• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

$200 Oil Coming As Central Banks Go CTRL+P Happy

Tyler Durden's picture


We have been saying it for weeks, and today even the WSJ jumped on the bandwagon: the sole reason why crude prices are surging (RIP European profit margins: with EUR Brent at a record, we can only assume the ECB will pull a 2011 and hike rates in 3-4 months even as it pumps trillions in PIIGS, banks bailout liquidity) is because global liquidity has risen by $2 trillion in a few short months, on the most epic shadow liquidity tsunami launched in history in lieu of QE3 (discussed extensively here in our words, but here are JPM's). Luckily, the market is finally waking up to this, and just as world central banks were preparing to offset deflation, they will instead have to deal with spiking inflation, because the market may have a short memory, it can remember what happened just about this time in 2011. And the problem is that when it comes to the inflation trade, the market, unlike in most other instances, can be fast - blazing fast, at anticipating what the central planning collective's next step will be, after all there is only one. And if Bank of America is correct, that next step could well lead to the same unprecedented economic catastrophe that we saw back in 2008, only worse: $200 oil. Note - this is completely independent of what happens in Iran, and is 100% dependent on what happens in the 3rd subbasement of the Marriner Eccles building. Throw in an Iran war and all bets are off. Needless to say, an epic deflationary shock will need to follow immediately, just as in 2008, which means that, in keeping with the tradition of being 6-9 months ahead of the market, our question today is - which bank will be 2012's sacrificial Lehman to set off the latest and greatest deflationary collapse and send crude plunging to $30 just after it hits $200.

How do we get to $200 crude? BofA's Francisco Blanch explains:

Oil could spike to $200/bbl to further slow down demand


In a supply-constrained world, however, oil is unlikely to spend much time hovering around its price floor. Rather, we believe oil prices will likely remain a key constraint on global economic growth. This suggests that prices will continue to spike over the next five years to keep on rationing demand back down to the limited available supplies. As we have highlighted before, the world economy can hardly afford to spend more than 9% of its GDP on energy (Chart 4). But central banks such as the Fed or the ECB will likely remain focused on expanding their nominal GDP values to smooth out the ongoing deleveraging cycle in the US and European economies. In a supply constrained world, increased liquidity should set oil prices on an upward path. In other words, as nominal global GDP in USD expands to $92tn through 2016, demand rationing will likely require ever higher $/bbl prices. On our estimates, occasional demand rationing episodes could result in prices occasionally spiking to $200/bbl over the next five years (Chart 5).


High liquidity is likely boosting Brent crude oil prices


As we have explained in previous notes, the prices of constrained real assets tend to appreciate in times of ample liquidity. Oil prices are no exception and have been supported by the environment of negative real interest rates prevalent in DM, in our view (Chart 6). Using historical data on USD real interest rates, we have previously tried to estimate the impact of negative interest rates on oil prices (Chart 7). Our conclusion is that a 100bps decrease on USD real interest rates historically increased Brent crude oil prices by more than 6% in the subsequent year.



Liquidity impacts oil prices through several mechanisms


This negative correlation between real rates and oil prices is the result of several  mechanisms; some very direct and some more subtle. First, not all sectors of the economy respond in the same way to monetary policy. As a sector with severe supply constraints, oil prices should behave differently from other prices in the economy when demand is expanding (or contracting less) due to easy monetary policy measures. In addition, if easy monetary policies are to force consumers to consume and companies to invest, the impact of low real rates is likely to gear consumption towards durable goods and investment towards infrastructure, both of which are energy intensive components of GDP. Finally, oil producing nations have very little incentive to produce beyond their budgetary requirement if returns on their assets, held in international reserves or in a SWF for instance, are yielding below inflation expectations (Chart 8).

The only solution: price exhaustion, plunging margins, and a deflationary shock, yet one which is unexpected and stuns the market out of the liquidity feedback loop. Lehman 2.0 anyone?

High prices will ultimately cure high prices


But oil prices cannot go up forever. Should the price differential to natural gas stay this wide or even continue to widen, large-scale substitution could come into play. Substitution out of oil has been going on for decades, but the price differential between oil and other fuels is now at record levels (Chart 9). Inevitably, ingenuity will trigger unforeseeable changes in energy demand patterns on a ten year time horizon. So even if the super-cycle in oil continues for the next five years on tight supply and demand balances, new technologies should start to reduce global oil consumption in a meaningful manner by 2016. Having said that, we believe that oil will continue to trade at a substantial premium over other fuels through the end of the decade, even if the current Brent crude oil to US natural gas price ratio of 10 to 1 seems unsustainable in the long run.

Luckily, we have seen this all play out before: liquidity surge, collapse, rinse, repeat. Only in the meantime it is only the lower and middle classes that lose. Prepare to see some astronomic numbers in crude, gold and all other commodities before the cycle is primed for repeating all over again.

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 02/24/2012 - 10:06 | 2192371 bdc63
bdc63's picture

We can only hope it stops at $200 ...

Fri, 02/24/2012 - 10:22 | 2192418 JPM Hater001
JPM Hater001's picture

I get quesey every time I hear the word "Hope".

Excuse me while I impale myself on a long stick.

Fri, 02/24/2012 - 10:39 | 2192482 kaiserhoff
kaiserhoff's picture

This makes a lot more sense than Japan (importing mostly LNG) or China (manufacturing mostly lies about GDP).

Fri, 02/24/2012 - 11:02 | 2192578 Vagabond
Vagabond's picture

Global liquidity schmobal squidity... it's those damned speculators!

Fri, 02/24/2012 - 11:44 | 2192706 Dr. Richard Head
Dr. Richard Head's picture

NO!!!! It's the IRANIANS.  They keep using words and they cut off some Euroblock countries from oil.  It's their damn fault.  We need to Bomb them, invade them, and promote democracy in Iran like the US did while installing the Shah in the 50s.  It worked so well last time, that we will do it again. - B.H. Obama

Support the Troops...I mean Military Industrial Complex - Bomb Iran http://www.dailypaul.com/216206/new-freeway-billboard-causing-a-stir

Fri, 02/24/2012 - 13:14 | 2193135 Spastica Rex
Spastica Rex's picture

It's the hippies' fault. And the queers and the coons and the reds and the Jews.

Fri, 02/24/2012 - 13:38 | 2193243 longdong silver
longdong silver's picture

I blame the internet

Fri, 02/24/2012 - 13:41 | 2193249 Flakmeister
Flakmeister's picture

Yep... them cock suckin' Vegan Commie hippies that made Texas involuntarily suppress oil production back in 1970... They have kept their jack booted oppressive socialist boots on the necks of  Texan oil can-do entrepaneurs since then...

Fri, 02/24/2012 - 17:23 | 2194194 trav7777
trav7777's picture

brent grades in steep supply decline...spreads to WTI and syncrude remain nutso

Fri, 02/24/2012 - 18:43 | 2194421 DaveyJones
DaveyJones's picture

good point - and most terrorists have meat restrictions

the most amazing thing is how those commies paid of Hubbert to predict it 15 years before it happened.

Fri, 02/24/2012 - 20:01 | 2194570 Flakmeister
Flakmeister's picture

You are walking a fine line with regards to the use of the sarc flag....

Fri, 02/24/2012 - 14:04 | 2193341 AgShaman
AgShaman's picture

Did you just have a "Floydian Slip"?

Get 'em/you up against the Wall

Fri, 02/24/2012 - 10:45 | 2192500 battle axe
battle axe's picture

I am sorry, and Obama is happy with this economy? Crazy.

Fri, 02/24/2012 - 11:35 | 2192710 Ruffcut
Ruffcut's picture

200 bucky oil will set this clusterfuck into its final stages. INflation will go ballistic. The global companies stocks will rocket. Another deranged fundraising scheme to fortify the common bad of the sheeples.

Fri, 02/24/2012 - 12:13 | 2192863 johnQpublic
johnQpublic's picture


Fri, 02/24/2012 - 11:44 | 2192736 achmachat
achmachat's picture

i just got fuel for my car.

I had to pay 1,40 € per liter. You US people can do the math... and know that here in Luxembourg it's still way cheaper than all around us in Europe.


edit: I just did the math: that's 7,10 USD per gallon

Fri, 02/24/2012 - 12:18 | 2192883 reload
reload's picture

In the UK £1.40 per litre

Fri, 02/24/2012 - 13:34 | 2193227 Ratscam
Ratscam's picture

Switzerland CHF 1.75 = USD 1.55 per liter.
my soon to be gone V8 engine is hating it!

Fri, 02/24/2012 - 16:51 | 2194073 I Dont Get It
I Dont Get It's picture

NZ$2.20 a liter here on my top up yesterday, or US$1.84 per liter. 



Fri, 02/24/2012 - 14:48 | 2193550 Blue Horshoe Lo...
Blue Horshoe Loves Annacott Steel's picture


Looks funny with that comma instead of the decimal point, @ least to us Yanks.

Fri, 02/24/2012 - 12:12 | 2192857 johnQpublic
johnQpublic's picture

wish and hope in one hand, and shit in the other


see which gets full faster




and.....gas is up 13 cents a gallon here since yesterday

Fri, 02/24/2012 - 13:48 | 2193280 vast-dom
vast-dom's picture

I'll cash out at $190 ;)

Fri, 02/24/2012 - 10:11 | 2192374 LawsofPhysics
LawsofPhysics's picture

Atlas shrugging, again...


as to the question "which bank will be 2012's sacrificial Lehman to set off the latest and greatest deflationary collapse "

My bet is currently that JPM will sacarfice BofA or Goldman Saches.

Fri, 02/24/2012 - 10:14 | 2192395 bdc63
bdc63's picture

BofA is my vote.

Fri, 02/24/2012 - 10:23 | 2192420 s2man
s2man's picture

Couldn't happen to a nicer bank.

Fri, 02/24/2012 - 11:04 | 2192586 peekcrackers
peekcrackers's picture

I think it will be citi Bank , 

BoA to much in the limelight

Fri, 02/24/2012 - 12:15 | 2192872 Big Corked Boots
Big Corked Boots's picture

BofA has a friend in the White House via Buffett.

Citi has a friend in Saudi Arabia.

If one were to be sacrificed, who would you bet on?

Fri, 02/24/2012 - 12:20 | 2192890 reload
reload's picture

MS ? certainly must be on the list of possibles

Fri, 02/24/2012 - 16:01 | 2193883 CIABS
CIABS's picture

JPM doesn't have the power to kill GS, nor apparently vice versa.  Morgan Stanley since 2008 has been a "beard," creating the appearance that GS and JPM didn't actually wipe out ALL of the other competitors back then.  You don't see Morgan Stanley people running central banks around the world, the New York Fed (which might mean simply "the Fed"), the CFR, the White House, the Treasury, and so on.  Morgan Stanley survives at the pleasure of the duopoly.  As for killing off Citi or BoA, why would they bother?  Those banks are more useful in their present form.

Fri, 02/24/2012 - 22:52 | 2194838 StychoKiller
StychoKiller's picture

Unless Buffet can poop out bbls of crude, my munny's on BofA.

Fri, 02/24/2012 - 10:23 | 2192423 JPM Hater001
JPM Hater001's picture

B of A is possible...  but not black swan enough...

Fri, 02/24/2012 - 10:25 | 2192427 mayhem_korner
mayhem_korner's picture



Would you look for Uncle Warren to first cash out a bunch-o-BAC and move it into, say, XOM?  Or do you think he's on the outside looking in?

Fri, 02/24/2012 - 10:27 | 2192434 Wakanda
Wakanda's picture

Seeing Goldman castrated would satisfy a lot of social blood lust.  Wouldn't Barry look like a hero to the sheeples?

Fri, 02/24/2012 - 10:42 | 2192492 LawsofPhysics
LawsofPhysics's picture

There you go.

Fri, 02/24/2012 - 10:51 | 2192523 WonderDawg
WonderDawg's picture

Highly unlikely Goldman will cut their own balls off.

Fri, 02/24/2012 - 10:55 | 2192542 LawsofPhysics
LawsofPhysics's picture

Bullshit, all that is required is that the "important" people find lucrative positions elsewhere first.  This is what I am looking for as the signal.  Same for "important people at JPM.

Fri, 02/24/2012 - 10:57 | 2192556 Wakanda
Wakanda's picture

The partners retire with their PMs to their estates.  What's not to like?

Fri, 02/24/2012 - 11:34 | 2192705 DaveyJones
DaveyJones's picture

yes, why would the government sacrifice the government?

Fri, 02/24/2012 - 10:48 | 2192515 falak pema
falak pema's picture

Normally its the squid that financially engineers the ritual cojones slitting...Ironic...you're going all in by designating them. O'bammy loses his Illuminati mentors! the whole caboodle...From Rubin to Rubble! 

Fri, 02/24/2012 - 10:57 | 2192562 LawsofPhysics
LawsofPhysics's picture

See my post above, wait and see if "important" people find lucrative positions elsewhere.  GS can simply become something else, the "illuminati" remains intact, just assumes a different name and the shell of GS is "sacarficed" for the sheeple.  Same as it ever was.

Fri, 02/24/2012 - 11:00 | 2192572 falak pema
falak pema's picture

Shades of the Leopard; new skin same animal. 

Pour que rien ne change!

Fri, 02/24/2012 - 11:20 | 2192646 JFK.4PREZ
JFK.4PREZ's picture

First, it was pumping and dumping stocks.  
Second, it was pumping and dumping whole sectors (i.e. goldman and the commodities sector). Now, it is pumping and dumping the whole economy. buckle up sheeple! 

Fri, 02/24/2012 - 11:21 | 2192647 JFK.4PREZ
JFK.4PREZ's picture



Fri, 02/24/2012 - 10:58 | 2192563 bdc63
bdc63's picture

Goldman ... hmmm ... that might help to explain all the rumors about Lloyd jumping ship this year ... collect your golden parachute before the company falls into the abyss ...

Fri, 02/24/2012 - 10:08 | 2192375 lolmao500
lolmao500's picture

as nominal global GDP in USD expands to $92tn through 2016

That is bullshit. Current world gdp is 63 trillion. So they are saying +50% in GDP in the next 5 years? BULL... oh wait, they are saying NOMINAL... so that means PRINT PRINT PRINT!

Fri, 02/24/2012 - 10:12 | 2192388 mayhem_korner
mayhem_korner's picture



Funny that they never report the Dow in nominal terms.

Fri, 02/24/2012 - 10:25 | 2192426 s2man
s2man's picture

The Dow is reported in nominal terms, that is why it is up.  Try looking at Dow/S&P adjusted for inflation or priced in gold. Last time I looked, S&P adjusted for inflation was down 40% since 2008.

Fri, 02/24/2012 - 10:27 | 2192432 mayhem_korner
mayhem_korner's picture



Agreed.  You made the point I was trying to, but my words failed me.  I was intending that they never highlight that the Dow is in nominal terms. 

Thanks for correcting.

Fri, 02/24/2012 - 10:33 | 2192451 s2man
s2man's picture

Anytime.  I thought that was an odd statement, coming from you. Thought maybe it needed a /sarc.  ;-)


Fri, 02/24/2012 - 10:38 | 2192474 mayhem_korner
mayhem_korner's picture



I'm fasting, so my blood sugar's low.  Trying to get myself lookin' like yer avatar.

Do NOT follow this link or you will be banned from the site!