disposible income at the pump, but interest rates stay low so when he runs out of cash he can get a loan on better terms and then go buy gas on credit while driving to Walmart to buy stuff made in China.    What could possibly go wrong? 

Yen Cross's picture

 That "thesis" is right up there with the 'rare' earth post yesterday.

ffart's picture

The old money is capital fallacy. Why does this industry pay so well again? oh, i guess it must be all the fraud.

alexdg's picture

Seems like it has already started...

"Saudi Prince Turki al-Faisal, who has suggested engaging in an oil war with Iran."

boiltherich's picture

From that story...

"Underlining the escalating cold war between Saudi Arabia and its rival Iran, former intelligence chief Prince Turki al-Faisal proposes the kingdom use its oil power to drive down prices to batter the Islamic Republic's sanctions-hit economy.

That would ratchet up tensions in the Persian Gulf and the wider Middle East at a time of unprecedented political upheaval."

And it would allow unprecedented emergency powers to the existing governments so threatened by the Arab Spring.  They see Tunisia, Libya, Egypt, Yemen, and now Assad's Syria and start wetting themselves. 

What better cover than the two theocratic polarities in the region, Sunni and Shia? 


oldmanagain's picture

'What would be further ironic is if the administration realizes this paradox, and in order to save the market (which it will have to very soon in the absence of ongoing flow monetization by the Fed), it send the price of WTI well over $100 to generate bond buying interest in the short-term."


Are you saying Obama lowered the price in order to raise it? 

Are you saying raising oil prices will replace QE?

Or are you saying you trying to pin the tail on the donkey but can't find the tail?

baby_BLYTHE's picture

How can higher oil prices replace QE?

Rising oil prices = demand destruction

Mr Lennon Hendrix's picture

Oil has an inverse relationship with the dollar.  The dollar has an inverse relationship with foreign currencie.  Oil demand will stay high. 

Oil supply is dropping. 

Price is set to skyrocket. 

As for replacing QE, you are correct, it doesn't.

Yen Cross's picture

 In todays world yes. Good post.   

statlawyer's picture

"We have to abandon free market principles, in order to save it."

cosmictrainwreck's picture

Dat's right! Dat's a direct quote from one of our most heaviest - a man veritibly brimming with patriautism - and not that long ago, even.........

ffart's picture

The old money is capital fallacy. Why does this industry pay so well again? oh, i guess it must be all the fraud.

buzzsaw99's picture

So the Sauds et al will buy NFLX and the facebook ipo? The market is saved! Sweet!

Quinvarius's picture

It was dumb because it won't work.  As far as being good or bad for the economy, it will have no lasting effect, so who cares.  It was political move.

Franken_Stein's picture


Nice concept of a 2 GW wind turbine.


If you have billions for fucking wothless New York banks ruled by motherfuckers like Blankfein, Dimon and other redundant vermin, why not spend it on something meaningful that serves everyone ?


buzzsaw99's picture

I have always liked that design.

CrashisOptimistic's picture

Because, Frank, John Deere agricultural tractors that plow 10s of thousands of acres before planting season ends, and harvests the crops when ready to harvest, before they rot in the fields . . . . USE OIL.

They don't use electricity.  Electricity doesn't have what it takes.  There are 740 watts in 1 lousy horsepower and a John Deere combine is 450 horsepower.  You drain any battery imaginable in 10 minutes, and you still have 40,000 acres to do.

Just put this wind stuff to bed.  It Doesn't Work.  Oil is oil for a reason.

buzzsaw99's picture

that's nothing my laptop is 500 hp ijit

malikai's picture

I think the Maglev doesn't look too feasible, especially considering the cost of permanent magnets of the required size and the enormity of the structure proposed.

But a few of them in Saudi might free up a few barrels of oil. A few of them in various highlands near population centers might also free up a few feet of gas or a few lumps of coal as well. Either could then be FT'd into diesel for your tractor.

fallout11's picture

Well said!  Lets also say something for energy density, which is important in an agricultural implement smaller than the size of Connecticut.

Diesel: 44,800 kJ/kg

Latest Lipoly battery design: 505 kJ/kg (degrades measurably with each discharge/recharge cycle).

There's two orders of magnitude difference there, and you'll melt the battery trying to recharge it in a meaningful timeframe..

russwinter's picture

 Since May 11, FCBs have reduced holdings by $15.8 billion, and that is really unprecedented. This lethal combination is the big reason I am so bearish on Treasuries.  FCBs still hold $3.445 trillion, but China and Russia in particular are highly critical of phony  US Ponzi finance, and Japan is busy with concerns of their own. I don't see how this bullet can be dodged.

Truth be known about the only thing keeping Treasury prices levitated is the Fed, and they are now gone. Banks would take on huge disintermediation risk buying Treasuries at these puny yields.  A  5 year at 1.8%,  a year's yield would get wiped out in one bad day.