warning to investors, page-2

China is being starved of energy, oil imports down, 7 days of coal reserves at power stations, huge industrial base with razor thin margins operating in a collapsing export market, inflation out of control..... I would say the probability of them continuing to grow in the face of all that very remote....





Wescott points out that historically this metric has been in the range of 1-3% and recessions have occurred when the expenditure exceeded 4%. $120 represents approximately 8% of world GDP, higher than at any time in modern history. Two studies are cited: The International Monetary Fund (IMF) suggesting a $5 increase cuts world GDP by 0.3% so it follows that the $60 to $120 doubling would reduce world GDP by 3.6% and the US Federal Reserve estimates that a $20 increase reduces GDP by 0.75%, which would result in a loss of 2.3% from the increase to $120.

With world GDP growth averaging 3.5% over the last 30 years we are clearly in the ball park of a global recession due to oil price, before even considering today’s other difficulties in the credit and housing markets.

Wescott associated $120 oil with $5 a gallon gasoline in the US and $8-9 a gallon in Europe. In April 2008 the average price of a US gallon of regular petrol in the UK was $7.98 (April '08 national average 108.1p/litre and assuming £1 = $1.95). In the US a gallon is $3.61 (EIA). How has he managed to be right on one count but off when it comes to the US? Current retail prices lag the oil price by several weeks and with low taxation the US price is more sensitive to changes in the oil price. Prolonged $120 oil is certain to increase today’s US price by a larger proportion than the European price.

Wescott forecast that inflation would rise from 2-3% to 6-8% and that interest rates would increase to combat this pressure. It was noted that as growth slows the reverse decision may be taken to ease credit conditions. We seem to have skipped the first stage of increased interest rates and moved straight to cuts, in an attempt to break the “credit crunch”.