Drowning in debt, the OECD did have one little nest egg tucked away in the form of strategic petroleum reserves (SPR). Yesterday the International Energy Agency (IEA), an OECD organisation, decided to raid these meager savings in order to try and keep the global growth party alive. The recognition that high oil and energy prices were threatening a weak and faltering recovery is an admission by the OECD that high oil prices were threatening recession.
The decision yesterday to release 60 million barrels from strategic reserves over a 30 day period sent already weak and falling oil prices through the floor with Brent futures down 8% at one point. This represents 4% of total OECD public stocks of crude oil and refined products that totals 1547 million barrels.
Many believe that the $900 billion of quantitative easing in the USA has underpinned the most recent commodities spike. Ask the question where the global economy would be right now without QE? Rising demand colliding with inelastic supply is the technical cause of high and volatile oil prices. The logical solution is to boost supply and reduce demand. Yesterday’s action by the IEA is designed to do the exact opposite of that since the aim is to reduce price. This will boost demand and hurt high cost oil producers in the OECD.
My own view on the OECD economies is that anemic growth in many countries has likely already turned negative mirrored by already falling oil prices. Higher taxes, reduced public spending and the burden of high energy prices lie at the heart of this problem. But there seems no way out. Countries like the UK require strong economic growth to repair their public balance sheets to avoid the risk of default. This growth requires growing supplies of cheap energy. 60 million barrels of oil, 18 hours of global consumption, is the latest sticking plaster to be rolled out.
There is another good write up about it here too.
Once the oil price starts getting high (over $85 is high, over $110 is very high), the high oil prices start causing recessionary influences, because citizens have to cut back on other goods. Oil and food prices usually rise and fall together, because a lot of oil is used in food production.
Unfortunately, if high cost oil is what sinks the economy, high cost green energy is of very little help. We have been misled in this regard. It doesn’t even matter if the government provides a subsidy for expensive green energy–it still comes back around to sink the economy, because higher taxes are needed–either that, or it adds to the overly burdensome debt situation. Once citizens are charged higher taxes, the effect is very much the same as if citizens had paid the high prices to begin with–it reduces their discretionary income, and thus tends to be recessionary.